The (Financial) Advantages of Living at Home

You have probably noticed a plethora of stories lately about how young people today are not moving out of the house very quickly after high school/college. There are many, many reasons for this (financial, emotional, and other). The stories you read typically take one of two approaches, depending on the focus of the author. The first approach is decrying the financial aspects of starting out today: the economy, wages, the cost of housing, interest rates, etc. The second approach focuses more on “we are coddling are children” and that this could do long term harm to their development as a fully-grown human. There are typically very strong opinions about how “bad” this is in terms of “growing up” and “assuming responsibility” and “being independent” and “kids these days” and various other pieces of wisdom from older people (mostly from privileged folks and/or those without children living at home). I’m not going to address those aspects, as I doubt I would change anyone’s mind. (Briefly, I think how good or bad this is in terms of the child’s development depends very much on the individual child as well as their economic circumstances. Obligatory “personal finance is personal.” And, of course, in many cultures and countries, multi-generational family housing is the norm, not the exception.)

Instead, I want to look at one (potentially) positive aspect of this trend. What does the child potentially gain financially from living at home? While most people intuitively know there is a financial advantage, there’s a difference between knowing in the abstract and putting some actual numbers to it. Well, no surprise, there’s a spreadsheet for that. Like all spreadsheets and projections, this one includes a lot of assumptions. Here are the base assumptions I made (you can make your own copy and change those assumptions if you’d like.)

Monthly Savings (as a result of living at home): $2,000 (cell B1). The average rent for a 1 bedroom apartment in the Denver area is currently $1,684. When you add in additional expenses from living on your own (renters insurance, utilities, furnishing it, etc.), I figure it’s fairly safe to assume that they’d save around $2,000/month by living at home. Note that depending on their income and spending, they could actually save a lot more than that – or a lot less – this is just focusing on the nominal difference between living on their own and living at home, and assuming any income above that they spend or save for other purposes (car, house, etc.)
Annual Real Return on Investment (after inflation) (cell D1): 6.8%. This assumes no fixed administrative fees and that any expense ratios for their investments are already included in that return. (If you invest in index funds then 6.8% pretty much matches the historical real return of U.S. equities.)
Starting Age (cell G1): I chose 23.
Simplified Calculation: For the sake of simplicity, I assume no return on investment for any investment in the year of contribution. This is simply for ease of calculation and also has the effect of making the calculation slightly more conservative.
Investment Amount and Location: This assumes the $2,000/month they save is fully invested in a tax-advantaged retirement account (IRA, 401k, 403b, 457b, HSA). Whether that is pre-tax, Roth, or some combination will depend on a variety of factors including their income, their state tax rate, and whether they have student loans and are on an income-based repayment plan. They could also choose to invest in a taxable brokerage account depending on their future plans (like early retirement), but there would be some tax drag associated with that.
Numbers of Years They Live at Home After Graduating: I illustrate three scenarios – living at home for an additional 3 years, 4 years or 5 years.
Amount They Contribute After Moving Out: I illustrate two variations, one where they never contribute any more to their retirement accounts after moving out ($0), and then one where they contribute $500/month (cell K1) after they move out.

So take a look. For my base case, I assumed starting at age 23 and running the scenario to a “typical” retirement age of 65.

Column B: Live at home for 3 years, then contribute $0.
Column F: Live at home for 4 years, then contribute $0.
Column I: Live at home for 5 years, then contribute $0.
Column L: Live at home for 3 years, then contribute $500/month.
Column O: Live at home for 4 years, then contribute $500/month.
Column R: Live at home for 5 years, then contribute $500/month.

At age 65 they would have (in today’s dollars because this assumes real return):

Using the 4% “rule of thumb”, that means that at age 65 they could safely withdraw (remember, these are in today’s dollars):

$42,800 per year if they lived at home for 3 years and then never contributed again to their retirement accounts.
$55,300 per year if they lived at home for 4 years and then never contributed again to their retirement accounts.
$67,000 per year if they lived at home for 5 years and then never contributed again to their retirement accounts.
$88,300 per year if they lived at home for 3 years and then contributed $500 a month (the $500 would have to be adjusted for inflation each year) until age 65.
$97,700 per year if they lived at home for 3 years and then contributed $500 a month (the $500 would have to be adjusted for inflation each year) until age 65.
$106,400 per year if they lived at home for 3 years and then contributed $500 a month (the $500 would have to be adjusted for inflation each year) until age 65.

Those are some significant numbers. They could conceivably be able to retire and never have to contribute any more to their retirement accounts after moving out (the first three bullets). Or they could contribute a relatively modest amount after moving out and retire with a very good retirement income.

To be clear, not everything is about finances. The concerns that folks express about kids not achieving independence are real ones, although I would gently suggest that it varies tremendously based on the individual child and is often overblown due to the very typical habit of older folks lamenting the younger generation’s choices. So if you find yourself in the situation of considering this option, it’s important to have a serious conversation that is specific to your child’s needs and wants. Part of that conversation, however, should also include the potentially large financial advantage this will provide them. As the spreadsheet illustrates, that advantage may be much, much larger than most people intuitively assume in the abstract when they say, “well, yeah, it’s cheaper to live at home but…”. Helping your children for three to five years in their twenties can make a huge difference in their lives when they are older (and at a time you may no longer be around to help them.)

Important Note: First, obviously, this only applies if they find employment within commuting distance of the family home. But, second, like most posts on this blog, this is assuming some privilege and level of socioeconomic status. It doesn’t apply to folks making poverty-level wages, or to families where the teenage and adult children have to work to help support the family. My assumption is, however, that it does apply to most of the folks reading this blog.