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Episode #552 - Securing Their Future: Retiring with Special Needs Children
Roger: The show is a proud member of the retirement podcast network.
Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence because you're doing the work to really lean in and rock it. My name is Roger Whitney.
By day, I'm a practicing retirement planner with 30 years’ experience founder of agile retirement management, and for the last 10 years or so, I've used this weekly podcast as my tool to hone my craft as a retirement planner. But even more importantly, to hopefully empower you to do your retirement planning well, but not create a second job or new job in retirement. The whole point of the exercise is to create a great life, not to be a retirement planner in retirement.
Today on the show, we're going to continue our survey of unique retirements and focus on people that are retiring with children with special needs or disabled children and how that adjusts the retirement planning process. To help us, we have Matt from Haystack Financial Planning, who focuses on people with disabilities and people that have children with disabilities in their financial planning, and this will be a good primer on the subject. Any one of these unique retirements we could dedicate a whole month to, but I wanted to make sure we at least created some general knowledge of this so we can start going deeper in the months and years to come from a planning perspective.
In addition to that, we're going to have Nichole Mills on the show, she hasn't been on in a while, to answer some of your questions around backdoor Roth contributions, optimizing asset location, how much do I need if I'm going to self-fund my long-term care? As well as how do we start to integrate our finances in a mature marriage? So, we're going to hit those questions as well.
But first, let's have a chat with Matt and do our first primer on retiring when you have children with special needs.
RETIREMENT PLANNING WHEN YOU HAVE A SPECIAL NEEDS CHILD
All right.
To start to explore navigating retirement planning, when you have a child or children with special needs or that are disabled, we have Matthew Ricks from Haystack Financial, Matthew, how are you doing, buddy?
Matthew: Good. How are you doing Roger?
Roger: Now in your practice, you specialize with individuals that are disabled and parents that have disabled children. Why did you choose to specialize in that area?
Matthew: It kind of found me. Five, five and a half years ago, through my normal practice, I kept coming up against questions about disability, whether that's parents with a child, right? How do we plan? When should we get ready to plan? All those fun questions parents have about just Kids, right? Kept coming up against it. Did my research was clueless because I had no idea.
Roger: You had not done that before.
Matthew: I don't have any firsthand experience. Trying to find the experts. Okay. Who are the attorneys I should talk to? Right? Who are, you know, are there any accountants out there that specialize who are the planners that maybe I should just send these people to through that through the research found just how big the disabled community is. Found out that within our community as advisors and planners, they are grossly underrepresented.
So, I said, okay. This is a great opportunity to help people and a great opportunity for me to kind of make myself a little different here in New York, where there's a dime a dozen advisors and planners.
Roger: There's a dime a dozen everywhere, but very few that have specialties that focus on an area. So that was the beginning of your mastery journey into specializing in this area.
Matthew: Correct.
Roger: For a variety of reasons. This is very natural. This is why I specialize in what I specialize in.
I always like to start with the intent of the exercise, which is in this case, the intent is, I imagine, with a parent, because I have a few clients that are dealing with these issues, on trying to create a great retirement and trying to make sure that they honor and take care of their children or child that has special needs that may live beyond them.
The intent is to try to find that balance, given the limited resources almost all of us have. So how does one begin to integrate the fact that there may be extra cost for care while I'm living, but also after I pass as a parent into retirement plan process?
Matthew: Sure. So, it's never easy, right? Similar with just regular financial planning.
I always advise people get started as soon as you can. Again, no different than traditional financial planning. In my mind, this is just solving for another goal, right. There's a lot more of an emotional aspect to it. There's a lot more sometimes literally life or death aspects to it. I always tell people this is just another layer of your financial planning, right?
You still have all the tradeoffs. You still have all the questions, all the unknowns, right? Those all still exist, and in this case, you're a parent of a child or multiple children with disabilities, right? You might have that great unknown of extended caretaking.
Roger: I think from a financial perspective, you're right.
It is another goal that extends the life potentially of the plan. Like when we do a normal retirement plan for a client, okay, you're going to live to 94, right? We'll say that's the default. Well, in this case, if you have a 50-year-old child that is going to need some level of care, where then we've just extended that goal beyond your life in essence, right?
Matthew: Correct. You're extending the plan out.
Roger: Like all these goals, it's just, how do we do it with the resources we have, right? What we talk about are, you know, the three resources we have are social capital, which are like social security, disability pensions, human capital, either me working in retirement, or in this case, maybe the child working a little bit in, in their life. Then what isn't covered by that has to come from financial capital. Those are all finite to some extent, and it's just active decision making where the opportunities where the risks I would imagine is the same process.
Matthew: Yeah, and it's one of those things right where the earlier you get started, the clearer the path may become with some of those.
