Wealth Planning for Empty Nesters

Wealth Planning for Empty Nesters

Empty nesting is undoubtedly a major life change—and you may be feeling an emotional and physical loss. You’re probably facing some financial changes too. So, as you go through the process of reinventing your life as an empty nester, reevaluate your financial state too. Here are some things to consider.

Published by Motley Fool Wealth Management Originally posted on Tue, Jun 28, 2022 Last updated on July 10, 2023

read time 6 min read

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Wow, it’s been a couple of decades in the making. You've cuddled, fed, rough-housed, counseled, consoled, cheered, and done much more. At last, your children have spread their wings and flown your nest. Now what?

Empty nesting is undoubtedly a major life change—and you may be feeling an emotional and physical loss. You’re probably facing some financial changes too. So, as you go through the process of reinventing your life as an empty nester, reevaluate your financial state too. Here are some things to consider.

Take stock of your financial situation

Most parents become empty nesters between the age of 40 and 60. Before this, you likely spent most of your money on your family. Now, it’s time to be selfish—and prioritize your goals, especially preparing for retirement. Because while your kids were a (welcome) financial burden, the last thing you want to do is run out of money later in life and become dependent on them!

Start by establishing your goals. For instance, when do you want to retire? Do you want to provide ongoing financial assistance to your kids? Would you like to give them a one-time significant gift (like purchasing a house)?

Once you have your goals laid out, next determine how to meet them. This may be a good time to reach out to your wealth advisor, if you have one, or find a financial professional if you don't. A wealth advisor can help you put an action plan around your goals by assessing your current situation, daily financial needs, and savings plan to reach your longer-range objectives. This is your roadmap.

Redirect toward savings for retirement

Many early empty nesters find themselves with debt—sometimes a significant amount—and too low savings because they redirected their money towards their kids. But now, as many empty nesters do, you may find that your living expenses can be cut and re-routed to save toward your goals. So this is a great time to revisit your budget.

Start by reviewing expenses. Fortunately, they often decrease when kids are no longer on your payroll! For example, education and housing (if they were in college), food, clothing, and transportation costs typically go down. Next, quantify your monthly savings to reallocate those funds to debt and retirement.

We understand some costs won’t go down at all, and others don’t decline immediately. For example, you may keep your kids on your family insurance until they are 26. Or even maintain them on your family phone plan! These are generous ways to continue providing some help as they establish a financial foundation.

What should you do with the “found money” from your budgetary cuts? First, use it to pay off high-interest debt. Then save towards your goals.

If you’ve sacrificed saving the maximum allowable amount in your retirement accounts while raising your kids, change course now. Max out your retirement plan contributions or play catch-up if allowed. In 2023, you can contribute $220,500 to a 401(k) and $6,500 to an IRA. And if you are over age 50, the annual catch-up amount is an additional $7,500 for your 401(k)and $1,000 for your IRA. This is a great way to save for retirement and take advantage of tax benefits.

Consider downsizing

Many empty nesters face a space issue—in other words, they often have too much space for their now smaller size. So sooner or later, think about downsizing. A smaller place not only costs less to own (reducing or eliminating a mortgage), but it’s also cheaper to heat, cool, clean, and maintain (such as less yard work!).

It may also be a time to rethink your geographic location. For example, would you be willing to move to a state with a higher standard of living through lower costs or taxes? Or can you move further from a city or town now that staying within a specific school district is no longer necessary?

These are not easy questions to answer, but they could impact important life decisions, such as when you can retire, if you can meet all of your long-term goals, or if you’ll be able to live within a worry-free budget.

Review your estate plan

Every life change warrants a review of your estate plan. And if you don’t have an estate plan, it’s an opportune time to create one. Estate plans are not just for wealthy people. Everyone with a family needs one. They include documents such as a will, a financial power of attorney (POA), and a healthcare directive. Consult an estate lawyer to get yours in place.

In addition, consider your legacy plans. Do you want to leave money to heirs or bequeath a one-time gift? These answers will influence how much you save, which type of account you use, and the management of those funds

For instance, if you want to leave a legacy, you may have a growth goal for your invested assets since they need to extend beyond your lifetime. Legacy plans also influence what type of account you use. For example, suppose you want to transfer money to heirs and don't need additional income in retirement. In that case, you may want to convert your traditional IRA to a Roth IRA or do a backdoor Roth conversion. This way, your money can grow tax-free forever, and you won't have to take annual required minimum distributions.

Your next phase

Seeing your children move out into the world as independent adults is a significant change for any parent. But you’ve done your job as best you could. And now you're embarking on the next phase of your life. So pick up a pencil and start sketching your life's new picture.

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