Preparing one’s finances can be confusing and challenging for most people. How much should you be saving for retirement? Where exactly should you be saving and investing? What estate planning should you do? These are just a few of the many questions families have. If a family has a child with special needs, however, those questions become infinitely more complex and require careful planning and analysis.
For example, perhaps your retirement plan calls for you to have $70,000 per year in expenses. However, you then realize your child may not be living with you forever. While you’re alive, you may want him/her to live semi-independently.
Will your child be working? If so, how much will he/she earn? Does he/she have a tough time with steady employment? It’s quite possible you, the parent, will end up planning to subsidize those living costs, which easily could be two to three thousand dollars a month or more depending on his/her income and level of care needed. The retirement plan you thought needed $70,000 per year to live off of may now be over $100,000.
When organizing someone’s retirement planning at Harty Financial, one of the questions we ask is how much money parents want left over when they pass. For planning purposes, let’s assume parents live to 90 and retire at 65. Most will tell us they want to spend X amount per year, “live comfortably” but not extravagantly, have funds set aside for contingencies like one or both parents needing long term care, and more or less that when they pass away they’re okay not having extra funds left over for their kids. If there is something left over, great, but it’s not a priority to prepare for in most instances.
However, when someone has a child with special needs, like my brother-in-law who has down syndrome or numerous clients whose children have autism, this thought process immediately changes. Parents leaving money upon their passing goes from being “nice, but not necessary” to “absolutely necessary” and a concern that can cause lots of stress and sleepless nights.
Like in the retirement scenario above, where expenses can increase as parents provide for their children, parents realize they’ll have to provide enough funds to generate annual income for the child when they’re gone. In most cases these expenses increase over time as well. In addition to housing costs there are now trustee expenses, care coordination (who will check in on the child to make sure he/she is receiving the services agreed to?), tax returns to file, and a long list of other expenses that likely didn’t exist while the parents were alive.
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Building a budget for the child becomes an integral exercise so we can know how much money we’ll need “left over”: a budget for the child to go out to eat once a week, go bowling, take a vacation once in a while, buy clothing and electronics, etc. These all need to be estimated and added up. Thankfully, there are public benefits that can help offset these expenses, but they often fall well short and many parents we speak with don’t want to rely too heavily on these government benefits in the first place.
Once we know how much money may need to be left for a child when the parents pass away in order to give him/her the lifestyle the parents want him/her to have, careful consideration then has to be put into how this should be done.
What makes this answer complicated is that money left to a child with special needs will likely be in a Special Needs Trust to preserve public benefits. Trusts in general pay the highest tax brackets very quickly (over about $13,000 of undistributed income; it’s like a married couple earning over $622,000 per year—the top tier*). This is when parents, regardless of their age, realize what they’re doing today for long-term savings may be good for their planning but not as much for their child’s, because different assets are going to be taxed differently when he/she enters that trust someday. 401Ks/IRAs can be problematic for this reason in particular.
These are just a few examples of how financial strategies for a child with special needs can be far more complex than parents realize. Retirement planning can be different on multiple levels, and certainly estate planning will likely be impacted. It can be stressful to consider all of these moving pieces but we often find when parents do the preparation, they can check off that “peace of mind” box. Prepared parents realize not only that their retirement planning reflects potential additional expenses but also that long after they’re gone, their child will have the resources he/she needs, in the most efficient way possible, to have the lifestyle the parents wish for him/her to have. This doesn’t make everything easy, of course, but having a mapped out plan in place does help bring clarity and peace.
This article was featured in Issue 116 – Enhancing Communication Skills