25 Nov Couple with special needs child concerned about retirement
Ted and Kathy aren’t going into retirement with blinders on.
They’ve done a lot of work to make sure they, and their 31-year-old child with special needs, will be prepared for the future.
Ted and Kathy both turn 62 this year, and while they’d like to retire, their child’s well-being is their biggest priority.
“Our child lives with us and will continue to do so presumably for the remainder of our lives,” Ted says.” Even though we have been savers for our 38 married years, we are always concerned if there will be enough money for our child’s future.”
He says their child — who we’ll call Tom — has recurring autoimmune health issues, which sometimes restrict Tom’s ability to work. Tom currently works four days a week and earns $17,000 a year, and almost all of those funds are saved.
Ted and Kathy have some good retirement benefits coming to them.
Family health care will be covered by Ted’s employer when he retires, which he considers a huge savings because today, he pays a third of the $21,000 annual premium.
Ted also has right pension options, but he thinks that choosing the benefit that pays 75 of his maximum or $82,482, and then provides 50 percent of that for Kathy upon Ted’s death, is the best option. He figures the 50 percent, plus Social Security and a possible downsizing after he’s gone would enable Kathy to maintain her lifestyle and provide for Tom.
The couple is wondering which Social Security option will be the best choice — taking benefits at Ted’s age 62 or waiting as long as he can.
“I collect at age 62, I can only earn $15,000 before I pay $1 for every $2 earned,” he says. “I will also receive a $6,700 payout a year for four years, so I’m assuming this counts towards the $15,000 threshold and thus will only allow me to earn an additional $8,300.”
He imagines he would want to work part-time after his official retirement.
Kathy would like to work for a few more years, so she’s not planning to take Social Security benefits at her age 62.
One big ticket item is the couple’s current brokerage account balance. They plan to withdraw $225,000 to rebuild a vacation home on the Jersey Shore that was wrecked during Superstorm Sandy.
“We plan to hold onto the house until prices rebound or a 10-year period,” Ted says. “We would have to sell it for $650,000 to break even, so I am conservatively pricing it at $500,000.”
Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, reviewed the couple’s finances for NJMoneyHelp.com.
LOTS OF POSITIVES
Lynch says the couple has led a rather conservative financial life, with their one “extravagance” being the beach house.
“The only real hiccup in their retirement planning is that they have a child with special needs who will always need their help,” he says.
Lynch says their starting point has lots of great components.
Using the joint and survivor option for Ted’s pension, he’d get around $75,000 a year. Social Security, even at age 62 for them both, adds another $36,000 a year of income. And then there’s the bonus of not having to pay for health care for the family.
“Having a base of income at $111,000 annually, without even touching the $1 million they have saved or using any of the equity in their homes, puts them in a really great position to retire,” Lynch says. “Their target of income was around $8,000 per month, so this puts them way above their target.”
Lynch says when he helps clients plan for retirement, and he sees someone in a position to spend more, he wants to take advantage of that.
“I want to really help them spend more, especially in the beginning years of retirement when they are in great physical condition and really can enjoy travel and having a lot of fun,” he says. “The issue that they face is very similar to what a lot of other parents face when they have a special needs child: How much do we need to take care of him?”
Lynch says that question always has the same answer: It depends.
CARING FOR THEIR CHILD
Lynch says when a someone has a child with special needs, it means that every dollar that with every dollar that’s spent, the parents often feel they are taking money away from their child’s care.
“How can you enjoy the vacation of a lifetime when in the back of your mind you feel that you are taking from your child?” he says. “The answer is life insurance.”
Lynch says life insurance, especially permanent life insurance, can allow parents to budget for their child’s needs.
He took a look a policy commonly called “second to die,” which pays after the second spouse passes. This allows the funds to be available when needed — when both parents area no longer around.
Lynch reviewed pricing on such a policy, and for a guaranteed death benefit, he said it would cost about $1,000 per $100,000 of benefit.
“If they wanted a $500,000 benefit, it would be around $5,000 annually, or for $1 million, around $10,000 annually,” he says. “They can work out the amount based upon what works with the budget and gives a meaningful benefit for their child.”
Lynch says even if Ted and Kathy tried to spend all their money before they died, they’d be unsuccessful.
“It is extremely difficult to save to the extent they that have on a very reasonable income level, then all of a sudden you flip a switch and start spending at a much higher level,” he says. “I will probably have to push them to spend more, but knowing that their child is going to be fine will make it easier to do than if they did not have the insurance in place.”
He recommends anyone with a child who has special needs to meet with an estate planning attorney who can set up a special needs trust, and work with knowledge about any public assistance for which the child may qualify.
“Someone who qualifies for public assistance can potentially lose that benefit if they inherit assets,” Lynch says. “No matter what, speak to the experts in this area. You cannot fix these after the fact so do it right the first time.”
REAL ESTATE AND INVESTMENT OPTIONS
Lynch took a look at the couple’s real estate an investments.
He said they can take advantage of tax laws to keep as much of their equity as possible.
“Most people are not aware that as long as the home is your primary residence for two of the past five years, if you sell the property and have a gain, up to $500,000 of that gain can be tax free,” he says. “It is possible that they sell their primary home where then have a substantial gain and get that money out tax-free, then move to the beach for two years and they can get that gain out tax-free.”
He says there’s another option for tax-free gains, but it would have to involve their deaths.
“At death there is a step-up in basis, so the people who inherit it would only have to pay a gain on any future appreciation,” Lynch says.
Lynch also talked to Ted and Kathy about their risk tolerance.
He says being aggressive in the stock market when you are young has its benefits. If you remain consistent in this approach, over time you should get substantially bigger returns.
But when you get close to retirement, it is imperative to stop focusing on the growth of the money and focus more on developing predictable income streams and protecting the money that you have.
“Any senior citizen who was living off their money in 2008 froze like a deer in the headlights with their spending, especially so if they were aggressive,” he says. “You get to a point when you can enjoy your life with the money that you have, take the risk down as there is no benefit.”
He says if you invest aggressively and your money doubles, you will probably not spend more. And if it can double, it can also be cut in half. Even if you didn’t need the money to live, Lynch says the loss can be very upsetting.
“If your goal is to double your money for your kids, reduce the stock allocation in your portfolio then buy a life insurance policy and shift the risk to the insurance company,” he says. “It has guarantees and generally will work better than just ‘going for it.'”
This story was first posted in November 2014.
Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .Net Worth:
Assets:
- Checking: $2,000
- IRAs: $501,700
- 401(k): $37,400
- Annuities: $275,600
- Brokerage Account: $236,300
- Primary Home: $710,000
- Vacation Home: $450,000
- Personal Property: $60,000
- Autos: $60,000
Total Assets: $2,333,000
Liabilities:
none
Total Liabilities: $0
Total Net Worth: $2,333,000
Budget:
Annual Income:
- Ted Salary: $140,000
- Kathy Salary: $35,000
Monthly Expenses:
- Income Taxes: $2,866
- Housing: $1,356
- IVacation Home: $1,129
- Utilities: $817
- Food: $867
- Personal Care: $410
- Transportation: $1,583
- Medical: $333
- Insurance: $654
- Entertainment: $25
- Vacations: $333
- Charity: $30
- Gifts: $50