How Having A Child With Special Needs Impacts Your Retirement Planning. Having a child with special needs can come with all sorts of unique challenges from a financial and estate planning standpoint. Public benefits, for example, can play a huge role in anticipating how much money your child will need down the road in your later years as well as when you’ve passed away. Many of these public benefits are “means tested,” which often puts a financial restriction on how much money that individual can have in their name, so careful financial and estate planning is necessary. For more information on public benefits, please visit or contact www.benefits.gov. What’s less understood and talked about, in my experience, is the impact special needs planning can have on someone’s own retirement planning.
When our firm works with clients on their retirement planning, we have conversations with them to try to figure out what their expenses will be so we can make sure they’ll have enough income to replace their paychecks once they’re done working. We also look at their assets to make sure they’ll have enough to hopefully not outlive them and keep pace with inflation by prudently investing. Lastly, we look at all of the risk management components (i.e., “what can go wrong”) such as needing long-term care insurance, the stock market dropping just as retirement begins, a spouse passing away and so on. These are all critical conversations to have, of course. If someone has a child with special needs, all of that still needs to be done, but now we need to on top of that plan for not just the parent’s needs but also the child’s making things far more complex.
For many families, providing financially for their kids ends a year or two after college. However, for a parent of a child with special needs, that financial assistance may never end. Furthermore, there’s a good chance the child will be living with their parents well into the parents’ retirement (like my brother-in-law with Down syndrome does). This will likely impact the income these families will need. If they would have needed $80,000 per year to retire comfortably, they now may need $100,000 or more to provide for their child’s various needs, such as therapies, hobbies, transportation, etc. If the choice is made to have the child live apart, like in a private-run group home for example, the cost can be substantially higher; I’ve seen food/housing/supervision around $4,000 per month and in some cases depending on the level of care required it could be much more than that.
I’ve had people say they “don’t want to do retirement planning” and would rather just focus on their “special needs planning,” at which point I say it’s almost impossible to separate the two. This is because in addition to the above points, another huge factor is Social Security. When a parent decides to collect their Social Security, they need to consider what different scenarios could mean, including delaying and getting more but having to spend down assets in the meantime, taking into account their life expectancy and other factors. If someone has a child with special needs and that disability began before age 22, the child may be eligible for Social Security disability insurance. This amount is generally half of the parent’s Social Security payment in retirement, in addition to what the parent receives. When the parent passes, the amount increases to three-fourths. This is a huge deal in calculating income now for the child during the parents’ retirement and ultimately after the parents have passed away. All of a sudden, that Social Security decision became much more complicated, and there are now multiple life expectancies and other issues to weigh in.
So what can parents do to prepare for retirement while taking into account their child with special needs? First, it’s critical that parents perform a budget analysis — not just of what their retirement income needs will be, but also what it may cost to provide for their child. Once they know these two figures, they can work with their financial planner to try to reconcile them by figuring out what assets and income streams would be best suited.
Also, it’s important to remember that different assets get taxed at different levels. Traditional 401(k) plans and individual retirement accounts, for example, are not taxed until withdrawal and can potentially be problematic to leave to a special needs trust. Life insurance and other select assets are generally income tax free and can be a more efficient asset to fund a child’s lifetime needs via their trust. As parents are planning for their retirement, they should carefully look at their entire picture and figure out which assets should be funded and which shouldn’t be.
These are just a few of the ways having a child with special needs can impact your retirement planning. From figuring out how much income you’ll need, to when and how to optimize Social Security benefits for the entire family, there are many factors to carefully consider along the way.
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