Money for Life – Evergreen Disability Financial Planning, Annuities and Pensions
Evergreen Financial Planning – Note for Parents
As a parent of a disabled child who may not be able to work and live independently, my wife and I have had to radically reshape the way we think about saving for retirement and our children:
OLD MODEL – Save enough for both of us to live comfortably for the rest of our lives… anything that is left for kids… nice, but they should assume that they are on their own (anything that they receive is a bonus). (30 to 40 years… we’ve been good about saving… so do-able).
NEW MODEL – Save enough for us, BUT also enough to take care of our disabled child through THEIR life. (70 to 80+ years).
Basically, we have to double the number of years that our money has to “do its job”… AND, as we have all experienced in the last couple of years, we need to consider that political changes that could seriously affect available disability services (California is tightening up Medicaid (MediCal) asset limits and Colorado has changed eligibility for disability programs… and that is in states that have been historically friendly to disabled people).
The financial change is simple, if scary. Essentially, we have to switch from planning to draw down savings gracefully to an “Evergreen” financial model – where we need to plan to live off the earnings (no asset sales) on our savings and investments AND grow those savings and investments to protect against inflation and other risks.
As we live in the crazy world of Silicon Valley, basically, without being mega multi-millionaires, we have to think financially in the same way as they do – with a “Home Office” investment strategy (barring the silly investments). (This is not well documented and you are going to wind up seeing a lot of layouts for having your “office at home ;).
So, no “4% Rule“, its an “Income Only” rule.
:(
Investing in annuities (for your disabled child) are also worth considering, but they often are quite expensive.
The trade-off is long (long long) term investment management is likely to be required (while smart “buy and hold’ strategies for investing in stocks or mutual funds work OK, at some point if you have a decades long time horizon, you need to be able to sell or re-adjust your portfolio).
Annuities and Pensions – Note for Disabled Adults
The US has switched from a “Defined Benefit” model for savings for retirement (Pensions) to “Defined Contributions” (401ks and IRAs and such) since the 1970s. An unanticipated side effect (I don’t think it was intentional) of this is that disabled people can’t “save for retirement” in the same way as everyone else.
Because your IRA or 401k account is an asset (formally it is effectively a “First Party Trust Account”) that you own, often control what it invests in, and even borrow from.
BUT, the problem is that you do OWN it as an asset… and this collides with Medicaid’s strict asset limit rules ($2000 in assets)… so, basically, no modern retirements savings allowed.
Ironically (is it ironic?), old school pensions and annuities do not create this problem. You don’t own the assets as they grow, you only draw income when you retire (or start taking the annuity).
Thus, if your employer sets up a pension for you (or you work for your own company and set up a pension for yourself – or someone could set up such an “disability employment services firm” to handle this at scale), the assets that fund that pension DO NOT count as assets.
Similarly for the funds for an annuity (I am not generically recommending annuities – they can be problematic… on my list to get smarter about – if you know about them, please reach out!).
The income is the only concern…
… and you may be able to finesse having to declare the income by having the pension payout or annuity payment go directly to a Special Needs Trust (I am NOT a financial advisor – do your homework on this!!!!).
… more investigation to follow.
