Investing as an Empty Nester: What’s different?
I started writing about being an empty nester when my youngest, Kendall, graduated from high school in June 2022. Since then I’ve been paying a lot more attention to what it means to be an empty nester. But what about investing? Shouldn’t that change, too? In this blog I’ll discuss how your saving and investing strategies need to change (or stay the same) once you become an empty nester.
And now I’ll start really saving for retirement
Before the last tuition payment, there were so many financial demands: saving for a house down payment, buying life insurance, starting 529 college savings plans, day care costs then private school tuition bills, renovating and expanding our home and the list went on. Now, there are fewer major financial goals. With the kids (mostly) off on their own, you can finally turn your focus to the future, specifically investing for retirement.
Making up for lost time
For some, this is when they will make up for lost time. In their earlier years, saving and investing for retirement just did not break into the top 10 priorities. Now it may be the only priority and time is short. Unfortunately, they will not have the benefit of decades of compounding leading up to retirement. But all is not lost.
Catch-up contributions
In the year in which you turn age 50, you can make additional contributions to 401(k), 403(b) and IRA accounts. For 401(k) and 403(b) accounts this year, you can make a regular salary deferral of $22,500 and a catch-up deferral of $7,500 for a total of $30,000. This helps but for many upper-middle income families, $30,000 a year now will not be enough to maintain their lifestyles in retirement.
Don’t forget IRAs
IRAs are also an option. While most middle-income taxpayers earn too much to make tax-deductible contributions to an IRA, everyone with earned income1 can still fund an IRA. The limits in 2023 are $6,500 regular + $1,000 catch up if age 50 or over. If you fund an IRA and it is non-deductible, in many cases it may make sense to immediately convert it to Roth IRA. The reason is that there is no additional tax if the Traditional IRA is immediately converted.2
Converting to a Roth provides current tax-deferral, qualified tax-free distributions at retirement and, importantly, no Required Minimum Distributions (RMDs) at age 73.
For those with big IRAs, when they reach age 73, they may be in for a big surprise as they will be required to start taking out RMDs per an IRA life expectancy table. If the RMD is large enough, it could push you into a higher tax bracket and / or cause you to pay extra Medicare premiums. Unfortunately, retirees are increasingly running into this problem of having high taxable income around the time of retirement and being forced to pay additional Medicare premiums. As such, putting money into a Roth IRA or Roth 401(k) at work is becoming increasingly attractive, especially if you are maxing out your contributions each year.
Is it time to become a more aggressive investor?
While empty nesters have most of their major financial obligations behind them, becoming more aggressive in an attempt to earn your way to a comfortable or even early retirement may not be the best strategy. With higher potential returns come greater risks of loss. Consider for a moment if you had become an empty nester at the beginning of 2022. That was a year when the Standard and Poor’s 500 index of unmanaged stocks declined by 18.11%3. In becoming a more aggressive investor at the beginning of that year, it is highly likely that you would have lost far more than 18% on your portfolio. How would you feel about that? In trying to catch up, you would have become even more behind in saving for retirement than if you had stayed with an appropriate risk profile.
With time shorter than when you were in your 20s and 30s, you have less time to recover from market downturns. As such, they can have a more pronounced impact on your retirement savings.
Become a supersaver
Rather than becoming more aggressive with your investments, you may want to focus heavily on just putting money aside in qualified retirement accounts or other tax-deferred investments. I would suggest that dedicating more current cash flow to accounts earmarked for retirement may provide you with more security and a greater likelihood of retirement success over the long term. Trying to invest your way out of years of under saving prior to becoming an empty nester is a higher risk strategy that increases the likelihood of coming up short in your retirement years.
If you are trying to figure out how to save and invest appropriately now that you’re an empty nester, give me a call. We’re here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-653-3303
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· On becoming an empty nester https://planwithfps.com/blog/on-becoming-an-empty-nester
· Empty Nesters: When your adult kids come home https://planwithfps.com/blog/empty-nesters-when-your-adult-kids-come-home
· Empty Nesters: Making the most of it https://planwithfps.com/blog/empty-nesters-making-the-most-of-it
1And spouses with no earned income who are married to someone with earned income.
2 No tax as long as there are no taxable earnings in the IRA before conversion
3Source: www.ishares.com/us/products/239726 retrieved on 10/2/2023.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.