MONEY retirement planning

3 Ways to Feather Your (Empty) Nest

Birds in nest throwing money in the air
Sebastien Thibault

Just because the kids are gone doesn't mean it's time to splurge. Here are some ways to treat yourself well without compromising your comfort in retirement.

The phrase “empty nest” may sound sad and lonely. But—shh!—don’t let the kids know that when they clear out, Mom and Dad have fun. Often too much fun. A study by the Center for Retirement Research at Boston College found that empty-nesters spend 51% more than they did when their children were home. “We have clients who go out to lunch and dinner every day,” notes Cincinnati financial planner John Evans.

Certainly after surviving Little League, teenage attitude, and the colossal cost of college, you ­deserve to splurge. But you also don’t want to compromise your finances as you begin the final sprint to retirement. Here are three ways to keep feathering your nest while still enjoying your freedom.

First, Keep Your Spending in Check

  • Rerun your numbers. While you can likely afford to let loose a bit, make sure your retirement plan is in order before you go wild. “You should save a bare minimum of 10% a year, really more like 15%—and if you’re behind you may need to save 20% to 30%,” says Boca Raton, Fla., financial planner Mari Adam. Use T. Rowe Price’s retirement income calculator to see what you need to put away to get your desired income.
  • Make a payoff plan. Erasing your debts before retirement will require sacrifice now—but will take pressure off your nest egg and allow you to have more fun later. Figure out how to do it with the debt calculator at CreditKarma.com.
  • Plug the kid leak. One in four affluent parents ages 50 to 70 surveyed recently by Ameriprise said that supporting adult children has put them off track for retirement. Lesson: Get your priorities (retirement and debt elimination) straight first, and build gifts into your annual budget proactively vs. giving willy-nilly.

Second, Free Up Even More Cash to Stash

  • Downsize. Convert Junior’s room into a better tomorrow: Moving from a $250,000 house to a $150,000 one could boost your investment income by $3,000 a year while reducing maintenance and taxes by $3,250, the Center for Retirement Research found.
  • Cut your coverage. If your kids are working, you may not need life insurance to protect them. You may be able to take them off health and auto policies too.
  • Moonlight. Besides increasing your income and helping you establish a second act, “self-employment makes a huge difference in what you can do on your taxes,” says Tony Novak, a Philadelphia-area CPA. That’s especially valuable in these peak earning years when you’ve lost the kid write-offs.

Finally, Supercharge Tax-Efficient Savings

  • Catch up on your 401(k) and IRA. Once you hit 50, you can sock away $5,500 more in your 401(k) this year, for a total of $23,000, and an extra $1,000 in your IRA, for a total of $6,500. In 2015, you’ll be able to put an extra $6,000 in your 401(k), for a total of $24,000; IRA caps remain unchanged. If you start moonlighting, as suggested above, you can shelter more money in a SEP-IRA—the lesser of 25% of earnings or $52,000.
  • Shovel cash into that HSA. Got a high-deductible health plan? Families can contribute $6,550 ($7,550 if you’re 55-plus) to a health savings account. Contributions are pretax, money grows tax-free, and you don’t pay taxes on withdrawals for medical expenses. If you can pay your deductible from other savings, let your HSA grow for retirement, Novak says.

Sources: Employee Benefit Research Institute, PulteGroup, MONEY calculations­

MONEY

How to Keep Health Emergencies from Bankrupting You

Celine Dion takes a break from touring to care for her husband, who is battling cancer.
To help care for her ailing husband, Celine Dion has stepped out of the workforce for a while. Ryan Remiorz—AP

Céline Dion cancelled her tour to care for husband René Angélil, who's been fighting cancer. She doesn't have to worry about money, but most people in a similar situation do. Here's how to contain the financial damage.

Earlier today, singer Céline Dion announced that she would be canceling her tour to take care of her husband René Angélil—who has been battling cancer.

“It’s been a very difficult and stressful time for the couple as they deal with the day-to-day challenges of fighting [Angélil's] disease while trying to juggle a very active show business schedule, and raise their three young children,” a publicist was quoted as saying.

No amount of money can erase the worry and heartache associated with caring for a loved one who’s dealing with a critical illness. And of course Dion, with a net worth estimated at $500 million, doesn’t have to fret about how her family will cope financially at this difficult time. But for the average American, the economic consequences of a tough diagnosis can compound the stress. A study by Sun Life Financial found that even with health insurance, the average cancer patient faced $6,700 in out-of-pocket costs a year. Plus, a family illness can take you away from the office, potentially crimping your earnings.

