Simple money moves can help family with special needs

When it comes to financial matters, Chad and Amy Patterson tend to play it safe.

Before starting a family, the Lake Stevens couple made a point of reducing their debt by paying off student loans and about $20,000 in credit-card balances in less than a year.

When buying a house, they put down 20 percent and obtained a fixed, 30-year mortgage well within their means.

As for cars, they own two smallish ones that get good gas mileage, both paid for.

And yet, they still feel uncertain about their future.

"While we've paid off all our debt except our mortgage, we have no idea how much we should be saving, how much life insurance we should have or what we can actually afford," says Amy, 38, a stay-at-home mom and Pampered Chef cooking-tools consultant.

Insurance needs weigh more heavily on the Pattersons than on many families. Chad, who's 39 and works as a systems engineer at Premera Blue Cross in Mountlake Terrace, was diagnosed with rheumatoid arthritis four years ago.

The disease causes inflammation of the joints and some days, Chad says, he can barely get out of bed. Just one of his medications costs $16,000 a year, making health-care coverage essential.

Because their only child, a 6-year-old named Emma, has Down syndrome, the Pattersons are especially concerned about providing for her after they're gone. To that end, they set up a special-needs trust for Emma and had their will prepared in Pennsylvania, where they lived before moving back to Washington four years ago.

They both have 20-year level term insurance policies with face amounts of $250,000 each, while Chad carries an additional $170,000 of term insurance through a group plan at work.

Even still, they're not confident they've covered all the bases for Emma's future.

"It's not something we can ignore or just hope it's going to work itself out," Amy says.

Part of their vision is helping Emma get a job after she graduates from high school. The Pattersons are eyeing the Venture Program at Bellevue Community College, which offers students with learning and cognitive disabilities an associate degree in occupational and life skills.

Though it's years away, the Pattersons want to make sure they can foot the bill for Emma's tuition.

They'd also like to retire in their early 60s, so Chad contributes 15 percent of his salary to his 401(k) at work.

To force themselves to save, Chad opts to have more taxes than necessary withheld from his paycheck to ensure a large tax refund.

"If I have money today, I'll spend it today," Chad says. "If I get it in one lump sum, that forces me to do something else with it."

Together, the Pattersons' gross income is about $100,000 a year. Not long ago, they sat down and asked themselves where all that money was going.

"We have the basic frugal lifestyle," Amy says. "But it's actually tracking everything and knowing what's coming in and what's going out."

Helping the Pattersons determine that is David Lamp, a certified financial planner at BBJS Financial Advisors in Seattle and a member of the Financial Planning Association — Puget Sound Chapter.

"They wanted someone to give them their marching orders," says Lamp. "Given their current track, they wouldn't meet their goals."

But Lamp says that with a little tinkering, the Pattersons' hopes — retiring between 60 and 65, paying Emma's tuition and taking an annual family vacation — are within reach.

Lamp says that given the state of the equity markets, the Patterson's investments have been in the best place: cash. Of the roughly $58,000 in Chad's 401(k), $55,000 is in a Vanguard money-market fund.

Long term, however, Lamp says history and inflation tell us that cash is not a good producer of wealth. He recommends Chad and Amy "ease in" to a strategy that has 70 percent equity exposure — stocks — and 30 percent fixed income, all based on their risk tolerance and goals.

Chad and Amy have done a good job keeping cash in the bank and staying out of debt, Lamp says, but they have not set up a separate emergency fund.

The Pattersons knew they needed to keep a few months' worth of cash available. But without a better plan, they kept the funds in their checking account.

"Our buffer that we thought we had just keeps going down," says Amy.

Lamp recommends they transfer $6,000 from their checking account to an emergency fund and build it up to $12,000 for three months of expenses, an amount he says the Pattersons were comfortable with.

For retirement, Lamp suggests Chad reduce his 401(k) contribution to the level where his employer matches it and use the rest to fund Roth IRAs, one for him and one for Amy.

"Right now all their eggs are in their retirement accounts," including Amy's 401(k) at a former employer, Lamp says. "If they reached a point where they didn't have any money, they would be forced to cash out their retirement accounts."

Roth IRAs — which are tax-free upon withdrawal since they are funded by after-tax income — would give them different baskets, Lamp says.

A year or two from now, Lamp suggests the Pattersons open a joint brokerage account so they have a source of funds not tied to retirement.

As for Emma, Lamp confirmed the value of her special-needs trust and Chad and Amy's will with an estate lawyer.

Lamp, who has family friends with an autistic daughter, says he's seen the challenges. "[Chad and Amy] did exactly what they were supposed to," Lamp says. "If something were to happen to them, their wills would funnel everything in their accounts to Emma's trust."

The Pattersons had left the trust unfunded, which Lamp endorsed. Putting assets in the trust now would lead to tax implications, he says.

Merely having the trust in place is enough as a default mechanism, he adds, possibly until Emma reaches an age where she qualifies for disability benefits. Assets held in the trust are not currently considered in qualifying for certain governmental benefits, Lamp says.

Emma's trust should be the owner of a new universal life-insurance policy with a guaranteed death benefit Lamp recommends the Pattersons obtain, so that when the term policies have expired, there is still protection for Emma.

To keep the premiums low and because the policy isn't meant to replace income, he recommended a joint-life, second-to-die policy that will give Emma resources after her parents are gone even if their financial plan fails.

In addition to the medical insurance and short- and long-term disability insurance Chad gets through work — vital because of his rheumatoid arthritis — Lamp suggests the Pattersons consider long-term-care insurance, though Lamp says Chad may be uninsurable.

Emma's tuition at a community college like the BCC program is well within the Pattersons' reach, Lamp says, and should be tackled as a pay-as-you-go expense when the time comes.

And though it goes against what a financial planner would usually recommend since it essentially gives the government a tax-free loan, Lamp says Chad can continue having a larger-than-needed amount of tax withheld from his paycheck to get a large refund in the spring.

"If they really want to do it, I would give them my blessings, but they should earmark that money to fund Roth IRAs and not just fritter it away," Lamp says.

Amy says she walked out of Lamp's office feeling like a huge weight had been lifted off her shoulders.

"[The plan] is absolutely, 100 percent doable," she says. "We're excited to put things in motion."

She also applauds the process of financial planning as much as the result.

"It really sparked a lot of good conversation between us about what we really want to do going forward," Amy says. "That's probably as important as getting the financial plan — just having those conversations and learning that we both want the same thing."