MONEY

When the nest is (finally!) empty

Used to be that once the last tuition bill was paid, parents got their house — and their budget — back to themselves.

Unfortunately, today’s tight job market has put the empty-nest fantasy on hold for many of you: About three in 10 Americans ages 25 to 34 live with their parents or have done so in recent years, according to the Pew Research Center.

These young adults eventually become employed, move out, and shift (mostly) off the parental payroll. But with chicks flying the coop later, Mom and Dad may be left a bit worse off for it.

“Today’s empty-nesters have more debt and less savings than previous generations,” notes Jenkintown, Pa., wealth planner Irvin Schorsch.

So once your baby does grow up and move out, you need to reassess your own needs. “It’s time to come up with a financial plan that’s not based on the kids’ living at home,” Schorsch says.

A few moves to help empty-nesters pad their nest eggs:

Redirect the kid spending. With your progeny out of the house, you may find you’ve got more room in your budget. Boston College’s Center for Retirement Research found that new empty-nesters tend to use this freed-up cash to treat themselves. Per-person spending on nondurable goods — like dinners out and vacations — jumps 51%!

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Let’s be fair: After years of shelling out for everything from tap lessons to textbooks, some indulgence is warranted. Still, “it’s a good idea to take at least some of the money that was directed toward kids and move it toward retirement,” says Edina, Minn., financial planner Ross Levin.

You might start by putting away “catch-up contributions.” Those 50 and older can stash an added $5,500 in a 401(k) this year, plus $1,000 extra in an IRA (on top of the standard maximums of $17,000 and $5,000, respectively, for 2012).

Just that much more a year from ages 50 to 65 could add $175,000 to your portfolio, assuming pretax annual returns of 7%, reports T. Rowe Price. See if that will make enough of a difference in your retirement forecast using T.Rowe Price’s retirement income calculator.

Reinvest your home equity. If you’re really behind on retirement, think about moving to a cheaper house now and investing the difference rather than waiting until retirement to do so.

“Even a seemingly hopeless retirement picture can be saved by the cash infusion and lower cost of living from a downsize,” says Tim Maurer, a financial planner in Baltimore.

Nationally, houses have appreciated an average of 3.3% annually over the past 30 years, according to the National Association of Realtors, while a 60% stock/40% bond portfolio has returned an average of 10.5%, per Morningstar.

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Even if investment returns are more modest over the next decade, you could still come out ahead by downsizing sooner vs. later, says Colorado Springs financial planner Allan Roth. Plus, moving could capture other savings by cutting your maintenance costs, property taxes, and insurance premiums.

Retract excess coverage. At this crossroads, you may be able to cut back on insurance coverage — and bank the savings.

With your kids no longer financially dependent, for example, you may have more life insurance than necessary, says Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards.

That doesn’t mean you don’t need any coverage: Think about whether anyone still counts on your income (such as a spouse) and to what degree, like for paying off a mortgage or covering living costs.

Use the calculator at lifehappens.org to estimate your needs. Reducing the benefit on term insurance usually cuts the premium proportionately. Permanent insurance is trickier to evaluate as it includes a savings component. But for $90, the Consumer Federation of America will assess your policy to see if scaling back makes sense.

Review other insurances too: Can your child get health coverage through her new job? You can have her taken off your plan right away, even if open enrollment is over. (Be aware that your premium may not drop if you have coverage for another family member.)

As for your auto policy, removing your kid could slash the cost as much as 50%, the Insurance Information Institute reports. That’s cash toward your sweet retirement ride.

Send your insurance questions to The Help Desk.

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