Should something like this happen to you, a parent or a partner, follow these steps to keep the financial toll to a minimum:

First, maximize your insurance coverage

Dig into your health plan. “Find out if the treatments you need will be covered or if you’ll have to go out of network to see the best specialist,” says Donald Duncan, a Chicago financial planner. Check how much you could be on the hook for; note that your out-of-pocket max when you leave your network can be twice as high as for in-network care.

Appeal to your insurer. If you can successfully argue that no specialists in your network are experts in your care or that none have treated your condition frequently, your insurer may be willing to cover out-of-network care at in-network rates.

Negotiate with your doctor. Another cost-saving option is to see if an out-of-network practitioner will accept in-network rates. Get a sense of what prices doctors and insurers typically agree on at healthcarebluebook.com.

Next, Get Down to Business at Work

Make the most of open enrollment. Use the annual benefits election period to switch to better health coverage, fully fund a flexible spending account ($2,500 max), and see if you can sign up for extra life and disability insurance. For most large group plans, you don’t need a physical for life insurance during this annual event.

Protect your position. If your firm has 50 or more workers and you’ve been there a year, the Family Medical Leave Act lets you take 12 weeks of unpaid leave—for your care or a family member’s.

Work out a lighter load. Your company may very well pay all or part of your salary for a leave under the firm’s short-term disability policy. If all you want is to reduce your hours, most policies will allow for that too.

Last, Guard Against Greater Financial Damage

Get your shoebox in order. Assemble all your financial statements, insurance policies, property records, and estate plans now, not later, says Philadelphia financial planner Stephen Cohn. Add to that list online IDs and passwords.

Raise cash. Prepare for big medical bills and a potential reduction in earnings by deciding which funds you’d tap in a worst-case scenario. If you must raid your assets and you’re under 59½, tap taxable accounts first to avoid the penalties you’ll pay to cash out an IRA or 401(k) (unless you can get a hardship waiver). “Sell before you need cash so you won’t have to liquidate at a bad time,” says Cohn.

Pick a point person. Draft a durable power of attorney and health care proxy. And says Tampa financial planner Keith Amburgey, “identify who will be your trusted person through your illness.”

MONEY buying a home

Countdown to Buying Your First Home: Our Checklist

Get ready for one of the biggest financial moves you'll ever make: Buying your first home.

First-time home buyers have it tough. The supply of homes for sale is tight, and lenders are tightfisted.

Student debt, at an all-time high of nearly $30,000 per grad, is getting in the way of saving for a down payment, says David Stevens, president and CEO of the Mortgage Bankers Association. But it’s a great time to get your foot in the door.

“Interest rates remain the envy of even your grandparents,” says Keith Gumbinger, vice president of mortgage publisher HSH.com. First, make your finances sparkle.

THE TURNING-POINT CHECKLIST

12 months in advance

Make sure the time is right. Use Trulia.com’s rent or buy calculator to see if you’d really come out ahead, based on loan rates, taxes, and where rents and prices are headed in your area. Nationwide it’s 38% cheaper buying vs. renting.

Clean up your act. Devote this year to saving money and paying down debt. You’ll need at least 3.5% down for an FHA loan, or 10% to 20% for a conventional mortgage. Lenders also like to see job stability, so settle in for now.

Learn what you like. When a home catches your eye—a listing, say, or a photo—pin it to a board on Pinterest. Or try Swipe, a new app from the site Doorsteps, which lets you browse listing photos and mark them pass or save.

Six months out

Look better to lenders. To boost your credit score, order your free credit reports at annualcreditreport.com and fix any mistakes. Pay bills on time, chip away at credit card balances, avoid new debt, and don’t close any accounts or apply for new credit. The average credit score for approved mortgage applicants is 755.

Figure out what you can buy. Use an online calculator like the one at Zillow.com to estimate how much house you can afford based on your income, savings, and debts. That’ll help you research homes and drill down on costs.

Forecast future bills. With an idea of how big a house you can buy, you can do a more detailed budget. Scan listings for property taxes on homes you like. Get a homeowners insurance quote at Insweb.com. Call local utility companies for the typical bills. And tack on 1% of the home’s value for yearly maintenance.

Related: Baby on the Way? Time to Make a Budget.

