There comes a time in every parent’s life when the kids fly the nest (sure, they sometimes come back!) and you’ll reach that point when you find the rooms echo to the sound of family life and the fridge doesn’t empty so quickly.
For many that empty-nest chapter in life is the point where they can take stock and think about themselves. For the first time in 20 odd years their time isn’t either spent at work or ferrying the children from school, to clubs or friends’ houses.
The bank balance also starts to look at bit healthier without the encumbrance of school fees, clothes, food bills and holidays at the most expensive times of the year. The common refrain is along the lines of:
“Now, it’s our time”. There’s a lot we want to see and do that working life and family life have prevented so now we want know we’ll be able to do these things”
It’s probable that there is still a number of working years left; either because retirement isn’t yet affordable or mentally you are not ready but now is the time to make the most of increased disposable income by making sure your money is working hard enough for you.
We Don’t Live in an Ideal World
Ideally, you will have been contributing to pensions and ISAs throughout your career and increased the savings rate as your income has increased.
But, of course, we don’t live in an ideal world and you might be concerned about the parlous state of your finances and the gap between what you have and how much you will need to live your ideal lifestyle in retirement.
The biggest determinant of how much you have in retirement is how much you save, how regularly and for how long. Whilst getting your money to work hard enough through an appropriately diversified investment portfolio, be it in a pension or ISA, is important, it doesn’t matter a jot what investment return you get if it is on a small amount.
So, if you feel you are behind the curve on where you need to be now is the time to make the most of the remaining years of earned income and an increase in disposable income.
Ramping Up The Savings
It’s not uncommon for pension and ISA portfolios to have taken a back seat because disposable income has been spent on educating the children so a sudden cost reduction is a great opportunity to plug any gaps.
There isn’t really a definitive answer about where disposable income is best allocated. A Share ISA is more accessible than a pension fund with both growth and income being free of tax. However, the tax relief available through pension contributions provides an immediate leg-up to savings, especially for higher or additional rate taxpayers. Furthermore, the maximum that can be saved into a pension is likely to be greater than the current £20,000 annual ISA allowance, especially if there are gaps in funding and income can support carrying-forward unused allowances from the past three years.
Reduce the Mortgage
It’s possible that you still have mortgage debt. Paying it off over time from disposable income or waiting for a cash injection from pension lump sum or perhaps a downsize are the two main strategies.
Again there’s no right or wrong answer (as long as you have a plan to have it cleared by the end of the mortgage term). Some people want to be debt-free as soon as possible and so channelling disposable income to reducing the mortgage is rarely a bad idea. However, some prefer to see their money working as hard as possible and with interest rates as a low as they are, there is an argument to say spare cash can be put to better use being invested into a pension or ISA portfolio.
The route you chose to take will depend upon a number of factors including your current financial position, amount of disposable income, willingness and ability to suffer temporary stock market falls and your various competing priorities.
Like many things in life, it might be that a balance is struck between investing in ISAs and pensions, topping up the emergency fund and reducing any mortgage debt.
Time to Re-Prioritise
No doubt your children’s happiness and wellbeing has been your priority for the last two decades and, to a large degree that will continue to be the case; you will be there to support them financially if they need bailing out. But, it is also time for them to stand on their own two feet and find their way in the world, as you did when you were a young adult all those years ago.
So, now is the ideal time for you to review your priorities. What is important to you and your other half? What do you want to be able to do with your time and money?
It may be you have found you are spending money on things that you don’t really value but make it harder for you to achieve the priorities you have set yourself. The problem with this is twofold: firstly, the opportunity cost of not allocating your spare cash properly and secondly, you are getting used to a lifestyle that will cost more to replicate when the earned income ceases. The consequence of this is either having to work longer than you wish to or having to accept a less than ideal lifestyle in retirement.
One difference between those who retire successfully and those who don’t is having a purpose to their days (find out about the secrets to a successful retirement in this video) so now is also the time to start finding out what interests you outside of work. This will help make sure the transition from working life to retirement isn’t a source of stress (I call it retirement adolescence).
Putting a Plan in Place
This new chapter in your life is also an opportunity to put in place a proper plan to give you the best chance of achieving your life priorities, whatever they may be.
A well thought out plan will help you set out a vision for what you want your future to look like, help you understand what wealth you need to achieve the vision and identify steps that need to be taken to get you from your current financial reality to where you need to be.
Failure to plan properly means that you are more likely to sleepwalk to retirement only to find that you actually needed more cash than you thought and a wish that you could turn back the clock and ramp up the savings when you had the opportunity after the kids left home.
So, now is an opportune point to make the most of any spare cash that you have. You’ll thank yourself later that you did.
If you would like help planning your future and to make the most of your disposable income contact me: www.neliganfinancial.co.uk/contact-us.
Photo by Thijs Schouten on Unsplash
