Ask an advisor: Should I cash out my 401(k) to provide for my autistic son?

November 4, 2022 4:02 PM

More than 2% of children in the U.S. are autistic, according to the CDC.

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Welcome back to "Ask an Advisor," the advice column in which financial pros answer pressing investment questions. The topics can range from retirement to taxes to wealth management — or even advice on advising — and the questions are from real people.

Today's question comes from a father in New York City who's afraid the bear market will erode his retirement savings — and he's not just worried for himself. Like many American parents, he has a child with autism who will need lifelong care. Building a solid nest egg is not only crucial for the father's future, but for his son's.

In the United States, about 2.3% of all children have been diagnosed with autism, according to the Centers for Disease Control and Prevention. More broadly, about 17% of children aged 3 to 17 have some form of developmental disability. Many of these children will need healthcare and other services long after their parents are gone, which can add urgency — and emotion — to their financial decisions.

In the case of this concerned dad in New York, he's considering extreme measures to protect his savings. Here's what he wrote:

Dear advisors,

I'm a 59-year-old insurance underwriter in Queens, New York. My biggest financial concern is securing a future for my son, who is 22 and has severe autism. My retirement savings are an important part of my plan, but I worry this year's volatility is putting them in jeopardy.

I am extremely concerned about the current market downturn. I plan to retire at 67, and I've saved up $1.1 million in my 401(k). But with stocks falling and a recession possibly on its way, I'm wondering if I should withdraw it all now and invest it in something safer. I have a few ideas: I could buy bonds — particularly I bonds, to outpace inflation; I could put all the cash in a series of high-interest CDs; or I could even deposit it all in a regular savings account and hope my money lasts longer in there than in the stock market. I know these may sound like drastic options, but I worry seven or eight years may not be enough time for the markets to turn around. Or should I just leave everything in the 401(k) and ride it out?

— Questioning in Queens

Here's what advisors wrote back:

Don't touch that account

Lora Hoff, CFP, CPWA, financial advisor at

IPI Wealth Management

:

You should definitely allow your investments to recover. You could reallocate a little bit to try to maximize your portfolio within the 401(k), but definitely do not kill your ability to recover your losses. If you sell now, while it's still down 20% or so, that will mean that if and when the market recovers, you won't get that increase.

Additionally, if you actually withdraw the funds from the 401(k), you are adding to the pain by creating potential tax problems and further depleting your funds. Leaving the money inside your plan and just optimizing the allocation will give you the best chance for having a healthy balance when you actually retire.

Plenty of time to recover

Joshua Hargrove, CFP, financial advisor at

Insight Wealth Partners

:

This father's concerns are completely understandable. Given his time horizon, the good news is he has plenty of time to allow for a market recovery. Even if the market recovers by a modest 6% per year from this point forward until he retires in eight years, he'll have 60% more money ($653k) in his 401(k) than he does today.

His best option is likely to leave everything in the 401(k). This way, he avoids paying taxes on distributions, which may require liquidating even more of his holdings at a loss.

If he were my client, I would advise him to take his focus off of the markets. With eight years until retirement, it just isn't helpful. Instead, he should make sure he has plenty of life insurance and disability insurance to provide for his son if something happens to him. Furthermore, he may consider a special needs trust that would allow his son to receive government assistance in addition to whatever inheritance he is able to leave for him.

Look into other resources

Andrew Komarow, MSFS, CFP, founder of

Planning Across the Spectrum

:

The client should keep in mind that his son has a life expectancy of 60-plus years, absent any co-occurring medical conditions, and that his time horizon is not his son's. This is why when doing planning, it is very important to do a plan for the individual with a disability as well as parent and their respective time horizons. Here are some points to consider:

The parent can only purchase 10,000 I-bonds per year, and not inside a retirement account.
Is the son getting funding from the Office for People With Developmental Disabilities? In New York, that can be $50,000 or more a year to help provide support and services.
Where will the son live? What kind of support does he need? Without the answers to those questions, we can't know how much the parent needs to leave.
Taking small taxable withdrawals every year and purchasing a life insurance policy to fund a trust are common examples of good planning. Making decisions in haste and emotionally is never good planning.

