Financial planning for empty nesters

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.

Two strategies to consider before downsizing

With the kids gone, selling the family home might seem like an easy way to free up cash to invest for retirement and reduce your monthly costs, too.

But not everyone sees it that way: according to a study of Canadian baby boomers by real estate firm Royal LePage, 41% of respondents said they’d move to a smaller place once they retired, while 52% planned to stay put. When you look at a market like Vancouver and its environs that starts to make sense.

In the Lower Mainland, there can be some resistance to downsizing because there aren’t many housing options between a detached home and a much smaller condo, and many people still want to have space to host family dinners or have a garden.

Whatever you do, take your time in deciding your next step. If you’re unsure, consider renting a condo for a year and try it out. You could even rent out your current home while you do so.

Plus, there’s another option that may be the best of both worlds. Consider creating a rental suite in your home. That might be better than moving into a condo, because you may not make as much as you think from the sale of your current home, after closing costs. This way, you can keep the family home and have that extra rental income for retirement.

If you have RESP funds left over

Finally, if you’ve saved cash in a registered education savings plan (RESP) and your kids don’t go to post-secondary school (or don’t use the full amount), you have an extra decision to make.

RESPs have a $50,000 lifetime contribution limit per beneficiary, but by the time your child goes to school, you could have a lot more, when you include the growth of any investments and grants held in the RESP.

With individual RESPs, you have four choices:

1. Do nothing 

An RESP can be held for up to 36 years, so you can sit tight in case your child has a change of heart later.

2. Give the funds to another student

If your other children have plans for post-secondary education, you can transfer the RESP to them, so long as they’re under 21 when the transfer is made. In all other cases, you can still make the transfer, so long as your RESP doesn’t push the new beneficiary over the $50,000 contribution limit. If so, you’ll be liable for tax on the excess. Also, if the RESP is transferred to a beneficiary who isn’t a sibling of the original child, you’ll need to repay any grant funds.

3. Withdraw the money

If you close the plan, you can take your contributions back with no tax or penalty. But you’ll have to repay the grant funds, and any profits on the investments in the RESP (including gains and interest on invested grant funds) will be taxed at your regular income-tax rate, plus an extra 20% in the year you withdraw them.

4. Transfer your RESP to your RRSP

If you go this route, you can still withdraw your RESP contributions without any tax or penalty if you choose, and you’ll have to repay grant funds. But if you or your spouse have enough RRSP room, you could choose to simply move the RESP funds (including contributions and any interest or capital gains generated) to your RRSP, subject to a $50,000 limit.

Get expert advice

One thing is certain: the weeks and months after your last child moves out bring a lot of changes – for you and them. That makes it a great time to talk to your financial advisor. They can help you get a complete picture of your assets and help you build a financial plan for this new stage.