Three months out

Pick your loan. Fixed mortgage rates, now 4.4%, may edge up to 5% this year, forecasts HSH.com. If you are confident this is a starter home, you can save with a 7/1 adjustable-rate loan, now 3.5%. The risk: You end up staying longer than seven years and rates rise sharply. Most—92% of mortgage borrowers—opt for fixed-rate loans.

Prove you’re a serious shopper. Based on your income and credit, a bank will give you a mortgage pre-qualification. “It’s the No. 1 thing you want in your back pocket when you go shopping,” says Svenja Gudell, an economist with Zillow.

Even better in a hot market: Pay a few hundred to go through underwriting upfront.

Find a guide. Look for a realtor who has worked in the neighborhood where you hope to live. And in a tight market like today’s, ask candidates what their strategies are for unearthing listings and handling potential bidding wars.

MONEY turning points

Don’t Let Divorce Wreck Your Finances

The average divorce today costs $15,000, according to legal guidance site Avvo, but that’s pocket change compared with what it could cost in the long term.

“The money you’d put away to fund retirement together now has to cover two separate retirements,” says New York City financial planner Dawn Brown. “This will be more expensive because it requires running two households.”

Meanwhile, for many of the newly single, living costs rise relative to income, while discretionary spending remains the same — leaving less room for the savings needed to catch up.

These steps can help you get to stable financial ground.

THE TURNING-POINT CHECKLIST

Well before the divorce

Know the score. Gather investment and bank statements, going back at least a year. Copy tax returns for income history. Pull your credit report to know what debts you have.

Consult a lawyer. In case you require counsel later and to learn about state laws. In nine “community property” states, assets acquired during marriage are owned fifty-fifty. In the rest, the court decides the split if it goes to litigation.

Open accounts in your name. Start stockpiling a cash stash for emergencies and legal fees. Apply for a credit card, too, while household income is higher.

Once the process is under way

Get the right help. Working out a settlement with a mediator may save money. But if your finances are complex or your relations contentious, an attorney can help you avoid mistakes or costly concessions.

Be strategic in getting your share. You may love the house, but if you give up investments of equal value, you lose the benefits of a balanced portfolio. You’re often better off selling the house. In divvying up retirement funds, specify percentages vs. amounts, in case the market soars or tanks.

Related: How to tell your kid you can’t afford her dream college

Take care of the kids. Be sure to specify in the settlement how you’ll handle big costs, like braces, summer camp, and college. If you’ll receive child support or alimony, insist that the provider get life insurance to ensure payments.

After the split is official

Stay insured. If you were on your spouse’s health plan, the next cheapest option is likely your employer’s offering. But if your ex’s job has 20-plus employees, you can also continue coverage via COBRA — so long as you notify the plan administrator within 60 days of the divorce. Or you can sign up through the Health Insurance Marketplace within 60 days.

Related: Baby on the way? Time to make a budget

Review your taxes. Usually only the custodial parent can claim kids as dependents. Give or get alimony? It’s deductible to the payer, and taxable to the payee.

Make a new financial plan. Base it on your new income and household costs. You may have to up your retirement savings, both to rebuild what you gave up and to cover continued higher living costs in retirement. Use the T. Rowe Price Retirement Income Planner to revise your savings goal.

Restate your estate. Draft a new will to prevent your ex from inheriting, and name new beneficiaries on retirement accounts, pensions, and life insurance.

Sources: Family-law attorneys Jennifer Brandt of Philadelphia, Kelly Chang Rickert of Los Angeles, and Mark Chinn of Jackson, Miss.; Cheryl Jamison of the Association for Conflict Resolution; Mediate.com; divorce financial adviser Jeff Landers of New York City

MONEY

Baby on the Way? Time to Make a Budget

Congratulations! There is nothing quite as exciting as having your first child — or as expensive.

Assuming your household earnings exceed $105,000, your precious bambino will set you back nearly $400,000 by the time he reaches age 18, the U.S. Department of Agriculture reports.

Then you’ll probably end up paying big, big bucks — gulp! — for baby’s BA.

Fortunately, while you can’t prepare for the sleepless nights ahead, there’s a lot you can do to get ready financially for the newest member of your family.

