Editors' pick: Originally published Aug. 4.
Tap an empty-nester on the shoulder and ask how life is going, and you'll likely get a glowing response along the line of "I miss junior, but past that, things couldn't be better."
That may be true on an emotional level, but increasingly, the data show it's not so true when it comes to the household finances.
A recent study from The Center For Retirement Research at Boston College tells the tale. In it, BC researchers show that the idea of extra income for parents after kids leave the house is a myth. It's not because parents don't have extra cash on hand when junior moves out of the basement. It's just that mom and dad spend the money quickly, on things like vacations and high-end home projects.
And that's not good for their long-term financial health.
"In short, empty-nesters appear to spend most of the new-found slack in their budget, rather than save it, a choice that will undermine their retirement security," says Irena Dushi, lead analyst and researcher on the study.
Furthermore, there really isn't a lot of extra money being plowed into retirement plans in an empty-nest household, although financial experts say there should be.
The BC study shows that additional savings in 401(k) plans only rise by a meager 0.3% to 0.7%, a figure range that is "extremely small," the study reports.
Besides higher household spending on things like upgrade and travel, what's keeping empty-nest parents from using added income toward retirement? Primarily, that money is going back to the kids, anyway.
"Among the explanations offered for the lackluster increase in savings is empty nesters' continued financial support of adult children," says Carla Dearing, chief executive officer of SUM 180, an online financial planning service. "Picking up their grown kids' expenses--student loans, insurance, auto payments, smart phone bills--is a generosity those who have not yet saved enough for retirement can ill-afford."
"Those in their 50s typically are ideally positioned to accelerate their retirement savings," Dearing adds. "They're at the peak of their earnings, the mortgage is paid and the kids are finished with college and out of the house. As this is possibly their final chance to ensure their retirement is financially stress free, directing more into retirement savings must be their top priority."
To maximize extra household income in an empty nest scenario, Dearing advises recognizing this time for what it is - a window of opportunity.
"You owe it to yourself to make these years count," she says. "It's never too late to save, and in all probability, you are now enjoying the heftiest earnings of your career to date. To boost your retirement savings appropriately, you may need to rethink your current priorities--including taking the difficult step of reducing or even eliminating financial assistance to adult children. Think of it as putting the oxygen mask on your face first. It may feel counter-intuitive, but, after all, your security in retirement is something your children want for you, too."
There are other ways to free up additional cash for the retirement savings account.
"Saving money is really hard, but the biggest impact on an empty-nester's budget is the hardest to change - housing," says Ryder Taff, a financial advisor with New Perspectives, Inc., in Ridgeland, Miss.
It can be really difficult for people to move, and often, they have lived in their house so long that even downsizing their house doesn't free up a lot of cash, Taff says. "One way to save money in the budget on housing is just by refinancing a mortgage," he notes. "I just helped a client lower their monthly payment from $2,000 to about $600 per month by extending the term and lowering their rate. For a house that has expensive upkeep -- i.e., way too many square feet or too big of a yard -- moving to a smaller house can help dramatically, also. If they get a big windfall from selling a house, I encourage empty nesters to supplement their income with withdrawals from the windfall so that they can boost retirement savings and lower their tax bill further."
Scott Hanson, a senior partner and co-founder of Hanson McClain Advisors, a California-based financial advising firm, advises empty-nesters to save money before you have a chance to spend freed-up cash. "Too many of us spend whatever passes through our bank account," Hanson says. "The key is to decide upon a savings strategy before you have a chance to spend it. Determine ahead of time how much of the funds that were going to the kids will now be directed toward your retirement.
A great way to do that is to max out that employer retirement plan, he says. "You can contribute as much as $24,000 into a 401(k) plan if you are age 50 or older," Hanson explains. "Too few of us ever reach that milestone, but from my experience, those who have contributed the most to their employer's retirement plan are in the best financial position during retirement."
Cutting back on medical expenses can unleash some extra dollars toward retirement too, in an empty-nest situation.
"The average American will spend more than $10,000 on health care this year," says Cameron McCarty, owner of Vivid Tax Advisory Services in Des Moines, Iowa. "Sure, medical bills are hard to avoid, but there are ways to save by opening a health savings account, or an HSA."
Basically, an HSA is a tax-free account that offers owners a way of saving for medical costs that aren't covered by insurance, McCarty says. "HSAs are usually part of a high-deductible insurance policy, where you -- and sometimes your employer -- put pre-tax dollars into an HSA and that money grows tax-free," he adds. "HSAs allow you to put some of your paycheck away before taxes - lowering your adjusted gross income and the amount of taxes you pay each year. But, what many people don't realize is that with an HSA, you can continue to invest and make money, which you can then use, without a tax penalty, when you get to your retirement years."
When it comes down to brass tacks, handling an empty-nest household, at least from a financial point of view, is all about finding balance, and staying focused on your long-term money needs.
By all means, enjoy the peace and quiet of your new home arrangement, and any extra cash that comes with it. But spend frugally, and make sure you're using a good chunk of that extra cash toward a happy, comfortable retirement - or you might wind up living in junior's home some day, in a nest that's not your own.