Retirement planning for parents with special needs children
The financial planning challenges for parents of special needs children are many and complex, and retirement planning presents one of the toughest challenges. The core challenge is balancing the financial needs of retirement with long-term needs of a child with a disability--needs that usually outlive the parents.
Retirement columnist Mark Miller writes about trends in retirement, aging, and the economy. He is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living, and writes a syndicated column for Reuters. Mark blogs at RetirementRevised.com Twitter: @retirerevised.
"If we aren't asking the right questions, we're going to miss an important part of the retirement plan for these families," says Mary Anne Ehlert, a certified financial planner based in Lincolnshire, Illinois. When Ehlert left behind a career in corporate finance and launched her own financial planning firm in 1989, she focused on serving families with special needs.
"People thought I was crazy, because they thought people with disabilities have no money," she recalls. "But in reality, youre working with families--and we made the decision from day one to work with all families, rich or poor.”
But she also had personal reasons for specializing in families with special needs as she has lived through the challenge herself. Ehlert has a sister who was born with cerebral palsyand a son who is blind and has a mental illness. Both of her parents developed disabilities later in life. Today more than half of her clients have a special-needs family member. Ehlert also founded Protected Tomorrows, an organization that provides planning resources to families with special-needs members, and to other financial planners.
The need is growing. One in every five Americans has a disability, and 20 million families have at least one family member who has a disability, according to the National Disability Institute.
The costs can be very high. For example, the lifetime cost of caring for a person with autism ranges from $1.4 million to $2.4 million, according to Autism Speaks, an advocacy and research group. Lifetime costs are similar for people affected by spina bifida, cerebral palsy, and severe mental impairment.
Government benefit programs provide some assistance. The qualification rules vary depending on when a disability is incurred--one set of rules apply for people disabled as children (before age 22), another set of rules for those disabled at older ages.
Ehlert sketches out the following nuts and bolts areas as key topics for consideration and action:
The care plan. This includes the safety of the child, of course, but also aspects of life fulfillment, including work, learning, and play.
Projected cash flow needs. This depends on the type of disability, capability of the individual needing care, and the level of care required. Ehlert finds that the question often is neglected.
Investment allocations. Families with special-needs children also should take a more conservative approach to how they allocate their retirement portfolios, with a higher level of cash than usual.
"You still want growth and a nice, diversified portfolio, but there needs to be enough cash there that if the market plunges, there are resources to meet immediate needs, and for the portfolio to recover."
Government benefits. This includes possible Social Security, Medicare and Medicaid benefits that may be available to the child.
Asset and income rules. Families need to understand, and navigate properly, an array of government rules government the limits on assets and income that a person with disabilities may have before jeopardizing government benefits.
Estate planning. Creation of a Special Needs Trust is a critical element of a solid family retirement plan. The trust becomes the vessel for assets that will be used to pay for a child's needs in the future, and the vehicle for managing the assets. Ehlert urges caution in picking a trustee. Although some banks offer this service, they tend to come in and out of the business depending on their own strategic interests. She usually refers clients to companies that specialize in trust services; estate planning attorneys and planners usually can recommend a reliable provider.
Beneficiary structure. Handled improperly, inheritances can jeopardize government benefits. Making sure that beneficiaries are structured properly in an estate plan is a must.
Quality planning is complicated; wherever possible, families with special-needs children should consult attorneys and financial planners with expertise in the field, Ehlert says.
In most states, SSI recipients automatically qualify for Medicaid, which pays for a range of healthcare services. But Medicaid is jointly funded by states and the federal government, and many states are facing severe financial strains in their Medicaid programs and are cutting back services. Moreover, President-elect Donald Trump and some in Congress have called for converting Medicaid to a block grant ,
Social Security Disability Insurance is an important benefit for special-needs families. SSDI pays benefits to adults with disabilities that began before they turn 22 years old. It is considered a "child's" benefit because it is paid on the parent's Social Security earnings record. The benefit is 50 percent of the parent's primary insurance amount - the amount he or she would receive at full retirement age. If the parent is deceased, the survivor benefit is increased to 75 percent of PIA.
But the decision to file for SSDI needs to be considered in a broader family claiming context. That's because SSDI is available for the child only if one of the parents is receiving Social Security retirement of disability benefits, or if a parent is deceased. That brings into play a number of computations about optimizing a family's overall Social Security income, and questions about the best time for a parent to claim benefits.
For a married couple, much depends on the ages of both spouses, whether they are working and other complex factors.
"It's important to look at the family's benefit joint value," says Laurence Kotlikoff, a professor economics at Boston University and co-author of Get What's Yours: The Secrets to Maxing Out Your Social Security. Kotlikoff and his co-authors include an excellent discussion of scenarios that would affect a claiming decision for parents of a child with a disability.
Kotlikov also is the creator of Maximize My Social Security, a software program that helps households create Social Security claiming strategies based on their individual circumstances; the program includes features that looks at an entire family's benefits and present a claiming strategy based on optimal joint present value. Total family benefits also are capped by a maximum family benefit; the amount available for a family can be found on annual Social Security statements.
Social Security Solutions, another leading provider of software-based optimization, prefers to provide advice in this area one-on-one to its clients due to the complex factors involved. The firm usually begins by advising clients to start the application process early.
Brewton also notes that claims for disability benefits often are denied on first application. "Often, families will either accept the denial and walk away, or they will file another claim for benefits," she says. "Instead, they should always file an appeal to the initial denial." If the appeal is denied, a disability attorney can help with an appeal.
Saving, Investing, and Insurance
Ehlert advises clients to fund the trust while they are still working and household income is higher. The trust can hold a mix of assets, including cash, an investment portfolio and life insurance.
Ehlert also advises clients to buy "second to die" policies that provide benefits to heirs after the last surviving spouse dies. The policy amount should be geared to a calculation of the disabled child's living expenses and projected lifetime needs.
"It's really the cheapest way to fund living expenses for a child," she says.
The Broader Family
After a retirement plan is in place, don't neglect sharing it with extended family. Anyone with a specific future role needs to know what it is, and agree to it.
"It's important to educate the family on what the parents have set up, and to make sure everyone knows where the important documents can be found," Ehlert says. "Often we find that people don't know what they are supposed to do after the parents are gone."
Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living.