Financial Tips for Empty-Nest Boomers
“The Boomer” is a column written for adults nearing retirement age and those already in their “golden years.” It will also promote reader interaction by posting e-mail responses and answering reader questions. E-mail your questions or topic ideas to firstname.lastname@example.org.
It’s a day of mixed emotions for boomer parents: The moving van is pulling out of the driveway and the house is quieter than it has been in years; they’ve been looking forward to this moment and dreading it all at the same time. But they have succeeded, they raised their children to be self-sufficient and able to move out of the home, whether it’s to their own place or off to college.
As we boomers grow older, we eventually become empty nesters. We find our once-bustling households filled with baseball games, loud music and arguments over who gets the car keys, suddenly as quiet as a library. For the first time in our lives, we can truly afford to be selfish. We can take that vacation we never had when the kids were at home, or turn that now empty bedroom into a study.
After all our children have flown the coup is the perfect opportunity to focus on the next stage of our financial planning. I reached out to Chad Viminitz, a certified financial planner and author Money Assassins, for tips and financial advice for empty-nest baby boomers. Here is what he had to say:
Boomer: Are empty nesters are concerned about generating income and preserving their estate for the next generation?
Viminitz: It is probably not as much of a priority as it should be. The historic perpective of saving has been lost over the last 10 - 20 years. Coming out of the Great Depression, the mindset of that generation was to save and to build a strong financial legacy to be passed on so future generations wouldn’t face monetary hardships.
Then in the late 1970s, 80s and 90s, come the huge run up in the stock market and the mindset of that generation shifts to: “I did it myself, and my kids can do it themselves.” People forget that tough times can come and stay, which we’ve certaintly experienced over the last few years.
The idea of preserving estates and transferring wealth to the next generation has been significantly overlooked. The mentality of “ I did it alone and so should my kids” is a dangerous statement—we are in a different economic environment. Giving the next generation a little bit of a head start is probably the legacy that some people need to take a look at, and remember where we came from. A lot of the things we enjoy today are because the generation back in the 1930s, 40s and 50s set a ground level for us to build on—that has been forgotten.
Boomer: Should empty nesters recognize life insurance as an important financial tool? If so, what kind: whole life or term life?
Viminitz: Empty nesters often wonder if they still need life insurance. Insurance, especially life insurance, is probably one of the best estate planning tools you can use to transfer assets to the next generation.
For boomers with no debt issues, we advise them to look at permanent life insurance. That can either be a whole-life type of insurance or a universal life, those are the two types of permanent coverage. The issue with term life insurance, is that if you are trying to buy that in your 60s or 70s, it can be extremely expensive and it usually expires around age 85 depending on the company and the contract. For those in their 60s term life insurance can still make economic sense, but the time to really start looking at it is when you are doing your retirement planning in your 50s.
With any type of insurance, the younger you are when you buy it, the better it is going to be. One way to reduce the cost of life insurance for those in their 60's is to buy what we call a joint last to die contract. Most of the estate issues couples face is when the second person in the marriage passes away. A joint last to die contract pays out the death benefit on the second death, which is usually when estate issues crop up.
Boomer: By the time the kids move out, a slot of baby boomers have little or no mortgage. How can they best utilize their home ownership asset?
Viminitz: That is a difficult question to answer. You always need a place to live, but when it comes to making the decision on whether to downsize, a good way to make the decision is to determine if you are going to use the cash. You will actually sell the asset and realize the gain on it, so that is the safest way to take up that equity.
The next safest way is doing a home equity line of credit--but the difficulty with that is then you are now going into borrowing money to access and pay for retirement and that has different risks. There are interest rate risks and real-estate risks, so there are more factors that come into play once you start accessing the equity in the home without selling the home.
Boomer: When boomers no longer have any financial burden of taking care of their kids, how can those monies be best directed toward retirement?
Viminitz: Any place that offers a tax shelter is going to be one of the best places to house your savings. The next financial step for boomers is to reduce any debt as quickly as possible-- especially ones with higher interest like with credit cards and lines of credit.
We are constantly being asked whether it is better to take extra money and pay down debt or to put in savings? My view has always been to do a little bit of both. Financial planning is more of an art than science, and I think there are some psychological reasons to do both. We work hard to pay down the debt, and then if something unexpected pops up it is nice to have some cash aside; psychologically, it is nice to not have to worry about going back into debt again. This just gives you a little more control over your financial direction.
Boomer: What are some of the mistakes baby boomers make when they become empty nesters?
Viminitz: Cash flow. For boomers who have no more kids at home but still have five to 10 years in the workforce, we often see they don’t make proper cash flow adjustments right away. The first thing I advise is that as soon as the kids leave, start doing that additional savings right away.
Another mistake I see is now that they start putting more money into their savings or investments, because they feel they are behind and one of the ways to catch up is to get enticed by some good returns—this is where a lot of people get trapped. They think they need those returns without realizing that in a time period of five to 10 years returns are important, but the amount you save is even more important and capitol preservation is pretty important. I think they take on too much investment risk once they start progressively saving as they are approaching retirement and that they really need to make sure they are just putting the money away into something more conservative. So the other mistake I see is they take on too much risk and they think they are further behind in their savings than they probably are
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