Raising one child to age 17 costs a middle-income married couple on average $233,610, according to the U.S. Department of Agriculture.
Once your kids leave the nest, all of the money you spent feeding, clothing, and entertaining them is suddenly up for grabs. But if empty nesters don’t earmark their newfound savings for specific goals, it’s easy to fall into the so-called “lifestyle creep” trap — when your lifestyle suddenly becomes more expensive as soon as your discretionary income increases.
A 2016 study by Boston College’s Center for Retirement Research found that a couple collectively earning $100,000 per year should be able to put an additional 12% toward their retirement savings after their children fly the coop. But in reality, researchers found that same couple would only increase their 401(k) contribution by 0.3 to 0.7 percent.
Covington, La.- based certified financial planner, Lauren Lindsay encourages empty nesters to put their extra pocket money to work.
“In general, when people have money ‘available’ they tend to spend it and not even be conscious about how they’re spending it,” Lindsay told MagnifyMoney. “I think it’s really important to refocus our goals now that we are in a different stage and, hopefully, on that home stretch towards retirement.”
Lindsay says the empty-nester stage is a really good time to circle back and revisit your budget to focus and make a plan for your financial goals. “Depending on where you are in the scale of retirement, you could use the extra funds to pay off a car, pay down the mortgage, save towards a trip, fund the emergency fund, or other goals,” she says.
As a new empty nester, there’s likely an endless list of purchases and lifestyle upgrades your newfound savings could go toward. You may even think you deserve a new car or boat, or to go on a luxury vacation every year after 18 or more years of child-rearing.
You can certainly treat yourself if you’d like, but you should make sure to get your financial house back in order before celebrating your freedom.
Here are a few things you can do to make sure your empty-nest savings go to the right places.
Put a number on what you’re saving now that the kids are gone
You may not be aware of exactly how much money you are really saving now that there are fewer mouths to feed at home. Creating or revising your budget gives you an opportunity to see the numbers behind the decrease and adjust your spending to maximize potential savings.
Peachtree City, Ga.-based certified financial planner Carol Berger suggests new empty nesters take the opportunity to complete a cash flow analysis — either on your own or with a financial adviser.
“This will allow you to identify how much discretionary income you have and then develop a plan on how to use it,” says Berger. Tally up the reduction in your spending to get an idea of how much potential cash you could be diverting to your own financial goals.
Shrink your lifestyle
If you’ve spent decades shopping for a family of three or more, it’s hard to break that habit right away. You might still be shopping for more groceries than you really need, for example, and wasting money in the process.
It might be time to take an even bigger step toward minimizing your housing costs — downsizing. Not only could this reduce your overall housing costs, but it’ll give you an opportunity to shop around for a home that better fits your needs as you age or to consider a residence in an active adult community with homes and amenities designed specifically for those ages 55 and older.
Check out what you’re paying for utilities, too. While you may have needed the tricked-out cable package when your kids were living at home full time, you may not care about paying for premium channels any longer. Call your provider and negotiate a less-expensive package. Try using a service like BillFixers or Trim to renegotiate or cancel bills and features you may no longer have use for.
Review your insurance policies
The same goes for your insurance policies like car and health insurance. Under the current health care law, kids can stay on their parents’ health insurance plan until they turn 26. But if your adult child already has employer-provided insurance, you don’t need to pay for their coverage anymore.
Contact your employer’s human resources department to discuss removing members from your family plan, or switching to a lower-cost individual plan when you’re on your own. The same goes for any vision or dental insurance plans you may still be paying the family price for.
If you’re still paying for your child’s life insurance policy, you may want to speak with them about transferring the plan into their name or canceling the plan if they have access to a better one through an employer.
It couldn’t hurt to ask for a discount on your car insurance or switch to lower-cost coverage because the kids aren’t there to drive your car.
Put your newfound money toward any outstanding debts
Saving for retirement is important and paying off your outstanding debts should be your top priority. The interest rates on unsecured debts like credit cards are generally higher than any returns you’d receive on potential savings. So if you pay off your debts first, you’ll actually save yourself more money in the long run.
According to a 2017 Consumer Financial Protection Bureau report, the number of Americans 60 and older with student loan debt rose from 700,000 to 2.8 million individuals between 2005 and 2015. The average amount of student debt owed by older borrowers almost doubled during that time, from $12,000 to $23,500.
One of the worst things you can do for retirement planning is ignore past-due debts. If debts go unpaid for too long, you could see your wages or even your future Social Security benefits garnished. The same CFPB report shows the number of retirees who had their benefits cut to repay a federal loan rose from about 8,700 to 40,000 borrowers over the 10-year period.
Don’t sacrifice your retirement goals to pay for college
College has never been more expensive. But remember: Your kids can take out a loan for school and pay it off as their income grows. You can’t necessarily take out a loan for your retirement.
That’s why financial planners often advise parents not to put themselves at financial risk by sacrificing their nest egg to pay for their child’s college education — unless they can afford to take the hit.
“Many people believe that they must send their kids to college, and they pay a hefty sum for that — sometimes at the expense of their retirement,” says Oak Brook, Ill.-based certified financial planner Elizabeth Buffardi.
If you’ve covered your debts and have room to save more, you still have plenty of time to contribute to your retirement funds.
Let’s say a married couple has $200,000 already saved for retirement with 15 years left to go. They collectively earn $100,000 per year, and they have diligently been saving 15% of their monthly pre-tax income for retirement. If they double their savings to 30% — putting away $2,500 each month — and their investment grows at an average annual rate of 6%, they could have well over $1 million saved by retirement.
Plan for long-term health care needs
A couple retiring today will spend an estimated $260,000 on health care needs in retirement, according to Fidelity.
Think of what other health care needs you could have in retirement. Buffardi says she always asks clients if they are worried about needing long-term care in the future. While most workers will qualify for Medicare once they turn 65, Medicare does not cover all long-term care needs. If you know you have a family history of dementia or other age-related illnesses that may require long-term care, this may be a concern for you. You may consider taking out a long-term care insurance policy or setting aside funds in a regular savings account.
Learn to say NO
Even after your kids move out, they can still treat you like the Bank of Mom and Dad. They may come to you for a wedding loan or to ask you to co-sign something they can’t afford, like a mortgage. Even though their pleas may pull at your heartstrings, consider your own financial needs first.