How a child's special needs steer retirement plans

As Nicole and Mike Zupan get closer to retirement, they worry about more than just covering their own living expenses for the next several decades.

They want to set aside enough money for their 15-year-old son, Josef, who is autistic and may never be able to live on his own. Their idea of retirement is to live a quiet life close to their son, who may need to move into a group home when he gets older. They want to create a special-needs trust to help pay for therapy and other expenses he might face as an adult.

"Because of our son's needs, I guess I never really considered true retirement for us," Nicole says.

The Zupans are also trying to save for their 14-year-old daughter, Elshaday, to attend college in a few years.

The Zupans' ideal plan is for Mike, 60, to retire first, in five to seven years, and for Nicole, 52, to continue working for several years beyond that before she joins him in retirement.

But before they can get there, they want to pay off the $18,000 in credit-card debt they've racked up, partly because Josef's therapy is not covered by insurance. They have about $230,000 left on the mortgage for their home in Fairfax County, Virginia, which they estimate will take about 12 years to pay off, and a $14,000 loan they used to make home improvements.

Matters are complicated by the fact that Nicole, who worked as a preschool teacher, is unemployed while she recovers from foot surgery. Mike's $120,000 income, from his work as a government contractor, is enough to cover basic living expenses. But Nicole wants to get back to work so the family can afford more therapy for Josef and pay down its debt faster.

We shared details of their finances with two financial experts, Sarah Halpin, a financial planner with Wells Fargo Advisors, and John Voltaggio, a senior wealth adviser at Northern Trust. Here is a summary of the family's situation and the experts' advice.

The bigger picture: The Zupans have about $200,000 in equity on their home and about $575,000 in their retirement accounts. They have about $12,000 in emergency savings and close to $22,000 total in 529 plans for their children's educations. Nicole expects that Josef will be able to stay in public school until he turns 22 because of his autism. Because it's unlikely that Josef will go to college, his parents want guidance on how best to use that part of his savings.

The family hopes that Josef will qualify for federal or state aid to help him move into a group home, but state aid may be limited. Josef is one of 10,000 people with disabilities in Virginia on a waitlist for Medicaid vouchers that should help pay for care, Nicole says.

The Zupans spend about $8,300 a month on their regular bills, savings and debt payments. That includes $2,600 for their mortgage and property taxes, an average $200 on electricity, and about $330 on cable, Internet and phone service. Their insurance bills, including long-term care insurance, health coverage, and car and home insurance, add up to $800 a month, and Josef's therapy costs $585 a month. Transportation costs, which include a car payment, gas and parking, total $700 a month. Charitable donations and savings add up to about $400 a month. They spend about $900 on groceries and $800 on miscellaneous expenses, including entertainment, a gym membership and home maintenance.

About $1,000 a month goes toward debt: essentially a $350 minimum credit-card payment, $275 for an interest-free furniture loan and an extra $350 to clear the debt more quickly. They paid off a chunk of credit-card debt using money they had inherited. Now they wonder whether it would be better to use the $12,500 they have left from the modest inheritance to make another dent in their debt or to build their savings.

Setting priorities

Although Mike and Nicole want to set aside more money for their daughter's college fund and a special-needs trust for their son, they should focus on their retirement savings first, the advisers say. They expect to live close to their son, in any case, and to help pay his expenses even after they stop working. And building up their retirement fund will help make them - and him - more financially secure, Voltaggio says. "They can just keep the money and help their son on an as-needed basis," he says.

To start, the couple should contribute $6,500 a year to Mike's individual retirement account, the maximum allowed for savers 50 and older and nearly double the amount they are saving now.

Then they should focus on paying off their debt, Voltaggio says. They can use the $12,500 left from the inheritance to pay off most of the credit-card debt, which has a 9 percent interest rate. The roughly $5,500 in debt they would have left should be transferred to a card with a lower interest rate to make their payments go further, he says.

Halpin offers another suggestion for using the remainder of the inheritance. She says the Zupans may want to use it to pad their emergency savings until Nicole goes back to work. Without it, the $12,000 they have in emergency savings now may cover their fixed expenses, such as housing and utility costs, for only about three months. Doubling their emergency savings, to $24,500, would leave them with enough cash to pay essential bills for at least six months if Mike lost his job or if Nicole's job search took longer than expected - although their debt would continue accruing interest.

Either way, once Nicole lands another job, the couple can use her paycheck to make extra payments on their credit-card debt. After the credit card is paid off, they can direct the money toward the $14,000 loan they used to renovate a bathroom, which has a 3 percent interest rate, the advisers say. Once that loan is paid, the Zupans could use the money to build their emergency fund until they have enough savings to cover a year's worth of bills. That stash would also give them a cushion if any surprise expenses appear. Next, they could focus on adding to their children's 529 plans.

Toward a comfortable retirement

After paying off their debt, the couple should increase their retirement savings as much as possible. Nicole will be able to add to her retirement savings once she lands a job, either by contributing an additional $6,500 a year to her Roth IRA or by saving in a 401(k) if her new employer offers one.

Delaying retirement for as long as possible would also improve their financial stranding, the advisers say. Mike should consider working until he's 70, Voltaggio says. At that point, the Zupans would have two years left on the mortgage, and Mike would begin receiving a maximum Social Security benefit of about $3,500 a month, compared with the estimated $2,600 a month he would begin receiving at 66. That's an additional $900 in monthly income on top of whatever Nicole might be earning 10 years from now. Nicole, who plans to work as long as she can, would receive Social Security benefits of $1,580 a month beginning at age 70, compared with $1,240 a month beginning at 67.

Any retirement savings they don't use can be left to their children through their will, Voltaggio says. They can also leave instructions to have Josef's inheritance placed in a special-needs trust to pay for therapy and other caregiving expenses not covered by government aid, Halpin says.

And if Josef doesn't go to college or use the 529 money for training, perhaps at a community college, the Zupans can transfer the money to their daughter to help pay her tuition costs, Halpin says.