EMPTY NEST, FULL WALLET?
Making the financial adjustments when your chicks finally fly the coop.
By: Trisha MacLennan CFP
Any parent is well aware of the emotional adjustments they face when their children finally leave home to begin life as independent adults. Many parents have even had some "rehearsal time" for this moment, such as when the children are away at university or spending the summer backpacking through Europe.
But not all parents are as prepared for the financial adjustments they need to make once they are no longer supporting newly independent adult children. Decisions made now could have a long term impact on your financial future.
This is an ideal opportunity to sit down with a Certified Financial Planner and take stock of your overall financial picture. You and your financial planner will work together to identify your financial goals, needs and priorities, some of which may have changed since becoming an empty-nester.
Your financial planner will then help you prepare a Net Worth Statement, which is a document that lists your assets and liabilities. This document alone may show you where to best utilize some of your f-up cash which was previously being used to feed and support your children. With your financial planner's guidance, you will identify and prioritize opportunities such as:
- topping up underfunded RRSPs
- paying off discretionary debt, such as lines of credit or car loans
- accelerating mortgage payments
- building a cash reserve, a kind of safety net, of two or three months salary
- starting a Registered Education Savings Plan (RESP) for the grandchildren
- having the cash to finally go on that long delayed vacation
Don't be alarmed if the list is quite extensive! Raising and educating children is expensive, and it is likely that other financial goals and dreams have been set aside for quite some time. At the same time, however, it is important to realize that trying to satisfy all these unrealized goals at once, by perhaps incurring more debt, may do more harm than good. Even though it is likely that parents are in their peak earning years when the children leave the nest, they are also closer to retirement than ever before. Taking on more debt at this stage is an unwise proposition.
Having identified your spending priorities, the next step is to determine how much cash you actually have to fulfill your dreams.
At the same time as your net worth statement is written, your financial planner will also help you prepare a Cash Flow Analysis. This document will identify your fixed expenses, such as mortgage or car payments, as well as your variable expenses, such as food or entertainment costs. The goal here is to identify the excess cash flow previously used to support your children and decide how much will be allocated towards your previously determined financial goals. With your financial planner's assistance, you will again set reasonable and achievable priorities. Very few parents can afford to achieve all of their pent-up dreams at once. It is more likely that your excess cash will be allocated something like this:
- Year 1 - pay off car loan and line of credit. Contribute an additional $400 monthly to a RRSP.
- Year 2 - save $200 monthly in a money market account towards a dream vacation. Increase monthly RRSP contributions by an additional $100. Make a lump sum mortgage payment of $5,000.
- Year 3 - continue RRSP and money market contributions. Start RESP account for grandchildren.
Your financial goals may be quite different but the end result is the same. With the assistance of your financial planner, you will have a clear understanding of your current financial picture, a prioritized list of the goals and dreams you have postponed while raising your children, and a written "roadmap" of how and when each is to be achieved. In addition, you will be setting a good financial example for your children to emulate when they marry and have children of their own. What could be better than that?
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