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Financial Areas of Focus for Empty Nesters

Oct 14, 2020

Key Takeaways

  • As children fly the nest, parents can refocus on lowering expenses and saving for retirement.
  • A good nester strategy is to look for ways to minimize future taxes.
  • Don't forget life insurance - it can play a valuable role in reducing risk.


In research utilizing the National Retirement Risk Index, the Center for Retirement Research at Boston College looks at the impact of children on parents’ retirement readiness. The research findings reinforce the critical inflection point that emerges when children leave home. It’s at this point of their financial lives that parents are likely able to reduce expenses and take action to help improve the odds of a more secure retirement.

In light of these findings, here are some key steps parents should consider that may help to improve retirement readiness when children leave home.

Increase contributions to retirement accounts. Currently, workers age 50 or older can contribute $26,0001 to their 401(k) accounts. This excludes any additional amount an employer will match. Those who have maxed out their pre-tax 401(k) savings in prior years may wish to shift some of their contributions to a Roth 401(k), if it is available. By paying taxes now, parents can enjoy tax-free Roth income in retirement. Roth income has the added benefit of being excluded from the Combined Income formula, which determines whether Social Security will be taxed. Those age 50 or older who are eligible can also contribute $7,0001 annually to an IRA or Roth IRA.

Convert IRA and 401(k) dollars into Roth dollars. Again, using available income (outside a 401(k) plan or IRA) to pay taxes now on retirement assets allows Roth assets to grow and then be withdrawn tax-free during retirement. Many 401(k) plans allow for in-plan conversions from pre-tax 401(k) dollars to Roth 401(k) dollars.

Save more in Health Savings Accounts (HSAs). With high deductible health insurance plans and HSAs becoming much more popular, parents in their 50s and 60s have a chance to save more for healthcare expenses in retirement. With the current average lifetime healthcare costs for a retiring couple at age 65 at $260,0002, pre-retirees should be preparing. HSAs have the rare triple tax benefit of tax deductible contributions, tax-free growth, and tax-free withdrawals if they are made for healthcare expenses such as Medicare premiums. Since HSAs can be invested for growth and future earnings can avoid taxation, pre-retirees may wish to pay current medical expenses out of pocket and leave their HSA assets to grow tax-free for use later, during retirement. Those under age 55 with a family health insurance plan can currently contribute $7,1001, while those age 55 or older can contribute $8,1001.

Convert IRA assets to HSA assets. While 401(k) and IRA assets are taxed when withdrawn, HSA assets are not (if used for qualifying medical expenses). Therefore, it may make sense to convert IRA assets to HSA assets if eligible to contribute to an HSA. An individual is permitted to do this one time in their life up to the HSA limit for the year (currently $8,1001 for those age 55 or older with a family health insurance plan) if they haven’t contributed the maximum to the HSA in that year. For example, if a couple age 55 with a family plan contributed $1,000 to an HSA, they could convert $7,1001 of an IRA to an HSA.

Start planning to maximize Social Security benefits. The decision on how and when to claim Social Security benefits is critical for most retirees. Pre-retirees should investigate how different Social Security payout strategies can be integrated with other retirement savings to provide income for as long it may be needed.

Consider the role permanent life insurance can play to reduce risk. As retirees face higher risks in retirement than prior generations, permanent life insurance can help protect against various financial uncertainties. For example, cash values can be used later in life to help pay healthcare costs or provide an additional source to supplement your retirement income3. In addition, riders can be added to life insurance policies to allow death benefits to be accelerated in the event a policy owner develops a chronic illness or long-term care is needed4.

Pay down housing debt. Many retirees are carrying an extensive amount of debt into retirement, especially housing debt. The median amount of housing debt for those ages 65-74 soared 397% in constant dollars from 1989-20195. Households can prepare themselves for a more secure retirement by paying down their housing debt once their children are grown.

Engage a financial professional. The retirement stage of a family’s financial life is much more complicated than the accumulation stage and the risks are much greater as well. Proper planning in the years leading up to retirement can help minimize taxes, mitigate risks, and ensure income is generated for as long as it is needed.


Prudential served as the exclusive sponsor of the National Retirement Risk Index.


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1The contribution limit is for 2019 and is indexed for inflation going forward.

2 Fidelity, “Health Care Costs for Couples Rise to an Estimated $260,000, Fidelity Analysis Shows”. https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise Opens in a new window

3 In general, loans are charged interest; they are not usually taxable as long as your policy remains in force while the insured is alive. Withdrawals are generally taxable ...... The tax laws are different if your policy is heavily funded and becomes a Modified Endowment Contract (MEC).

4 Accelerating the death benefit will reduce the death benefit dollar-for-dollar and may result in beneficiaries receiving less or zero proceeds at death, if the death benefit is fully exhausted due to benefits paid out under the rider while the insured is alive.

5 New York Federal Reserve, Survey of Consumer Finances, 2020. Values are in 2019 dollars.

The Prudential Insurance Company of America, Newark, NJ

For Compliance Use Only:1020285-00004-00

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