This parent should absolutely ride out the stock market and look at what his son's needs are. The absolute worst thing you can do is sell when the market is down. Now is the time to develop a plan for the future. Nothing could hurt their goals more than pulling money out.

Talk to a professional

Bryan Minogue CFP, CFA, founder of

Kardinal Financial

:

Without knowing a lot about Questioning in Queens, I would strongly advise against pulling money out of stocks and bonds today to invest in cash. While nothing is guaranteed, seven years until retirement (and hopefully decades after that) is a very long timeframe for your portfolio to rebound. Even during the financial crisis in 2008, stocks recouped their losses within five years.

2022 has been ugly, with stocks and bonds both declining by double digits (something that hasn't happened in over 50 years). But the silver lining is that forward-looking returns are expected to be higher. Bonds are finally offering compelling interest, with investment-grade bonds yielding more than 4%. And the stock market's 20%+ decline has resulted in valuations in line with historical averages, compared to the lofty valuations we started the year with. Again, the returns from here are expected to be far better because of the correction in stocks and much higher interest rates.

Before making any changes to your investments, I'd highly advise speaking with a financial professional about your overall plan, which includes, but is not limited to, your investments. Without a focus on your big picture, it's easy to focus too much on your investments and overblow the impact 2022's market performance has on your long-term plan.

Tweak it, don't trash it

Tammy Wener, CFP, RICP, co-founder of

RW Financial Planning

:

I understand the reader's biggest concern is securing a future for his son, and the best way to do that is to first make sure the reader has a plan in place for himself. He should be commended for building such a sizable retirement account. It's understandable that he's considering drastic options, as this is a very unsettling time for many, but that is usually the exact wrong time to take drastic action.

Withdrawing the entire 401(k) could have catastrophic consequences. First, assuming the 401(k) was funded with all pre-tax contributions, 100% of the withdrawal will be treated as taxable income. A withdrawal of this magnitude will push the reader into the highest income tax bracket, resulting in hundreds of thousands in federal taxes, not to mention New York State taxes. Second, if the reader is not yet 59 ½, a 10% penalty on the amount of the distribution would also be incurred, resulting in an additional $100,000+ in federal taxes.

The reader should review the 401(k) allocation to determine how much of the portfolio is invested in stocks, bonds and other investments. Make sure the investments are well-diversified — but don't take equities out of the equation. For someone who is approximately eight years from retirement, a stock allocation of 50% to 70% is generally a reasonable starting range. In this case, the reader is not just planning for one retirement, but potentially 70-plus years of support for a young-adult son with severe autism. Holding a portion of the 401(k) in stocks is even more important given this timeline.

Also, the reader should identify other sources of income — including Social Security benefits for the reader and potentially Supplemental Security Income for the son — to understand how much income will likely be available at retirement and how much additional income may be needed from the portfolio to cover expenses. If the reader does not have an emergency fund/source of cash outside of the 401(k), now is the time to commit to building one. I bonds, CDs, and high-interest savings and money market accounts are great options for this cash. Strive to build a six-month reserve and, if possible, increase it to a 18-to-24-month reserve as retirement nears. This cushion will be helpful if the market has not yet recovered and/or we are in the midst of another downturn when the reader retires.

Regarding planning for the young-adult son: Research what public benefit programs he is eligible for and make sure to access them. Meet with an estate planning attorney who specializes in working with families with children with special needs. The reader should make sure the estate plan does not jeopardize the son's ability to maintain or obtain any government benefit programs due to a poorly planned inheritance. If the son is currently living with the reader, begin thinking about what future living arrangements may be needed. What can be done now to mitigate the possibility of crisis planning in the future?