All right, if you are a parent in their fifties starting to get serious about prepping for retirement, and your child is in their thirties, you may have lost some time because, you know, for the child, you have social security disability, you have supplemental security insurance, right? So those are ways that the child themselves can get some sort of income, but those are income and asset based, there's some prep work involved a lot of times to get them qualified.
Roger: I think that's the perfect profile of we have a parent in there because we're to focus on the parents that have children special needs at various levels, in the fifties is when we start thinking about retirement, right? Then we also start realizing that we're not going to be here forever. It's becoming closer in our minds at least. We're thinking, oh, my goodness, what happens to Johnny or Sally when I'm not here or when we aren't here? That probably is the spark that says we need to start thinking about this.
If we're going to treat this as a goal in a planning process, how do we go about determining the cost of the goal? You had mentioned earlier to me that They're really two different costs, right? Their costs while they're living, but then, you know, we're probably more focused initially on the cost when we are not here.
How much do they need when we're gone? How do we determine those costs? How do we go about that?
Matthew: Yeah. Again, with anything else, these are guesses but educated as we can get, right?
So, the costs associated with that, I rely on the communities themselves. A lot of these communities are tight knit and they are very open to sharing information, right?
Roger: You say communities, you mean people, other parents or people that have children with similar issues.
Matthew: Correct. So, if you're, you have a child with autism, right. I am more than confident there are other parents and you've reached out to some type of network or community to share resources, share support. Various other things to help out with. I have found in my experience and doing this, like I said, five, five and a half years, they're very open with each other. Like lay the cards on the table. This is exactly what it cost me. This is what I found. This is what I like. This is what I don't like. I use that, you know, this doctor, that doctor, that facility, this facility, right?
Open book policy, which is phenomenal because you get a lot of information without having to spend a lot of time getting that level of detail.
The other resource I would say is the doctors and medical community themselves. Right? So, again, you're that parent in their 50s child, you know, multiple children with disability that are in their 30s. What has it cost you so far? Right? What does it cost you every year? Now, if you are paying for that care? If things all else remains equal, right? That's a fairly straightforward inflate the cost for the lifespan.
Now, with some individuals where the prognosis or diagnosis, for lack of a better word, that child may not outlive the parent, right? The timeline is not as long, or if the care may ramp up as the child gets older, we have again more of that guesswork.
Roger: This is the same kind of guesswork we do on our own life expectancy and planning and long-term care planning and the probability of it and the potential cost of it, depending on my zip code.
So, it mirrors that fairly closely. You may just go to different resources, so it's not quite as foreign as initially it can feel. It's a goal.
Matthew: Absolutely. Yeah. It's one of those things were. I tell some clients I work with and people I talk with, Hey, look, you're basically just doing their financial planning for them and you're just incorporating it. You are funding it, right? Or you're doing your best to fund what you can. That's one way to think of it. Instead of them talking to me, I'm talking to you as a proxy for them, right?
Roger: I have not considered this and then maybe I should. In this instance, you could almost run a parallel plan for the child or children, identify their goals, which is the cost of their goals, identify the sources of income that they could have, whether it's human capital working and for how making guesstimates on how long that would be, what the amounts would be, and then the social capital, what social security and other benefits they might get. And then whatever monies is accumulated, say in an able fund. I know we're going to talk about that and, and maybe insurance proceeds and see how feasible that is. It may not be a beautiful answer initially, but at least it's active problem solving in an organized way.
Matthew: Correct, and I'm sure you've had this experience as well. Most people, when they see the results of their financial plan, no matter the situation, usually there is not a beautiful answer in their mind right away.
Roger: But that's the beginning of problem solving.
Matthew: Exactly. Right. So, it can be a little more fearful, you know, when you see that potential gap, but as you just said, it's the start of figuring it out.
Roger: We've talked a little bit about figuring it out of the cost, and we identify, let's say, the gap, which even most people without children with disabilities have gaps, and then you negotiate your goals. Some goals can be un negotiable because they're basic living.
What are the tools that are different that are in the toolbox to help fund the gap for, say, someone with special, a special needs child? What other tools do they have that say, I don't have as someone who doesn't have a child in that situation?
Matthew: Yeah. So, most of the tools are different ways to fund. You still need the cash somehow, right?
You can work with an attorney and get a special needs trust. Those can be costly. Those can be time consuming but you still need the capital to do so.
Roger: Yeah, special needs trust is essentially just a trust that is there to provide, not just, but provide the legal management for the child, but it doesn't fund it.
