Childhood trauma tied to deep retirement shortfalls

Childhood hardships can cast a long shadow over a person’s finances. A new study from the Center for Retirement Research finds that adults who endured adverse childhood experiences such as abuse and emotional neglect often reach retirement with far less wealth than their peers.

Researchers found that these early-life experiences are associated with 25% to 45% lower net worth in retirement, even after accounting for family income, parental education, race and other background factors.

The study used data from the National Longitudinal Survey of Youth 1979 Cohort, which follows a nationally representative group of individuals born between 1957 and 1964. Researchers identified five types of adverse childhood experiences (ACEs): physical abuse, emotional neglect, parental separation, household mental illness and parental alcohol abuse.

Respondents who reported experiencing an event “once” or “more than once” were considered to have an ACE. The cohort does not include information about other traumatic experiences, including family violence, physical neglect, having an incarcerated parent, sexual abuse or emotional abuse.

Researchers then tracked participants’ wealth from adolescence into their 50s and 60s, measuring household net worth. The study controlled for family background factors — like parental education, income and marital status — to isolate the association between ACEs and late-career wealth.

“By the time individuals approach retirement, the net worth of those with ACEs is less than half the level of those without ACEs,” researchers wrote.

How childhood trauma shapes retirement wealth

Hardships early in life have been linked to other factors that can hurt long-term financial health, including lower educational attainment, lower rates of employment and lower earnings.

“While employment outcomes are one obvious way ACEs could impact the accumulation of wealth, less direct ways exist too,” researchers wrote. “Survivors of childhood abuse and neglect are more likely to never marry. And, once married, middle-aged adults with a history of ACEs are more likely to be divorced or separated.”

Marital status can greatly influence financial well-being: Marriage is often associated with faster wealth accumulation, while divorce tends to have negative effects.

All five ACEs studied were found to have a negative impact on net worth, though some had a stronger effect than others.

Without accounting for background factors, parental separation had the largest impact, cutting median wealth by about $84,900. Emotional neglect and physical abuse also reduced wealth, by roughly $70,800 and $66,700, respectively.

After controlling for demographics and family characteristics, household mental illness had the greatest effect, lowering median wealth by about $50,200. Physical abuse and emotional neglect followed, reducing wealth by around $39,000 each.

Those shortfalls are often coupled with lower educational attainment and earnings, but even high-earning workers can find themselves lagging behind in their retirement savings due to traumatic experiences from their childhood.

Certified financial therapist Rick Kahler, the founder of Kahler Financial Group in Rapid City, South Dakota, works with clients who struggle to save any money, even while making anywhere from $150,000 to $300,000 a year.

Kahler recalled working with three clients who felt a strong compulsion to spend any money that hit their checking accounts. 

“I mean, if money was in the checking account, it had to go,” he said.

Two of these clients, Kahler recounted, had their savings vanish overnight as children under 10. In one case, parents used the money for household expenses and legal fees; in the other, a bankruptcy wiped out the account. Because the accounts were tied to the parents, the children had no control.

Neither client realized the impact until working with Kahler, who helped them explore the history behind their financial behaviors.

The third client had begun working at age 12. During their exploration, the client revealed to Kahler a strange childhood belief: If she had money left over from her paycheck, she wouldn’t need to work, because only people without money had to work. Since she wanted to keep working, she felt compelled to spend every dollar of each paycheck.

“Well, why was working so important? ‘It got me out of the house.’ Why was getting out of the house so important? Because she was physically and sexually abused,” Kahler said. “So having money left in her account or in her hand equated to not having to work, which equated to having to go back to the home and back to the abuse.”

“I remember in the session when we did that, she kind of threw herself back and said, ‘Oh my God. Part of me has kept me broke my whole adult life so I don’t have to go back to the abuse,'” he said.

Identifying clients with trauma-linked financial behavior

For financial advisors, spotting trauma-linked financial behaviors in clients may seem daunting. But Kahler said the process doesn’t have to be complicated.

If a client’s financial challenges are simply due to a lack of knowledge about managing money, the solution is straightforward

“You simply give them the solution to their problem,” Kahler said. “In other words, [if they say,] ‘I am overspending.’ [I’ll say,] ‘Okay, great. Let’s look at your budget. We’ll cut this, cut this, cut that.’ You know, and problem solved. If they do that, then all they needed was cognitive information. … And job’s done.”

However, Kahler said that when clients don’t respond to straightforward advice, the issue often runs deeper.

“If that doesn’t happen, then it’s not about the money. It’s going deeper. And typically, I hate to use the word always, but very, very, very often, there is trauma,” he said.