After 18 years of paying for their groceries, clothes and internet service, the kids have finally left the house. After basking in the accomplishment, it’s time to look at how to readjust your budget to reflect your new priorities for this next life stage, says Mary Alice Hughes, co-owner of Insurance Advantage and LMA Financial Services in Jacksonville, Arkansas.
[See: 9 Easy Ways to Save $500 More Per Year for Retirement.]
“For some, [it’s an ideal time for] building back the balance sheet,” says Paul Gaudio, a wealth planning strategist at financial firm Bryn Mawr Trust’s Wealth Specialty office in Princeton, New Jersey. Raising children can result in debt or may have meant that retirement savings took a back seat to funding college accounts, paying for traveling sports teams or any of the other myriad expenses children can incur.
While every parent’s budget after the kids leave home will be different, follow these four steps to make sure you’re on the right track to enjoying your golden years to the fullest.
Plan for future expenses. Parenting doesn’t end just because children are no longer living at home. “The house might be empty, but the pocketbook is still being drained,” Hughes says.
College decisions can play a big role in determining how much parents are paying for children after they leave home. “We find that it all depends on whether the parents have budgeted for college,” says Eric Aanes, president and founder of financial firm Titus Wealth Management in Larkspur, California. Parents who have money set aside in college savings accounts may be able to easily fill requests for assistance with tuition. Those who don’t have money put aside will need to decide whether they want to pull money from their cash flow or take out loans to help their kids get through college.
However, it isn’t only higher education that can cost empty nesters. They may also have to grapple with if and how to help pay for weddings, first homes and expenses related to grandchildren. Spouses should agree, in advance, about what type of financial assistance they will provide adult children. Then, their budget should be adjusted to set money aside for these anticipated needs.
Wipe out debt. The next step for empty nesters is paying off any lingering debt. “I want their house completely paid for,” says Steve Ng, a chartered financial analyst and professor of practice at Clark University in Worcester, Massachusetts. Going into retirement with a mortgage can make it difficult to live comfortably off of Social Security and savings. The same can be said for credit cards, auto loans and other debt.
Parents should also be wary of accumulating new debt after the kids are gone. “I see people follow their children and that can be a bad thing,” Gaudio says. Highly mobile young adults can move multiple times. “You could be on this train ride following the family around the country.”
Setting up a new household is expensive, and if parents buy a home only to sell it a few years later, they could find it difficult to come out ahead financially. The first few years of payments on most mortgages go primarily to interest, which means that frequent movers aren’t building up any equity and could be prolonging their time in debt.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Make retirement savings a priority. Empty nesters may be in their peak earning years, meaning that now is the time to stash as much as possible into retirement accounts. Hughes recommends parents review their past bank statements to estimate the costs associated with their kids. Then, parents can use that figure as a starting point for boosting their retirement savings. “Give to yourself that which you were giving your children,” Hughes says.
Ideally, money should be placed in tax-favored accounts such as 401(k) plans or IRAs. Keep in mind that contributions to traditional 401(k) and IRAs are tax-deductible, while money placed in Roth accounts grows tax-free and can be withdrawn tax-free in retirement.
“The biggest mistake is getting caught up in the latest and greatest idea,” Aanes says. Some empty nesters hear about complex investments or real estate ventures that promise big returns and are tempted to place their money there instead. However, Aanes says these investments can be risky, and 401(k) plans and IRAs are the best bet for retirement savings.
Splurge on yourself. With the kids gone and debt paid off, parents might find themselves with a significant amount of disposable income. The question is what to do with it, Ng says.
Financial experts say there is nothing wrong with splurging now that the intensive parenting is done. Taking a once-in-a-lifetime trip, upgrading a vehicle or refreshing a family home are all common splurges for empty nesters.
Still, people should be careful not to go overboard. “I think there is a tremendous risk of seeing this as party money,” Ng says. Parents still need to be responsible with their money since there are so many uncertainties in their future. For instance, Ng says he’s not confident Social Security will be around forever, and health care costs may be a bigger expense than many people expect.
[See: How to Max Out Your 401(k) in 2018.]
Guiding your children to adulthood is an accomplishment to be celebrated. But don’t forget to also pay down your debt, save for retirement and put money aside for the day when your kids may come home asking for more.
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How to Adjust Your Budget Once Your Kids Leave the Nest originally appeared on usnews.com