Matthew: Correct. So outside of some of these benefit programs that the government provides us, you know, we have the health care, the Medicaid, Medicare, SSDI, SSI. Everything else, you have to kind of figure out how to fund. All right, so that could get troublesome if you have that big gap which most of us do. There are some instances where there are organizations, nonprofits, hospitals where they may provide some type of care or some type of stipend for care where that's a possibility. But there is unfortunately no magic bullet to solve all your ills when it comes to funding.
Roger: Now, how often have you seen people use life insurance to help fund for after we're gone and using the leverage of premium versus death benefit?
Matthew: I think that's very common in all instances of instances of planning, but especially here, especially if the parent is able to, from a cashflow perspective, support care during the lifespan, but afterwards when that faucet of cash is turned off, life insurance is a very easy way, like you said, to leverage the care going forward.
Roger: With life insurance, going back to the earlier you start the more reasonable the premiums are in theory, the healthier you are in terms of underwriting. You get later in the game, you're in your 70s and you're thinking about this, it's going to be maybe prohibitive from a cost perspective.
Matthew: Yeah. Like any other insurance conversation, right? What's the goal of the policy? We don't have to get into a whole term versus whole life versus universal, all that, it's what's your goal? What's the objective?
Is the objective just to provide a benefit for the child when you've passed? The terms could absolutely solve that. If you want to throw in a few other things, the whole life, the cash balance, maybe as part of your retirement? Great. You can do that.
There's not again a one stop fix that can answer all of it. You can marry different solutions together to solve multiple problems. Just like any other thing with planning.
Roger: Now, explain what an ABLE account is. I've heard of an ABLE count related to those with disabilities.
Matthew: So, an ABLE account is very similar to a 529.
The college savings plan, but it's actually in the same legislation. So you might hear it referred to as a 529 ABLE. An ABLE account is an account where you can fund and put monies for the care of a disabled individual. Similar to those special needs trust. However, it is incredibly simple, incredibly cost effective to set up.
Again, 529 is right. They're all run by the state. All right, so New York has one, California has one, Pennsylvania, Alabama, right? So, on so forth. I'm pretty sure 47 of the 50 have them now. We're able to deposit funds into that account for the care of that individual similar to the 529. It has to be kind of that approved list of spending.
Roger: So that money that gets deposited in there is there's a limit on that, right? It's like 17, 000, I think.
Matthew: Yeah. It's the gift limit. Then each state program has its own maximum account limit. So, California is the highest at 529, 000. They make it a nice round, fun number, but there's one state where it limits it somewhere in the 200, 000.
Roger: Meaning that's the maximum you're allowed to have in there.
Matthew: Well, that's the maximum balance. You can't have any more than that, right?
Roger: Okay.
Matthew: Yeah, and again, similar to the 529s, each state is slightly different. Some states are a closed system where you must be a resident of that state to use these be ABLE account. Some states give you some state tax advantages. The idea there is it's a, in my opinion, simple, easy, cost-effective way to start saving for that person's care.
Roger: I would imagine from a planning perspective; this is like an easy win before we get to special needs trust and thinking about insurance. This is like, let's start this first because it's simple. No friction.
Matthew: Yeah, and like I said, doesn't take an attorney. You and I could sit here and do it in seven minutes.
Roger: Okay. But then you have limits on what you can accumulate in that.
Matthew: As well as some restrictions on what you can spend the money on.
Roger: One of the wrinkles here, it sounds like with ABLE accounts, and I was wondering if you have a disabled child that is earning income, I'm assuming they could open up a Roth account, even as a dependent and start to contribute to a Roth account.
One wrinkle I was wondering, Matthew, is how these interact with your benefits?
Matthew: Yeah. So, we could have a multi series podcast on all of that, Roger.
The benefits are not clear. I have found in my experience in talking with various individuals, whether you get approved or not may very much depend on the person in the office you talk with and what office you're talking to. Unfortunately, during that process, I have seen some people that you look at the letter, right? You look at whatever and it's like, oh, that's a slam dunk and they've gotten denied. That process is not simple or easy unfortunately, where in my opinion, it should be.
Roger: Then some of that is related to the assets that the child has.
Matthew: Yeah, and some of it could be assets, right? You mentioned the child working, some of these are income based so the social security disability income, the more they earn, the less benefit they get, which makes sense when you think of it in a cold financial perspective.
Supplemental security insurance, right? SSI that is asset based. So, the 1st 100, 000 of that able account. Does not impact the benefits for SSI. So that's why I said, that's a clear, easy win for the planning because you could either kind of super fund it, or just put a few monies in there and you're not going to change their benefits.
Now, if you have over a hundred thousand or you plan to accumulate more than a hundred thousand, that's where I always recommend, okay, maybe we take it up to that next level of that, that SNT, right?
That special needs trust, whether that's a third person where you're funding it for your child, or if they're able to work a first person where they can fund some of it themselves.
