How to factor finances when the family nest is empty

Becoming an empty nester is bittersweet.

Your child has grown into an adult and moved out of your home. They may have moved into a dorm for college, signed a lease on their first apartment or simply reached a point when it is time for them to move on.

You may now feel like there’s a void in your life because your household is quiet and does not revolve around your child’s needs. But the home is neat and clean, expenses are lower, and there is time to place your interests first.

Empty-nest syndrome is a psychological condition that affects parents when their children leave home. Feelings of grief, loss, fear and difficulty in adjusting to new roles are common. Navigating this period of transition can 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 are financially independent. You may feel a new sense of financial freedom. You might also notice there is unexpected cash remaining in your bank account at the end of the month.

Revisit the budget

Over the years, you’ve probably accumulated items, memberships, or service subscriptions that benefited the kids more than you. Some examples include streaming subscriptions, family phone plans, and gym or pool memberships. Are you paying for any monthly services that only the kids used? Review your monthly expenses to find items you can eliminate or reduce to save money. Hopefully, this will encourage savings while reducing your monthly services to only the ones you use and enjoy.

With fewer family members eating, using electronics, and taking showers, you can also expect to spend less on groceries and utilities and should have additional discretionary cash. If you have outstanding debt, use this excess income to pay 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, this may be an ideal time to downsize by moving to a smaller home, condominium, or senior community. Smaller homes cost less to heat, cool, and maintain. And condominium and senior communities typically have shared 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 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 rooms. For extra cash, consider selling unwanted items. Listing these items on Facebook Marketplace is an easy option. Donating them to the Salvation Army, Goodwill, or a local charitable resale shop is also a good idea. This can not only create space in your home but also provide a tax deduction.

Review 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 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 often, most empty nesters can benefit by diverting their newfound discretionary funds toward their retirement savings.

Putting extra money toward your 401(k), individual retirement account (IRA), or other savings can help you obtain your retirement goals. If possible, take advantage of catch-up contributions, which allow people who are ages 50 and older 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 and 63 will be eligible for a special catch-up contribution of $10,000 or 150 percent 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 pretax basis. Instead, these savings will be taxed before they go into the person’s retirement account, making them Roth contributions.

If you have not met with a CERTIFIED FINANCIAL PLANNER™, now may be the time to do so. A CFP® professional will help you to understand if you are on course to meet your retirement income expectations. And if you are not, they can help you plan accordingly.

Refresh estate plan

Often, we create our family trust, wills, healthcare directives, and power of attorneys while our children are young. Over time, our needs change as our children grow. This means your estate plan may no longer meet your needs.

If you have not met with your attorney in the past few years, this is a good time to do so. In addition to updating your estate plan, consider appointing 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.

Revise life insurance policies

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

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

Long-term care insurance helps pay for long-term medical care. It also helps pay for professional assistance with the activities of daily living, like bathing and dressing, which Medicare and private health insurance do not cover.

529 plan conversions

If there is money left in your child’s 529 plan after 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. The SECURE Act 2.0 passed at the end of 2022 created a new option for people who invested more than they needed in a 529 college saving plan. Now, some of these 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 throughout 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 simply entering a new phase in life. As you move through this transition, now is the time to reevaluate your finances. Take the time to talk to your children about your expectations regarding your financial relationship as they become independent adults. And talk to your financial and tax advisors about this relationship too. Recognize that it is okay to pivot from focusing on your child’s needs to focus on your own financial freedom and retirement readiness.

Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at [email protected].