Children Can Significantly Impact Parents’ Retirement Security

Parents are especially at risk when they maintain a heightened level of spending after children leave the nest, the CRR finds.

Household expenditures obviously increase with the addition of children.

Without adequate control on spending and saving, these additional costs could place a major strain on the retirement preparedness of older, working Americans. The Center for Retirement Research at Boston College (CRR) explores this issue and potential solutions in its new paper, “The Impact of Raising Children on Retirement Security.”

The CRR cites research from the Organization for Economic Cooperation and Development (OECD), which indicates that the cost for a family of four is 140% of that of two adults. Just adding one child brings that figure to 120%. Moreover, the CRR notes children also contribute to income loss in the form of less involvement in the labor force, a burden typically taken on by women. The CRR’s data notes that the labor force participation rate for women with children is 61%, compared to 73% for women without children. The CRR adds, “Similarly, when women with children work, they earn lower wages.” Its research indicates that median earnings for women with children are $35,000. The figure for women with no children rises to $44,400.

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However, the CRR says the real problem lies with the way household spending is handled when children are factored into the equation. Particularly, retirement preparedness can be put at risk when parents boost household spending after having a child and maintain that level of consumption after the child is no longer in their care.

Based on its research, the CRR suggests two ways families can strategically plan for retirement preparedness while considering children.

First, parents can keep household spending steady over time while sharply cutting back spending on themselves. The other option involves planning for higher household consumption while children are at home, and cutting back when adult children leave the nest.

The CRR notes, “Either way, households would accumulate enough wealth to maintain their standard of living in retirement.”

The study also found that children have a particular impact on the retirement preparedness of middle income earning families ages 50 to 59. For this group, a child raises the prospects of being at risk by 2.5%. That figure drops to 1.8% for lower income families and 1.7% for higher income families.

Moreover, the CRR finds children can also have a negative impact on overall wealth. In the study, wealth factors in financial assets, savings in DC plans, net housing wealth, and the pro-rated value of DB and Social and Security income. The study concludes that: “In terms of wealth, each child is associated with roughly 3-4 percent less wealth.”

To gauge retirement preparedness, The CRR referred to the National Retirement Risk Index calculated by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households.

The full brief “The Impact of Raising Children on Retirement Security” can be found at crr.bc.edu.

Employee Engagement a Better Measure of Financial Wellness Program ROI

Maximizing ROI starts with knowing employee demographics and how employees think and feel about money, Ernst & Young says.

Organizations expect the return on investment (ROI) to justify the expense of offering financial wellness programs, but calculating that figure is not an exact science.

A better barometer, according to Ernst & Young, and one which indicates employees value the benefit enough to use it, is employee engagement.

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Among the 200 HR professionals the firm polled, 14% said they do not have a program, and half of that group have never considered it. Only 16% felt they could justify adding a financial wellness program without knowing the anticipated ROI. Among those who already offer some type of benefit, 34% felt they could offer the benefit without knowing the ROI.

Most workforce populations cross several generations with varying perspectives on personal finance, Ernst & Young notes in its survey report. They also consume information differently. To engage them, leading organizations craft a multidimensional program and formulate a targeted communications plan to foster awareness and push employees to action. With those core components in place, employee engagement can then be measured. The firm notes that organizations often cobble together financial wellness programs by offering solutions for a specific personal financial wellness need, such as retirement, insurance or student loan debt. This siloed approach leaves gaps in the program that can limit the potential of a well-intentioned benefits suite.

Among employers who do not currently offer a financial wellness program, 59% say the biggest factor they will consider is price, followed by the ease of the program (53%) and breadth of the program (44%). However, employers that do offer a program focus less on cost (35%) and more on the breadth of the program (47%) and the quality of employee communications (45%).

The survey showed that those who offer financial wellness plans saw a direct correlation to employee retention (56%), well-being (50%), and productivity (45%). Most respondents considered those the main benefits of a financial wellness program. Those without a program had a more limited vision of the potential benefits, with 50% considering it a way to encourage employees to boost retirement savings, 38% seeing it as a means to help employees boost savings overall, and 31% thinking it could lead to greater employee retention.

Maximizing ROI starts with knowing the employee base—age, career stage and income ranges. But fostering engagement depends on more than demographics. It requires a deeper understanding of workforce psychographics—how employees think and feel about money, Ernst & Young says.

Employers should ask:

  • What are employees’ money habits?
  • How satisfied are they with their current personal financial situation?
  • Do financial concerns affect their family relationships?
  • How much time do they spend worrying about their personal financial situation?

A financial wellness assessment can help uncover these more subjective beliefs and enable employers to craft targeted communications to inspire action.

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