Food. Clothing. Soccer lessons. Summer camp.
Parents these days are spending more money than ever to keep their kids healthy, happy, and entertained. In fact, it costs most parents almost a quarter of a million dollars to raise a child from birth through age 18, and that doesn't include college expenses. It's no wonder that watching their kids fly the nest is a bittersweet experience for many parents. Sure, you might miss them, but on the other hand, there's something to be said for a well-deserved financial break. With no one but yourself and perhaps a spouse to worry about, you'll get a chance to start storing away some serious money to pay off your mortgage or save for retirement.
Or will you?
According to a study by the Center for Retirement Research of Boston College, empty-nesters only managed to increase their 401(k) retirement savings by 0.3 to 1.0 percentage points over the eight-year period after their kids left home. Though some of the families surveyed did make progress in other areas, such as paying down a mortgage, the study found that on the whole, empty-nesters didn't significantly increase their non-retirement savings, either.
Where does all that money go?
So where does all that leftover money disappear to? For some parents, the void left by their children's day-to-day expenses looks like an invitation to spend the savings on themselves, be it in the form of home improvements, entertainment, or travel. But let's also not forget that many parents support their children financially even once they've moved out. In a 2013 Pew Research Center study, 73% of adults aged 40 to 59 with at least one grown child claim they continue to support their kids financially. Furthermore, about 50% of those parents identify as their grown children's primary source of financial assistance, and in many cases, supporting children who live on their own exceeds the cost of having those children remain at home. For example, having an older or adult child at home might mean spending $200 extra in groceries per month plus a small increase in an electric or water bill. Writing out a $500 check every month so an adult child can pay his own rent is a far more costly prospect.
Prioritize retirement savings
If your children have finally left the nest, then now is the time to ramp up your retirement savings while you still have several working years ahead of you. This means taking whatever money you otherwise would've spent on your children and reallocating it to a retirement account. If you're 50 or older, you can make a yearly $6,000 catch-up contribution to your 401(k) on top of the general $18,000 pre-tax limit, and you're allowed a $1,000 catch-up contribution to your IRA in addition to the standard $5,500 in pre-tax dollars.
If you're 10 years away from retirement and manage to set aside an additional $7,000 per year on top of what you were previously saving, then you'll have an extra $70,000 once you exit the workforce. Better yet, if you invest that money at an 8% return, you'll grow that balance to $102,000 over the course of 10 years.
Pay off your mortgage
Once you retire, you'll be living on a fixed income, and with that comes less financial flexibility. It's for this reason that so many homeowners aim to enter retirement mortgage-free. If you're still carrying a mortgage, it's in your best interest to use some of your extra disposable income to pay down your principal. Even if you're unable to eliminate your mortgage entirely, the more you chip away at that principal balance, the less money you'll have to pay in interest.
Whether having your kids move out makes you ecstatic or teary-eyed, you now have a real opportunity to start saving some serious cash. Tempting as it may be to upgrade your vehicle or invest in that plush leather sofa you've been eyeing, you'll be doing yourself a disservice by earmarking that money for non-essentials. Besides, at some point in the future, you may be lucky enough to call yourself a grandparent, and if you thought your own kids were expensive, just wait until you see how much it costs to truly spoil a grandchild.