Roger: The funding is either going to be putting money in there or putting money in there to buy insurance or to do it with it.
Matthew: Or you know, grandma and grandpa pass away and they want to give their grandkids money. I've unfortunately seen the back end of this where they get the money and they're like, what do we do with it? I was like, first of all, don't take it. You shouldn't have taken it, should have gone right to the trust because now you have benefits or benefits, right? You may lose your benefits, then you have to get them back on. You might get it reduced, then you have to get it back on, right? Or Aunt Sally or Uncle Jim or whatever left some money, or you win the lottery, all these different things, right? You know, mom and dad downsized, they get some proceeds from the house they want to distribute, maybe start funding care. So yeah, you have to be aware of all those situations.
Roger: This is one of the benefits of having a special needs trust is you have this bucket that can receive those things so it doesn't impact benefits.
I think of retirement planning, Matthew, and there's so much I don't know, and there's so much I can't remember, and I have to keep re figuring it out. This is another layer of that, and I think that's important when we're looking to resources, whether it's someone working with you, or an attorney is, we're all trying to figure this out, and you want active problem solving because there is no answer on a lot of this stuff, which is unfortunate, but just sort of the reality of life.
This is a great primer on this subject. I think, Matthew, there's so much more as you said, this could be a multi-layer series, if not its own blog or podcast or practice because there's so many levels of this.
Last thing I want to hit on is how to approach guardianship.
Obviously, there's the basics. When I die, who will be the guardian for my child if they can't be their own? How do you start approaching that? What have you seen that might be, how do we avoid unforced errors? First of all?
Matthew: Yeah, I think the first thing to do is open conversation, right? So, you're a parent, you're caring for your disabled child. They might have siblings. Some parents automatically assume the siblings will take care of that child. Those siblings may not want to. Having an open conversation about it is, in my opinion, step number one, right? I don't think anyone wants to feel forced into it. They may have their own, you know, plan in place where this could kind of put that metaphorical wrench into it.
After that, it would depend on the level of care, the individual needs that child has. If they're in a facility of some kind, you can work with an attorney to figure out how to get the facility named for their physical needs, then similar to regular kind of estate planning, someone for the financial matters.
Roger: But the key is the conversation.
Matthew: Oh, gosh, yes.
Roger: To not have assumptions because that can really go awry. There's this whole other layer of, if you have three children and one is disabled, the non-disabled children sometimes get short changed for lack of a better term because there's so much focus on just managing the child that needs help, which is what we need to do.
Matthew: Early in my career, I was on the side of the table after the fact where the parent died was a disabled child and 2 other children and those 2 other children came in and we're like, what do you mean? There was some animosity there because he was very controlling and didn't have that conversation. Would that have changed anything? I don't know, but at least then if they were given a heads up and maybe an explanation of why that might have helped. I'm not positive, but sure.
Roger: Do you have a go to book or resource or two? We'll put links to your practice and some of the stuff that you create that people can read or consume to help set the table for a lot of conversations around everything we're talking about, because that's essentially what it has to be.
Matthew: Yeah, there's two books that I read early on that really helped me, right? So, whether you're a financial planner or not, there's The Special Needs Planning Guide, by Cynthia Haddad and John Nadworny.
It's a book that was focused on you and me, as the audience, but I have recommended that some others who may be the DIY type where they want to know a little bit more and figuring it out. So that was very helpful. That's the biggest one and there's some others out there that you can find.
I have tried to make some inroads with again, some of these communities out there, right? I'm not on Facebook a whole lot, but Facebook, a large number of those groups exist where you can certainly find more resources there.
Roger: Yeah. I was texting before we got on, Matthew, a teammate of mine, Tracy, who has a child that she's planning for, and she recommended Retire Secure: For Parents of a Child with a Disability. That would be another one. We'll put links to these as well as your site, Matthew, in our 6-Shot Saturday email.
Thanks for helping us begin this journey that we'll have other episodes on, on planning with children with disabilities.
Matthew: I appreciate it. Thanks for having me, Roger.
LISTENER QUESTIONS WITH NICHOLE
Roger: Now it's time to answer your questions. If you have a question for the show, go to askroger.me and you can type in a question. You can leave an audio question. You can just say hi.
To help me today, it's been a while, is Nichole “Rockstar” Mills? How are you, Nichole?
I'm fantastic.
Nichole: If you guys send those questions in, it will be my eyeballs that read them first, so send them our way.
Roger: It's been a long time since you've been on.
Nichole: It has. I'm not sure how long, but a while.
Roger: Yeah. We've had Kevin on, we've had Mark on, we haven't had Troy, well, we haven't had Troy on yet, but we haven't had Troy on ever.
