Dear Dave: We have a special-needs child, who will likely be under our care for the rest of her life. The doctors say there's a good chance she'll live to be about 40. We just finished Baby Step 3 of your plan, and we have three to six months of expenses in our emergency fund. How does the situation with our little girl affect our retirement planning and college funding?
It really doesn't affect anything. I know that sounds a little weird, but the only financial difference is that you'll be responsible for your daughter for the foreseeable future - not just until she's 18.
So, what's the next step? If you don't have it already, both you and your wife should buy term life insurance. That way, your little girl will be taken care of in the event of your deaths. Also, make sure the money from this is set up in your will to go into a special needs trust that would be managed for her care.
In the meantime, keep following the plan. Baby Step 4 is putting 15% of your income into pre-tax retirement plans, like Roth IRAs and mutual funds. Baby Step 5 is college funding, followed by paying off your home early. Then, of course, the last Baby Step is building wealth and giving.
Basically, you're looking at filling a need in the event of your deaths, and this will be covered either by life insurance or investments. If you reach a point where your investments are substantial, and money from those things can adequately cover her needs or the needs of your family, then you can drop the insurance policy. That's one of the cool things about building wealth. It negates the need for life insurance, because you're self-insured!
God bless you guys, Jonathan.