Many parents are tempted to splurge on themselves once they are free of child-related expenses. Celebratory spending sprees may have significant staying power, lasting much longer than originally anticipated. Continued spending of this newly-acquired discretionary income often prevents empty-nesters from adequately contributing to their retirement.
Studies show that parents whose children are out of the house often fail to save the way they should. Boston College's Center for Retirement Research found that some 52% of working-age households are at risk of failing to maintain their lifestyle post-retirement. This study showed that, after children leave home for good, new empty-nesters only increase 401(k) contributions by less than 1% of income.
A spending impulse is only natural, as families whose income is $106,540 or more spend $20,000-$25,000 a year per child under 18, according to recent government data. Tack on the cost of college tuition and the figure balloons up even more. Then end of these costs makes parents feel richer, and this newly-acquired wealth is often re-allocated to trips, projects, or luxury goods.
To prevent the need to play catch up once the kids are out, empty-nesters should iron out solid savings strategies before the nest empties. However, for those empty-nesters who are already spending too much, the following tips may be useful.
Ask Yourself Why
"Is this something worthwhile?" – a question empty-nesters should ask before pulling the trigger on an expense or purchase. Often times, parents with lightened child-care expenses are moved to impulse spending. Are you increasing the value of your home by remodeling the kitchen, or attempting to buy happiness with a romantic getaway? Consider the "why" before you buy.
Knowing how and why you are spending this extra cash is a big step. Technology can help in this regard; sites like Mint.com have powerful tracking and goal-setting tools that allow empty-nesters to manage their financial day-to-day as they see fit. Though the site won't prevent you from swiping your credit card or writing a check, it will provide you a snapshot into your spending habits while allowing you to set up savings strategies that are manageable and trackable.
Instead of setting your sights on saving all of your newly allocated money, take small bites and gradually increase your savings by decreasing your expenses. Weaning yourself off of significant spending habits is a better approach than trimming all of the fat at once. Pick a reasonable date in the future to begin reducing the amount spent on certain things or to cut certain expenses all together.
One of the most effective ways to save is to remove the human element. Setting up automatic savings to occur on certain times of the month takes away the possibility that you will spend the money elsewhere. Removing the emotional components of spending/saving with these auto-deposits and increased 401(k) deductions forces a savings strategy upon you. Not having the money at your disposal leaves less of a chance you will spend it.
If you are a recent empty-nester and need help planning your financial future, please call us at 516-496-7800.