Nichole: Maybe we should remedy that here in the next few months.
Roger: So how are you doing? I'm sure people want to know.
Nichole: Well, I'm doing good. I made it through my first major house remodel.
Roger: The one that was supposed to be finished by Memorial Day, right?
Nichole: No, no. Yeah, it was Memorial Day. It was supposed to be done and it is now, uh, the beginning of August. So, they kind of overshot with that timeline. It was a little aggressive, but I'm excited that it's almost finished and we'll be able to enjoy it.
Roger: You're ready for school to start.
Nichole: Yeah, yeah, it was a lot, you know, the in and out contractors unannounced and the kids home and it's just been busy this summer.
MAGGIE'S BACKDOOR ROTH CONVERSION QUESTION
Roger: Well, our first question, Nichole, is from Maggie and related to backdoor Roths and this is an audio question so you get to just hang out for a second and listen to Maggie's question.
Nichole: All right. Let's go.
Maggie: Hi, Roger.
My name is Maggie and I love your show. A recent episode, I think it was your last one, triggered a question, however, for me. We started taking advantage of backdoor Roth conversions, I think as far back as 2010 thankfully, and have now retired and rolled our 401ks into IRAs. I still have a pension which delivers some form of income. It must be some portion of my pension is still counted as income, and wanted to continue making backdoor conversions, but now that we have IRAs as opposed to the 401k, is this off the table?
Do we not have the ability to actually make a backdoor conversion given that our now, tax deferred accounts sit in IRA accounts at Fidelity.
Hopefully this makes sense and we'd love to hear your answer.
Thank you.
Roger: But Maggie, that totally makes sense.
Yes, it does impair the ability to do backdoor Roth contributions because the IRS, again, doesn't see the actual, you know, nondeductible contribution going to a Roth and then moving to a Roth conversion, like we talked about the other week.
To do the math on this, let's just assume you have zero in an IRA and you make an 8, 000 nondeductible contribution. Then in the same year, you roll over a million-dollar 401k plan into the IRA or even into another IRA, because it doesn't matter which IRA it's in. So now you have a total of 1, 008, 000 in your IRA, that nondeductible contribution that you made, plus the million-dollar rollover.
When you go to convert that 8, 000, what's happened, Maggie, is the IRS won't see it that way. They're going to use the calculation that we talked about last week or the week before. So how much of that is 8, 000. conversion that you want to do is going to be taxable and how much will be nontaxable. The way you would calculate this is you take the nondeductible portion of that 1, 008, 000, which is 8, 000, divide it by pretax contributions, which is the million, that gets you to eight tenths of a percent. Because you rolled over the 401k to the IRA, now it's going to be included in that calculation.
This was an unintentional, unforced error in that if you wanted to do backdoor Roth contributions, it would have been best to leave that money in the 401k so it didn't get included in that allocation. So unfortunately, if you were to roll over this 8, 000 in this example, 99. 2 percent of that 8, 000 conversion would be taxable.
These can get a little complicated.
Actually, Andy Pankow, Nichole, one of our favorite people, I was just talking to him on the phone today, just wrote an article, and I think he had a podcast on it about the advantages and disadvantages of rolling money from a 401k to an IRA. We'll have a link to that in our 6-Shot Saturday email because it's a great article and he's very thoughtful.
This is one of those disadvantages of moving money from a 401k to an IRA is that it can impair backdoor Roth contributions.
How do people sign up for 6-Shot Saturday, Nichole?
Nichole: They can go to sixshotsaturday.com. We make it nice and easy.
Roger: Nice and easy.
Nichole: We've got a flow chart too about Roth conversions.
Would it make sense to throw that in there? You think Andy's article covers it all?
Roger: I think Andy's article covers it all. I think we're perfect. I just read it the other day. I'm like, well, why can't I be as smart as Andy?
ON THE ORDER OF WITHDRAWALS IN RETIREMENT
All right. So. On to our next question. Who's that from, Nichole? Do you know?
Nichole: This one is from Dave about asset location.
Roger: Okay, cool.
Nichole: He says,
"Roger, love your podcast. Thank you for sharing your knowledge and wisdom.
It seems that conventional wisdom says withdrawal order would be taxable accounts first, then tax advantaged accounts, Roth, traditional, etc. It also seems that generic asset location theory would call for the least tax efficient assets to be held in the tax advantaged accounts.
This seems contradictory to me. Our pie cake would want to use fixed income for the shorter-term withdrawals and our equities to have a longer term. Is this conventional wisdom on asset location or withdrawal order misguided?"
Roger: That's a great question, Dave. The key here is the word conventional.
