How to factor finances when the family nest is empty

By?TERI PARKER?| Contributing columnist- The Orange County Register

PUBLISHED:?July 23, 2023, at 5:37 a.m.?| UPDATED:?July 23, 2023, at 5:38 a.m.

Becoming an empty nester is bittersweet.

Your child has grown into an adult and has moved out of the home. They may have moved into a dorm for college, recently graduated from college and moved into their first apartment, or just reached a period when it is time for them to move on. You now have a void in your life because your household is quiet and does not revolve around your child’s needs. But your home is neat and clean, monthly expenses are lower, and there is time to place your interests first.

The empty-nest syndrome is a psychological condition that affects both parents when children leave the home. Feelings of grief, loss, fear, inability, difficulty in adjusting roles, are not uncommon. Navigating through this period may be difficult. You may feel as if you no longer have a purpose. Whatever your situation, you are now entering a new phase in your life.

Becoming an empty nester will change your monthly cashflow (especially if your children are no longer in college) and living independently. For the first time you may feel a sense of financial freedom. You might also be wondering why there is cash remaining in your bank account at the end of the month.

Revisit Your Budget

Over the years, you may have accumulated stuff or subscribed to services that benefited the kids more than you. Some examples might include TV cable or streaming subscriptions, family phone plans, and gym or pool memberships. Are you paying for streaming services only the kids used? Review your monthly expenses to find areas that you can eliminate or change to save money. This will hopefully encourage savings, while reducing the kinds of services to only those that you will use and enjoy often.

With fewer family members eating, using electronics, and taking showers, you will spend less on groceries and utilities and should have additional discretionary cash. If you have outstanding debt, shift your extra discretionary income to paying off your debt. Give yourself a month or two to cycle through your monthly expenses, then sit down and pencil out a new budget.

Is Downsizing an Option?

Depending on the size of your home, it may be an ideal time to downsize, moving to a smaller home, condominium, or senior community. Smaller homes cost less to heat, cool, and maintain. Condominium or retirement communities often have common maintenance areas, meaning that you will spend less time on yard work and more time enjoying life. Lower bills and less maintenance can help free up additional cash to be invested for retirement.

Depending on the market conditions and the equity in your home, you may be able to buy a new home outright, reducing your monthly cash flow.

If you are not ready to move, take the opportunity to declutter your home and repurpose unused game rooms or bedrooms. For extra cash, consider selling unwanted items. Listing items on Facebook Marketplace is an easy option. Additionally, donating items that you no longer want to your favorite charity will free up space in your home and provide a tax deduction for your efforts.

Review Your Taxes

As long as your children are still full-time students, you can claim them as dependents on your tax return up to age 24. Otherwise, you can only claim children who are nineteen or younger by the end of the tax year. Do not let any potential tax impacts of your children's new independence take you by surprise. To make up for this loss, you could consider increasing your contributions to a retirement account; this will decrease your gross income, reducing your tax liability.

Revisit Your Retirement Planning

Ideally, after your kids leave home, cash that you used to pay for their expenses will be available. While it is fine to pamper yourself a little more, most empty nesters can benefit by diverting their newfound discretionary funds towards their retirement savings.

Putting extra money toward your 401(k), IRA, or other retirement accounts can help you obtain your retirement goals. If possible, take advantage of catch-up contributions, which allow people ages 50 and up to put extra money into their retirement plans. Beginning in 2025, employees with 401(k)s or other workplace retirement plans between the ages of 60 to 63 will be eligible for a special catch-up contribution of $10,000 or 150% of the standard catch-up limit for that year.

Starting in 2024, however, people who earned more than $145,000 in the previous calendar year will no longer be eligible to make catch-up contributions on a pre-tax basis. Instead, these savings will be taxed before they go into a person’s retirement account, making them Roth contributions.

Do you know if you are on track for a secure retirement? If you have not met with a Certified Financial Planner (CFP?), now may be the time to do so. A CFP? will help you to understand if you are on course to meet your retirement income expectations. If you are not, they can help you plan accordingly.

Revisit Your Estate Planning

Often, we create our family trust, wills, health care directives, and power of attorneys while our children are young. Over time, your needs change as your children grow older. Your estate planning may no longer meet the needs of you or your family. If you have not met with your attorney within the past few years, now may be the time to do so. Besides updating your estate plan, appoint an estate administrator who is aware of their role, is familiar with your attorney and financial advisor, and knows where your estate planning documents are stored.

Revisit Life Insurance Policies

Many parents buy term life insurance to provide for their families until the kids are grown. If you're still providing some support for your children—such as paying for college—life insurance can help cover those costs if you were to unexpectantly pass.

On the other hand, if you have no dependents and your spouse will have enough retirement income and savings to live comfortably, life insurance may no longer be necessary. In lieu of paying for life insurance, shifting the funds earmarked for life insurance payments to cover the cost of long-term care insurance may be sensible.

Long-term care insurance helps pay for medical care and assistance with activities of daily living, like bathing and dressing, that Medicare and private health insurance do not cover.

529 Plan Conversions

If there's money left in a 529 Plan after college graduation, and your child (the beneficiary) is employed and eligible, you may be able to roll the excess funds into a Roth IRA for your child. On December 29, 2022, the SECURE Act 2.0 created a new option for people who invested more than they needed in a 529 college saving plan: some of those funds can be used for retirement savings.

Beginning in 2024, beneficiaries of 529 accounts will have the option to roll over up to $35,000 over their lifetime to their Roth IRA without paying taxes or penalties. Rollovers will be subject to Roth IRA annual contribution limits, and the 529 account must have been held for the beneficiary for more than 15 years. In addition, the rules indicate that funds contributed to the 529 account within the five years preceding the rollover will not be eligible to roll over.

Remember, just because your child is no longer living under your roof, your parenting duties are not over. You are just entering a new phase in life. As you transition into this new phase, now is the time to evaluate your finances. Discuss the expectations that you and your child have for the type of financial support you will provide as they become independent adults. Recognize that it is okay to pivot towards focusing on your financial freedom and approaching retirement.