savings

Kids Leaving Home? How New Empty Nesters Can Save, Invest

Whether your kids are off to college or to kindergarten, becoming an empty nester could free up a big chunk of money for parents. It could help fund your retirement or pay off your mortgage in half the time.

One morning in early August, my husband and I put our three children on the bus and entered a new phase in life — early empty nesting. I periodically work from home, so with our twins beginning third grade and our youngest child starting kindergarten, we now have a very quiet house for eight hours a day.

At the other end of the spectrum, we have many friends who are either sending their youngest child off to college next month, or will see the last one graduate in spring 2018.

Regardless of your stage in life, if you are marking a major family milestone, your finances are likely entering a new phase, too. It’s an opportunity to make a real difference in your own financial future.

Empty Nesters, Phase 1

Parents sending their youngest child off to public school have likely celebrated paying their last day care tuition bill, a savings that could amount to $1,000 a month. But rather than rush out to buy a new car, consider using this cash to pay down debt instead.

By taking that $1,000 and applying it each month to pay down your mortgage — in addition to your regular mortgage payment — it could cut the number of years to pay off the mortgage in half.

Here’s a great example. A couple with a $450,000, 30-year mortgage at a 4% interest rate could pay off their mortgage in 16 years by making the extra $1,000 payment each month — vs. 30 years if they don’t. And if that family can also add one extra mortgage payment each year, they could be mortgage-free by the time their kindergartner starts college.

Another way to use this cash is to sock it away in a college savings 529 plan for your little one. By the time they are 18 years old, $1,000 in monthly savings could equal almost $230,000 to pay for their college education. Even if pre-school expenses were only $200 a month, setting this amount aside for college each month for next 13 years could build a 529 plan portfolio worth $50,000 by the time college comes around (assuming a 6% annual rate of return; not indicative of a specific investment).

For parents with children entering private school, expenses are likely increasing instead of going down. If that’s the case, review your budget and determine if daily expenses can be reduced to ensure your finances aren’t going in reverse.

Many of my clients are grandparents who enjoy paying some or all of their grandchildren’s private school tuition. It’s a great idea for them to pay the school directly. These payments won’t count against the $14,000 annual gift tax exclusion, thus avoiding gift taxes and possibly saving the grandparents estate taxes down the road.

Empty Nesting Phase 2

If they started saving early enough that they had the full cost of college covered by the time their children graduated high school, couples sending their youngest child off to college can see their disposable income soar. For those who still need to come up with the funds to pay all or part of their child’s college tuition, this bump in disposable income will likely come four years later, when their child graduates. Regardless of the timing, keep your eye on the financial finish line and understand how to get there.

Once a couple’s youngest child is out of the house and graduated from college with a job, grocery bills will be lower, and vacations for two people will cost less than for trips for three or four. Everyday expenses, such as gasoline will be gone, with fewer $20 bills flying out of your wallet on the weekends.

More important, the couple will begin to envision their own retirement. I often watch my clients begin to ramp up their savings and focus on a plan for retirement once they know all of their children’s college expenses are behind them.

For couples in this situation, I recommend starting an automatic transfer of funds each month from a checking account to an Individual Retirement Account or brokerage account. By saving an extra $1,000 a month for the next four years, a person can generate an extra $200 a month of spending money for the next 30 years in retirement (assuming a 5% annual rate of return; not indicative of a specific investment).

Time to Evaluate Your Own Goals

It’s also a good time for these empty nesters to re-run their retirement projections. This exercise helps people understand their total personal living expenses in retirement, which is the most important factor in determining how much money is needed to retire.

Once a person develops a budget and knows their current spending, they can better answer the question “how much is enough for retirement?” One common method is to use the 4% withdrawal principle, which means having enough funds to last through retirement by annually withdrawing 4% of your total portfolio.

For example, if someone determines that they need to withdraw $100,000 (pre-tax) per year from their investments in retirement, they will need to have a nest egg of $2.5 million. Understanding the amount needed in retirement will help anyone realize how much more they need to save, or how much longer they should plan to work.

About the Author

Lisa Brown, CFP®, CIMA®

Partner and Wealth Advisor, Brightworth

Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College." She is the Chief Strategy Officer for corporate professionals and executives at wealth management firm Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner and supporter of charitable causes focused on homeless children and their families.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 14, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President-elect Joe Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 18, 2021

Recommended

10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)
retirement planning

10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)

Once you run through this checklist, you’ll be in great shape for a prosperous and organized new year.
January 18, 2021
Fund Your IRA, Cut Your Taxes
Tax Breaks

Fund Your IRA, Cut Your Taxes

There’s still time to make a 2020 IRA contribution and lower your tax bill.
January 13, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
January 12, 2021
Is a Fix Coming Soon for Social Security?
Smart Buying

Is a Fix Coming Soon for Social Security?

Social Security has funding problems the COVID-19 pandemic has made worse. What are the prospects for the next Congress and administration doing somet…
January 12, 2021