There always is a conventional wisdom in a vacuum of the withdrawal sequence as an example, all of taxable, then tax advantage, then Roth, that is the conventional wisdom that's usually hardwired as a default in a, say, retirement planning software.
But the problem is Dave, I bet if I met you, just like when I got to meet Nichole, I bet Dave that you're not conventional. Nichole's not conventional. You are your own unique person with your own situation. One thing I love about having Nichole on the show is you can't see this because we're not doing video, but I can see her reaction when I, when I say things like this, and it's just hilarious to watch. I need to take some snapshots.
The point here, Dave, is that not one person is conventional. They're their own iteration of their life, and so these conventions are good starting places. This goes the same with asset location. You know, the theory of asset location is you want to put the most tax efficient assets in after tax accounts and the least tax efficient assets in tax deferred accounts.
A good example is bond interest, you know, bonds in tax deferred accounts is technically more efficient because you would pay income taxes on that and equities you get favorable treatment on dividends, you get favorable treatment on capital gains, so you want those in after tax accounts. But again, this conventional wisdom falls down when it comes to you.
What is the intent of the exercise, Dave, for you?
Well, your intent is to make sure you have money available from the accounts that you've identified, safe so when you need to pay yourself, the money is there and showing up.
I think both of these conventions are a good starting point for you to create a plan specific for yourself.
Did that, that makes sense, Nichole?
Nichole: Yes, absolutely.
Roger: When you go through that. Like when you go through the first pillars of what your vision is, is it feasible, making it resilient, you use these conventional, let me have my withdrawal strategy and then optimize, you literally just create it year by year. If you're going to pay yourself out of an after-tax account, say a hundred thousand dollars in two years, and you know it's coming from an after-tax account, or you're going to need to have the money available in that account, which is likely going to go into a fixed maturity bond of some sort.
That's more important than some very, very marginal tax efficiency.
Thank you, Nichole.
HOW MUCH WILL I NEED TO SELF-INSURE FOR LONGTERM CARE?
Nichole: All right. Looks like we have another audio question.
You got that queued up?
Roger: I do. Hold on.
Nichole, this one is from Dana related to long term care planning if you're going to self-fund long term care.
Dana: Roger, here's my question.
How much do you need if you're going to self-fund your, I call it assisted living. I know people will say that it depends on where you live, but as a lot of people move to their kids, to where their kids are, we don't know where we're going to live.
So, how much do I need if I'm going to self-insure for my long-term care?
Thanks. Bye.
Roger: Dana, well, first off, you don't know how much you're going to need, and you also don't know if you're going to need it or not, right? You likely won't need it, but this is one of those risks that you want to manage, right?
How do you go about figuring this out? I think step one is you do want to at least make a guess on the zip code that you're going to be getting this long-term care assistance or this assisted living assistance, because it varies greatly from zip code to zip code, state to state, region to region. You do have to assume there, knowing that you'll just keep revisiting that assumption.
When you're self-funding it, meaning you're not going to transfer it to some kind of insurance policy, there are two choices that I am going to talk about today.
One is, is just to realize that this is a possibility, but don't actually plan for it and just try to grow a portion of your assets to be available later if needed, so that would be buffer in the system so you don't have to actually specifically plan for long term care, because we don't know whether you're going to need it or not.
The second way is to fund it like you would if you ran an HOA, a homeowner's association.
Let's assume you have an HOA and you have a community pool. A well-run HOA would have sinking funds. They know they're going to have to replace the filter system in five years for the pool. So, what they would do is create a sinking fund or an envelope that would grow and they would fund it in order to fund that expense when the pool filter system finally went out. That would be like a contingency fund or a sinking fund, just like pensions do for future benefits.
If you want to have money segregated, so you feel like you have money set aside for a specific purpose, in this case, long term care, here's how I would go about getting an answer of how much you fund that with.
Step one, what care will you need and when will you need it?
Now, I'll use myself as an example, Nichole. I'm 57. How do I know what I'm going to need and when I'm going to need it? How many years? I don't know. So, the way that I would, you just have to make an educated guess.
My default assumption with this kind of planning, Dana, is I'm going to assume at 85 years old, I'm going to need nursing home care for three years. If you look at statistics, that's probably a good range to start with. So now I know at age 85, I'm going to need assisted living or nursing care for three years. Three years. That's step one.
Step two is, well, how much does that cost?
Well, Genworth has a great calculator that will give you a range of what the cost is for various levels of care. We'll put a link to that in 6-Shot Saturday, that's part of our decision pod for long term care that we have in the club. We'll put a link to that website so you can get an idea of what the cost is based off of zip code.
