Financial planning for empty nesters

Building your new financial life after the kids have grown

Your kids are all grown up and have moved out of the house. You finally have that peace and quiet you always asked for, but you’re also facing a new chapter in your life. It’s time for some new thinking and new priorities – starting with your money management habits.

Sure, you’ll still spend a lot of time wondering (and worrying) about your kids and what they’re up to. But being an “empty nester” has advantages, like more free time and, possibly, extra cash, especially if you’re done saving for higher education and tuition fees. So how do you start this new stage of life on the right financial foot?

Beat empty-nester “tunnel vision”

New empty-nesters often face a stark realization: with the house suddenly quiet, retirement seems closer than ever. That may trigger a bout of anxiety if you haven’t contributed as much to your RRSP as you’d have liked while raising your kids.

The key to overcoming that worry is to take inventory of all your assets, not just your RRSP. You may be in better shape than you realize. For a one-stop check on your financial health, keep tabs on your net worth every year (which you can do with your advisor).

Even if the markets haven’t co-operated in the past year, remember you’re in for the long haul. And if you’ve owned your home for many years, you could have little (or no) mortgage debt with significant equity built up.

Take advantage of the RRSP carry-forward

Your late 40s or 50s are not too late to get a bang for your RRSP buck. That’s because you can contribute 18% of your earned income to your RRSP every year, up to an annual maximum (check the CRA website for the current year’s limit). But the real opportunity for empty nesters is that you carry forward unused RRSP contribution room indefinitely, and that can really add up.

Let’s use Sam as an example. Sam started contributing to his RRSP 15 years ago, when he was making an annual salary of $70,000. His salary increased 3% annually since.

Sam contributed half of his limit of 18% of earned income each year. In his first, that was $6,300 (9% of $70,000). Fifteen years later, his income climbed to $105,881, and his contribution was $9,529.

Because Sam was only contributing half his limit during those 15 years, all of his remaining contribution room carries forward, which is $117,173.

If you’re in a similar situation, that can be a lot of ground to make up (and cut your tax bill, as you deduct RRSP contributions from your income in the tax year in which you make them). If you have cash freed up from saving for your kids’ education and the fact that you’re likely making more today than when you started working (and are likely in a higher tax bracket), and you’ll be poised to take advantage of that extra room—and get a bigger tax return.

Help your kids access the housing market

If you’re planning to help your kids buy a home, you’re not alone: many studies have shown that first-time buyers in BC’s pricey real estate markets have had parental help.

Here’s where a tax-free savings account (TFSA) can be helpful. Because of its flexibility you could redirect cash you were putting toward education into a TFSA to help your kids with a down payment in the future.

TFSAs are useful for real-estate investing because your contribution room has grown a lot over the years: you can contribute $7,000 to your TFSA in 2024 (check annual limits with the CRA), but as with RRSPs, unused contribution room from previous years carries forward for each year from 2009, when TFSAs were introduced (so long as you were 18 or older and a resident of Canada during each year).

The bottom line is that your individual cumulative TFSA limit as of 2024 is $95,000 and with your spouse’s account, that could total $190,000. And that doesn’t include capital gains, interest, or dividends accrued by the investments you hold in these accounts.

You don’t get a tax deduction for your TFSA contributions, but the investments in your TFSA grow tax-free – another plus if you’ve got, say, 10 years or more until today’s 19-year-old is looking to buy their first home.

TFSAs have very little downside. But do make sure you hold investments that generate interest, dividends or capital gains in your TFSA. Don’t leave your contributions in cash or you’ll miss out on the tax-free growth TFSAs offer.