Many of life’s milestones come with a financial impact. When children grow up and leave the nest, a new chapter of life begins for many parents. The empty nest stage may seem like a time of loss, but it’s also a period of gain. The money once earmarked for your child’s needs and wants is now available for you.
It’s a great time to update your financial plans and priorities so you can make the most of your next phase of life. Below is a checklist of primary considerations for Empty Nesters.
Maximize Retirement Contributions
“Savvy savers are always looking for ways to maximize their cash flow, so any change in life circumstances or monthly expenses represents an opportunity to recalibrate and push excess funds into savings or other investments,” says Greg McBride, chief financial analyst and SVP of Bankrate.com.
Putting your retirement on the front burner should be a priority during the empty nest years. You’ve probably been a good steward with your money and have been allocating 10 to 15 percent of your income towards retirement. With fewer financial obligations, now is a good time to maximize your contributions.
“For my clients, having a savings rate of 25 percent in the empty years would not be uncommon,” says Timothy Wyman, CFP at the Center for Financial Planning, Inc. Wyman says if retirement savings have fallen short, the savings rate may need to be even higher.
Contributing the maximum to your 401(k), 403(b), or the federal government’s Thrift Savings Plan means a yearly contribution of $17,500. If you’re in your 50’s, you have the opportunity to make catch-up contributions with an additional $5,500, for a yearly total of $23,000.
You can ramp up your retirement even more by contributing to an Individual Retirement Account (IRA) with a maximum contribution of $5,500 in 2014. That amount jumps to $6,500 if you’re age 50 and older.
“If there’s excess money, looking into a Roth IRA is a good option,” says Wyman.
Exercising once doesn’t get you in shape and neither does infrequent retirement check-ups. Each year, review whether you’re still on track to reach your retirement goals. Then adjust your savings rate accordingly.
Assess investment risk: While it’s rarely possible to avoid investment risk entirely, it’s prudent to manage risk throughout every life stage. The objective is to determine the level of risk that’s appropriate for you and your situation. As you get closer to retirement, managing investment risk generally means moving at least some of your assets into more conservative investments.
Determining your investment risk is contingent on the amount of your investment base and how many people are dependent upon you. The more assets you’ve accumulated, the more added risk you may be willing to take. If you have more than just yourself to care for, you may decide on less risky investments.
McBride recommends balancing your investment risk to help make your money last. “Regardless of how many years until retirement age, many people are looking at a 30-year planning horizon within retirement. You’re going to need a good chunk of assets invested in higher returns to make your money last for the long-haul.”
Weigh Insurance Needs
While you may have many financial obligations behind you, you’re not out of the woods. Depending on your scenario, you may still need to hold on to some insurance policies. How much you need and the types you need are up for review.
Life Insurance: When assessing your life insurance needs, take into account your retirement balance(s) and what would happen if your spouse could no longer contribute to a sufficient retirement savings. Could you reach your goal without the security of life insurance policy? Could you financially help to support any dependents, like aging parents and “Boomerang” kids on one income or pay down/off any large debts without sacrificing your savings and retirement? You may still need life insurance to cover the unexpected and possibly leave a legacy to your family, but you may not need as much.
Umbrella liability: Anyone concerned about losing income or assets would benefit from an umbrella liability policy. An umbrella policy kicks in when you reach the underlying liability coverage in a homeowners, renters, condo or auto policy. It will also cover you for things such as libel and slander. While you may already have an umbrella policy, it’s a good idea to reassess your coverage needs as your asset base grows.
Long-term care insurance: While no one likes to think about illness or needing help with daily tasks like dressing and bathing – being financially prepared for the possibility that you will require long-term care is a significant part of retirement planning.
The cost of a home health care aide, an assisted living facility or a nursing home can quickly deplete your assets. The average annual cost of nursing home care in 2014 is just over $87,000, according to Genworth Financial’s Cost of Care survey.
There is a saying in the long-term care insurance business, “Your money pays for long-term care insurance – but your health buys it.” In other words, don’t wait for failing health to purchase a policy.
The American Association for Long-Term Care Health says, “for most people, the best age to apply is in your mid-50s.” The earlier you lock in a long-term policy, the more likely you are to qualify and the less it will cost over the long haul.
When comparing long-term care policies, consider if the premium is worth the investment. According to Nolo.com, “Consumer and financial experts generally agree that LTC insurance is a bad investment unless the monthly premium is 5% or less of your monthly income.”
Other considerations are the average daily benefits, elimination period, benefit triggers and what is covered and excluded.
You may never need long-term care, or you might not need enough to collect much in the way of insurance premiums. Instead of buying a policy and paying premiums, consumers could set aside savings for long-term care.
“Deciding to spend a large amount on premiums instead of building up retirement savings needs serious consideration and calculation,” says McBride.
The Not-So-Empty Nest
While many empty nesters plan for the next stage of life, the door never fully closes on family responsibilities. Just when you think you’re alone, a knock at the door could change your circumstances.
A recent study by the Pew Research Center found that the number of young adults between the ages of 25 to 34 living with their parents has nearly doubled since 1980. Pew research also noted that roughly half of parents (48%) provided some financial support to their grown child within the last year.
It’s one thing to help a “Boomerang” child over a financial hump, but on-going financial support can have negative consequences for both parent and child. If you’re not teaching your child how to manage money, they could frequently run into trouble and look to you to bail them out – possibly resulting in reduced savings or delayed retirement.
“I’ve had more than one client where their retirement is in jeopardy because they’re financially supporting their adult kids,” says Wyman.
“It’s very important that parents consider a contingency plan should kids return. It requires communication – what happens if they do, expectations on how they will pick up the slack,” says Jack Tatar, retirement expert and author of “Safe 4 Retirement: The 4 Keys to a Safe Retirement.”
Tatar suggests setting time limits on how long you will financially support your child and how they will contribute to the finances of the house – rent/groceries/utility bills. While you don’t want to turn away your child when they’re in need, parents shouldn’t make it too easy and comfortable either.
Enjoying the Empty Nest
Part of empty nesting means tapping your ambitions, hobbies and reveling in “you” time. Whether that’s scaling back on your career or focusing on a new one, traveling to exciting destinations or trying new adventures.
Your overall financial picture will determine how much disposable income you’ll have for the things you want to do.
Setting aside funds is an important part of accomplishing your “life list.” Measuring your financial health will help you find balance between earning enough to warranty life is lived fully and saving enough to generate financial security in later years.
“The empty nest years can help you put the final touches on the financial aspect of your retirement readiness, while giving your intended retirement lifestyle a test drive,” says McBride.
How are you financially preparing your empty nest?