We'll assume I did this exercise. Private room in my zip code today for nursing care is 86, 140 a year. Nichole's eyes just bugged out. Let's assume a 4 percent inflation on that. The future value of that Meaning that when I'm 85, I'm 57 now, when I'm 85, 28 years from now, that's 258, 308. The Genworth calculator will show you today's dollars and future cost, and it'll actually allow you to tweak that inflation rate.
Step one is we want to know what the future dollar cost is for the years that we're making assumptions that we're going to need it. So, I'm going to need it for three years, starting at age 85, so that's $258,308, and then year two is $268,641, if I'm assuming three years and I do the same thing for the third year. Now we know the future value of these three expenses way off into the future. That's step two.
The next step, if we're trying to figure out, well, how much do I need to put into an account to have that future value available 28 years from now? The next step is we need to discount that future value back down to today's dollars.
So current cost is 886,140, the past value of that using 4 percent inflation is 258, 308 for year one. Now we need to discount that back to today. Well, my assumption is that I can invest this money for the next 28 years, right? I'm going to invest in it, hopefully, more than the inflation rate of 4%, so you have to choose a discount rate, which is essentially the rate of return you're going to receive between now and that future date.
So, if we use a discount rate of 7%, which means I'm going to get a 7 percent return on whatever monies I put in today for the next 28 years. The present value of 258, 308 is 38, 850 for the first year. Okay, that sounds a little bit more reasonable.
If we use a 6 percent discount rate, which would be, I'm only going to earn 6%, it's 50, 532. Then you would do that for each of those three years. So, in this exercise, If I wanted to have this reserve sinking fund that I wanted to fund today at age 58, that could grow to cover those three years, and I wanted to assume a 6 percent return on that money, I would need to deposit just shy of 150, 000. In theory, that would grow by 6 percent and get close to my estimates of the cost of care and my zip code. for three years, 28 years from now.
That's a lot of numbers, Nichole. I should have put my geek hat on.
Nichole: It was a lot of numbers. You definitely needed that.
Roger: Yeah. Maybe I should do a video on that, but does that make sense, Nichole, as you heard me walk through that?
Nichole: Yes. That was a good explanation.
You may have offered some kind of warning just stating that daily healthcare number, yearly healthcare number. It was shocking.
Roger: It is shocking. That's what's scary about these numbers. When you put them into future dollars, the older you are, like Dana, if you were 70 and thinking about this, the dollar amount is going to be a lot more because it has a lot less chance of growing. You know, I'm 57 and I'm thinking about 85. So that's one reason why we want to think about these things earlier than later so we have more opportunities.
Nichole: Makes sense.
HOW TO HANDLE FINANCES AS A NEWLY MARRIED COUPLE
Our next question is from Greg.
He says,
"Roger, my girlfriend and I are going to be married."
Congratulations, Greg.
"We're both retired and each of us will come into the marriage with substantial assets. However, she owns the house we'll be living in free and clear. She also co owns a vacation home with her ex. She wants me to buy into our primary residence and help with the expenses of the vacation home.
How should all of this work? "
Roger: So, Greg, it's a great question.
I encourage you to listen to January's Retirement Plan Live, to hear two individuals share a bit of their journey. Actually, I never got a recap of where they're at now, but to hear other people that were struggling with this in a way that at the time didn't appear very healthy.
So, for you, she's got a house. She's got a vacation house. She wants you to buy into the house. She wants you to contribute to the vacation house. This is going to be an instance where I would suggest that you divide this into phases because it's still your girlfriend, you're still her boyfriend so you're not even married yet. This is a great time to be having these conversations to see how aligned and how unaligned you are in a lot of these areas around money management.
Phase one is to walk through almost line item by line item. How are we sharing household expenses? What is Greg's contribution to the house, to the living expenses? Should Greg own part of the house or should it be agreed beforehand that this is her house, and Greg just contributes to living expenses so in the event that it dissolves, she doesn't lose ownership of the house she has that's paid for.
You want to go line item by line item together, preferably not in the house, but in a neutral location like a quiet coffee shop or library or something. We just think differently there. And what are we contributing to each thing? The vacation home. What is Greg's contribution to the vacation home? What is her contribution to the vacation home? There are going to be lots of little conversations where you're going to understand where the other one is coming from, so you can make decisions about that.
Phase one is, I would say, keep it all separate, the ownership of things, until you get a handle, because ultimately what you want to start with is her plan, your plan and your goals are going to be your contributions to the household plus the goals that you fund yourself.
Let's say you're into mountain biking and she's not. So, you take three trips a year where you go someplace exotic and mountain bike. Those are your specific goals that she's probably not going to contribute to so you would have your plan with your unique goals, maybe funding a prior child something and then also the goals of your shared expenses that you've already talked through with her beforehand, and then she'll have her own plan with the same. Then ownership. She might have ownership of those two properties to begin with for phase one and then phase two, after you're married, after you've gotten into a rhythm, you can start to decide how much you want to integrate everything in terms of you buying into the house and et cetera.