 

THE TURNING-POINT CHECKLIST

First Trimester

Make a post-baby budget. Disposable diapers alone can run $900 the first 12 months. Figure out what other costs to expect with the First-Year Baby Costs Calculator at BabyCenter.com.
Investigate child care. It’s often the biggest line item, with day care averaging $4,900 to $16,400 a year depending on location. One of you planning to stay home? Account not just for loss of pay but also for perks like 401(k) match.
Sew up a cash cushion. Start knocking away credit card debt and aim to bank at least three months’ living expenses — more if only one of you will work.
Estimate health bills. In a typical employer-sponsored health plan, prenatal care and delivery cost a patient $2,244. Contact your insurer to see what it will cost you so that you can plan for the outlay.

Second Trimester

Protect your paycheck. Use the tools at lifehappens.org to estimate your life and disability insurance needs. Term life will be most affordable. See if you get disability through work before buying.
Make a will. You’ll need one to appoint a guardian. Get it made now — you can DIY with software like Quicken WillMaker Plus ($43) — while you have time. No need to know the name of your offspring.
Check your benefits. Only 16% of companies offer paid maternity leave. Want to take time off without pay? Be sure you have savings to cover expenses.

Related: How to Tell Your Kid You Can’t Afford Her Dream College

Last Trimester and Beyond

Get the gear. Talk to other parents about what you need — and don’t (e.g., a wipes warmer). Ask your BFF to throw you a shower. Register to avoid repeat gifts.
Set up a 529 …and deposit any cash gifts. All 529 plans offer tax-free growth and withdrawals for college, and many states let you deduct a portion of contributions.
Enroll baby. You have 30 days after the little one’s birthday to put your child on your health plan and to sign up for flexible spending accounts that let you save pretax for health care and dependent care.
Celebrate your tax break. In 2014, the exemption you get for having a child is $3,950. Use the Withholding Calculator at irs.gov to see if you can reduce what you’re paying to Uncle Sam each paycheck.

Related: Ace Your Annual Review

MONEY Kids and Money

3 Money Skills to Teach Your Teen

To become captains of their financial destiny, your kids need to master these three skills. Illustration: Mikey Burton

To become captain of his or her financial destiny, your child needs to master these three skills.

As they regularly remind us, teens know everything. Money is no exception.

In a recent Capital One 360 poll, 87% of 12- to 17-year-olds reported knowing at least an average amount about managing finances. Or not. That study also found that 24% of them think a debit card is used to borrow cash.

And a Charles Schwab poll found that fewer than a third of teens understand how credit card interest works and four in 10 can’t budget.

Parents’ money talks with high schoolers tend to start and end with “How much do you need?”

“The more you teach your kids before they go off on their own, the better prepared they are,” says Daniel Hebert of Jump$tart, a coalition promoting financial literacy.

The most critical skills to impart:

Managing on a limited budget

The key word is limited. “Teens need to know that money is finite,” says Anton Simunovic, founder of ThreeJars.com, a money-management site for kids.

How to build the skill. Figure out what you’re spending for junior’s clothing, entertainment, and gifts for friends. “Then give that amount to your kid and let him pay for those things,” says Jayne Pearl, author of a series of books on kids and money.

Set teens up with a checking account and debit card, and when they mess up, resist the urge to bail them out.

“It is important to make them responsible for their financial actions while the consequences are not serious,” says Jeffrey Arnett, a psychology professor at Clark University and co-author of When Will My Grown-Up Kid Grow Up?

Paying yourself first

“You want to get your child in the habit of putting something aside,” says Stephanie Bell, spokesperson for Junior Achievement USA.

A good goal is to stash 10% of every allowance, paycheck, and birthday check. And nothing provides better motivation than an understanding of how money makes money — a.k.a. compound interest.

How to build the skill. Use an online calculator to show your teen how compounding works, says Beth Kobliner, author of Get a Financial Life. (Try the Simple Savings Calculator at Bankrate.com.) You might also sweeten the pot by offering to match her with, say, $25 for every $100 she banks.

Steering clear of credit debt

Just 9% of college kids pay their credit cards off every month, a study in the International Journal of Business and Social Science found. Help your child understand the value of being in that minority.

How to build the skill. The next time you pay with plastic in your child’s presence, point out that it’s borrowed money and that compounding works against you when you carry a balance. Later, show her your bill, specifically the box illustrating how long it will take to pay off and how much it will cost if you fork over only the minimum.

Make sure she understands, too, that you’re “graded” on your use of credit; regularly paying late, for example, could result in a higher rate on a car loan. When she’s ready for her own card — around age 21 — “ask for a $500 limit,” says Hebert. Well prepared as your child may be, it never hurts to use training wheels the first time out.

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