Financial Considerations When Your Kids Are Finished with College

<b>Susan Black, CFP® AEP® CAP®,</b><br>Senior Vice President,<br>Private Banking

Susan Black, CFP® AEP® CAP®,
Senior Vice President,
Private Banking

December 8, 2021

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 When that proud day of college graduation comes, parents face a new financial reality. 

 
For many families the joy of raising children is an intricate balancing act. Most parents juggle the financial responsibilities of saving for college while paying for basic necessities, childcare, healthcare, quality family time activities, school fees and supplies.

When that proud day of college graduation comes, parents face a new financial reality. For some, the newfound independence of their children means changing considerations for the family budget, savings plans and investments. For others, their newly-minted college graduates may return to the family home as they build the foundations of their post-college lives. So, what is the impact of these new financial realities on a family’s budget and plans?
 

For the Empty-Nesters: A Potential Windfall and an Opportunity to Refocus

Some parents will see their progeny go from their last dormitory room to their first apartment, and from their last internship to their first full-time professional job. For those parents, their new financial situation is one in which their annual committed expenses could drop significantly.



For the average family in the United States, the estimated inflation-adjusted cost of raising a child to the age of 17 is likely to be upwards of $285,000, or over $16,000 a year. On top of that, saving for college requires an additional $550 a month to accumulate $100,000 by the time they start undergraduate studies. While that is not enough to pay for a full four years of college, it is a great start that, and if invested well, could provide a substantial portion of the total cost of an undergraduate degree.

All of that means that empty-nester parents could see quite a financial windfall, offering real opportunities to refocus on their next chapter in life, including retirement. Most parents wave their kids off to college on the precipice of their second half century of life, which means retirement could be nearly two decades away. By refocusing their spending and saving more on their retirement plans, they can transition from providing a great upbringing for their kids to ensuring a bright future for themselves.



This might also be the right time to explore planning for long-term care needs. Nearly half of the people turning 65 today will need some form of paid long-term care services as they age. The cost of healthcare, and more specifically long-term care, is increasing at an inflation rate that is higher than the overall cost of living. Having satisfied the bulk of their investment in their children’s educational foundation, they might do well to consider shifting their financial attention to some form of long-term care preparations. Their choices could center around self-insurance through savings and investments, long-term care insurance as a stand-alone option, or as a rider on a life insurance policy. In addition, they might even choose to make an investment of time and energy to manage their own health to prolong their years of healthy living.
 

 The combination of rising housing costs and the
current status of entry-level salaries has meant
that approximately half of young adults are moving
back to reside with their parents. 


Another way for empty-nesters to reorganize their finances is to look for “right-sizing” opportunities. Whether they consider down-sizing or moving to a less costly area, some families can find substantial savings by leveraging a change of address. Today’s hybrid work environment allows many families to take advantage of lower real estate prices in less urban areas as they continue to pursue full-time careers. The significance of a particular school district may no longer be a major consideration, thus providing a broader choice of affordable homes, which could enhance their finances and wellbeing in their later years.
 

For Parents of “Boomerang Kids”: An Opportunity to Set Up Their Children
for Success

The combination of rising housing costs and the current status of entry-level salaries has meant that approximately half of young adults are moving back to reside with their parents. The emergence of remote work has only increased that trend. College graduates are now able to begin their careers from the family home rather than in the city of their employer. Many of these “boomerang kids” are looking to leverage a lower cost of living at home to save for an eventual move into a place of their own.

For parents whose children have returned home after college, there is an opportunity to support their offspring as they establish a foundation of independence, instilling good financial practices such as budgeting and investing.

One option is to have them agree to a reasonable monthly payment for room and board. That way these young adults can get into the habit of budgeting for rent and living expenses. Parents can then put some of this monthly income towards a high-yield savings account or money market that might later be used as starter money for their son or daughter when the time comes to move out.

 

 Parents can also take this time to involve the children in
planning their own financial futures to help teach them
the importance of long-term money management. 


Parents can also take this time to involve the children in planning their own financial futures to help teach them the importance of long-term money management. Providing an introduction to a comprehensive vision of financial literacy, including banking, credit management, investments, insurance and retirement plans, will offer this next generation a better chance for the successes they earn their first full-time paychecks.

A Bright Future for the Entire Family

Regardless of whether children have flown the nest or returned temporarily, with the right financial planning and an eye towards the future, this time in the life of a family with adult children can be rewarding and beneficial for all. With mutual respect, everyone in the family can feel that their value is recognized and appreciated as the allocation of the family’s resources continue to evolve.

To learn more about how Cambridge Trust can help you and your family, please contact your Relationship Manager or Susan Black, CFP® AEP® CAP® at [email protected].
 

This article is for informational purposes only and should not be construed as investment or legal advice. Please consult your tax advisor and/or legal counsel to determine if the strategies described above are right for you.