I think this would be a good instance where you consider having a neutral arbitrator to help frame these discussions and create a constructive place so neither of you has to manage the meeting while you're actually participating into it, and it might end up in a prenup of some sorts. But the more you get all of this figured out before boyfriend and girlfriend become husband and wife, the better chance you have of not having the experience that we had in January with the couple that got married very quickly. That was painful for me to navigate here, and I hope the best for them, but that's how I would approach this.
Take it in phases. Don't go so fast, but start to have these conversations in detail, not in theory right now. This is one of the complications, Nichole, you don't have when you've gotten married and stayed married as young as we were, not that you and I are married, but we didn't have anything to, there's stuff, right. You want to be all in on the marriage, and sometimes this can feel like half in and half out.
Nichole: Yeah, I think it's easy to forget sometimes when it comes to money that hopefully, you're playing on the same team.
Roger: Yeah. Yeah. Yeah. So, hopefully, that helped with some structure, Greg, to begin to approach this.
MY PLANS WITH MICHAEL EASTER
Nichole: Before I go, are you going to tell everyone about your plans with Michael Easter?
Roger: I mentioned it at the end of the show. So, I'm doing another Michael Easter event, who is the author of Scarcity Brain and The Comfort Crisis.
Nichole: Are you, are you going to be in the jungle again?
Roger: No jungle. This one's going to be in Nevada so it's going to be in the desert.
Nichole: In the conference center in the desert?
Roger: I don't think there's a lot of conference room time. I saw like defensive driving. It's only two days, so it's not four days.
Nichole: But what is your risk of personal injury?
Roger: This is a very sensitive item for Nichole since the Costa Rica episode in January.
I don't think there will be any IVs involved. We're not rucking through jungles or on long distances. This is more situational awareness, surviving in unfamiliar places like travel.
Nichole: Okay.
Roger: Bobby's going. I'm going to have a doctor with me.
Nichole: Well, Bobby was there last time. I don't know if I can trust Bobby as your chaperone.
Roger: He totally left me. He just kept on marching.
Nichole: Uh, okay. I'll have a word with him.
Roger: Yeah. We'll put a link to the event in 6-Shot Saturday because Michael Easter does great events and I think he's an awesome guy. No financial affiliation whatsoever. I just like to support him because he's good at what he does.
I'm going to be safe, Nichole.
Nichole: Okay. Yes. We need the Retirement Answer Man on the Retirement Answer Man.
Roger: Okay. Can I go set that smart sprint now?
Nichole: You can.
TODAY’S SMART SPRINT SEGMENT
Roger: On your marks, get set,
now it's time to take a baby step we can take in the next seven days to not just rock retirement, but rock life.
All right. In the next seven days, I challenge you to begin to manage, if not severely limit your exposure to mainstream media of any source related to the election. Doesn't matter what side you're on.
Here's my logic.
One is we're entering that season where the megaphones are at full volume related to the attacks and the debate around all sorts of topics, some relevant, many not. We're also in that season where trial balloons of if you elect me, I will do this, or I will change social security that way, or I will do this. We're just in that season, and that one is very stressful.
Two, it is not very helpful in you or I determining who we're going to vote for, whether that's in federal, state, or local election come November.
Then lastly, It doesn't have a material impact on you or I doing our retirement planning, which is in my world, the point of this exercise. It actually can hurt our planning because we start to make decisions based off of proposals that likely will never happen or we make decisions from a point of fear and anxiety.
I don't think it's helpful, so I'm going to limit mine severely, try to get my information to where I can make a reasoned decision come election day, but not get caught up in all that's going on.
That's my challenge for you over the next seven days.
CONCLUSION
Well, I'm doing it again, and I'm freaking Nichole out, because I am doing another event that Michael Easter is hosting. It's a two-day event in November, limited to 25 people, where we're going to learn to build fitness and mindset and perform under pressure. It's just mental training, a lot of mental training, not near as physical as the thing that Michael hosted in Costa Rica. What's cool is I raised the flag, told people I was doing it in the rock retirement club and so I have like six people going of the 25 that I know.
If you have an interest in it, we'll post a link to it in 6-Shot Saturday, and you can come hang out with me and I think Bobby DuBois is going and A few other club members.
I have no financial affiliation with this. I'm not going to get anything if you go, but I'm going, it's going to be a blast. I'm going to do some cool things in the desert. If you want to hang out with some people, at least feel like you know somebody you can go too.
The opinions voiced in this podcast or for general information only and not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal tax or financial advisor before making any decisions.