How Will You Pay for Your Health Care in Retirement?
“Don’t let a nursing home take your home and your life savings if you become sick and need care!”
Have you heard that line in a radio advertisement lately? If you have, you’re not alone.
Elder care attorneys run ads with this message over and over because they know it strikes a chord. And, as you will discover in a moment, their solution for you is very profitable…for them.
It’s hard to resist the temptation to emotionally react to that message! Attorneys brilliantly stir up even the most rational thinking among us.
The challenge with these ads is that they present a “magic pill” which does not exist, and there are consequences which are not revealed in the short time frame.
Given this, I wanted to take another opportunity to revisit this financial risk, and clarify a few misconceptions perpetuated in these radio ads.
I strongly recommend taking a few minutes to read this. I recognize that it’s rather long, but it’s very important.
“Don’t Let Them Take Your Home”
Before we get into this very real risk you face, I want to clarify one quick point which is obvious once thought through. Forgive me if this comes across as silly, but I continue to hear this false notion all the time.
Nursing homes don’t “take” your home, or “take” your lifetime savings.
They are operating businesses like many others all over the world who provide a service. And, in order to provide that invaluable service, they have to be compensated.
How you choose to pay for that service is up to you and is what this Blog is all about.
What’s Your Financial Risk If You Get Sick and Need Care?
Let’s begin with the risk we’re all confronted with. If you objectively take a step back for a moment, one of the conclusions you will arrive at is that the downside “financial” risk of you passing away decreases over time, thus decreasing your need for life insurance with each passing year.
However, on the flip side, the “financial” risk of caring for your health increases dramatically with age.
Here are a few facts to ponder again on human longevity and the incredible advances we’ve made since the beginning of the 20th century:
- The joint life expectancy of a 62-year-old non-smoking couple is 92! That means that the likelihood of one spouse reaching age 92 is very good.
- Of those turning age 65, 52% of them will require some form of long-term health care at some point in their lives.
- The average length of stay for those who enter a nursing home is 5 years, and 14% of people over 65 will need five or more years of care.
Now, if we remove the emotional aspect of the care for a moment and strictly evaluate the financial risk that you face, it becomes a pretty daunting thought.
“Managing” Your Risk
We need to first assess this financial risk, and then determine how we want to “manage” it. Whenever you’re confronted with a risk, there are three questions that you must ask yourself:
- “What’s my potential financial loss?” (Assuming you don’t have insurance already to protect yourself) So, you have to actually put a number on it.
- “What’s the probability that I’ll suffer this loss?”
- “Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?”
Let’s start with #1: what’s the potential loss? The cost to receive care in your home or to move into a nursing home in and around the Boston area now exceeds $14,000 per month.
Given that the average length of stay is 2.5 years, that’s a total “potential” average risk of over $400,000 for each spouse.
Now, before we move on to anything else, let’s stop and think about that potential risk you face.
Let’s assume for a moment that your Retirement Resource Forecasters™ look fine given your need to withdraw $8,000 per month from your Retirement Bucket™ to supplement your pension and social security income.
However, if you get sick, and it costs $14,000 per month for care, you now need to withdraw $22,000 per month from your Retirement Bucket™.
$8,000 to support your cashflow needs and $14,000 for your extended health care.
If you continue at that pace for long, your Retirement Bucket™ may not be able to handle it and you would run out of money.
This is financially devastating for your healthy spouse who still needs money to live.
The key is to know just how financially devastating for you personally. In other words, what does your scenario look like if you need care for three years?
For five years?
For seven years?
You need to define what your personal risk exposure is so that you can make an educated decision for yourself.
Please notice that all of this has to be clarified before you even think about how to “manage” the risk.
How Will You Deal with This Dilemma?
Setting aside the emotional aspects of this dilemma for a moment, there are two ways to approach this problem. The first is to accept 100% of this risk yourself.
In other words, if you need care, you will assume 100% financial responsibility and deal with the extenuating consequences.
In my opinion, as long as you do this after a complete assessment of the risk, and the costs of passing some or all of that risk on to some other entity, I believe that’s fine.
While it’s not necessarily a good bet, the chances are in your favor that you won’t need the care.
However, if your family’s health history is not great, or if you’ve personally witnessed hundreds of thousands of dollars walk out the door to pay for the care of a family member, you may have second thoughts about assuming 100% of this risk.
If that’s the case, you have two alternatives:
- pay for it yourself (personal funds or long-term care insurance), or
- have the government pay for it through Medicaid
Qualifying for Medicaid Assistance
To be very clear about this, in order to have the government (taxpayers) pay for your care through Medicaid, you have to qualify financially, similar to qualifying for financial aid for college tuition assistance.
And, that involves relinquishing all control over virtually all of your assets and giving them away to your family (and the government through income taxes).
Or, you have to place your assets into an irrevocable trust (a decision you can’t change after you make it).
If your assets have been out of your ownership and control for five years, you may be able to qualify for help from Medicaid (which is government assistance for the poor).
In order to qualify for Medicaid, you must have virtually no assets left titled in your name.
Overlooked Tax Bill to Pay First
Before you quickly conclude this is the way to go, there is a key distinction most are not aware of when it comes to the use of trusts in order to qualify for Medicaid (government) assistance.
If the majority of your investment assets are in IRAs, they must be withdrawn from your IRAs first, and then placed in the trust. What this means is you have to pay income taxes on the balance of your IRAs all at once before funds can be placed in the trust.
For a nice round-number example, let’s assume that you and your spouse have $2 million in IRAs. If your plan was to place your assets in a Medicaid Qualifying Trust, you will have to withdraw the balance of your IRA resulting in federal and state income taxes of over $800,000!
Yes, you read that correctly: over $800,000!
The reason for this is the majority of your IRA would be taxed at the highest marginal tax bracket (35% currently on the federal level plus state taxes).
If you do the math for a moment, that $800,000 that you will have to give up right away could have gone to pay for over 60 months of care (assuming average costs in Massachusetts as noted above). And, you would have retained control of your assets.
Medicaid Qualified Annuity
As attorneys will outline for you, if you don’t have five years to work with, the alternative to this is to “annuitize” all of your investment assets. This is a very popular recommendation right now.
In short, this means turning all of your investment holdings over to an insurance company who will then pay you a guaranteed monthly income.
What’s important about this is that once it’s done, it’s done. It’s irrevocable. You relinquish all control of your lifetime savings to the insurance company who issues your annuity checks each month.
At your demise, or the demise of your spouse if you chose a joint and survivor payout, payments end and your family receives nothing.
You may very well qualify for Medicaid. However, the assets you are looking to protect have been turned into a monthly check which ends at your death (or your spouse’s if you chose the lower joint and survivor monthly payout.)
A question you may want to ask an elder law attorney is if they are licensed to sell insurance and annuities. Or, if someone in their firm is licensed.
You are likely to hear a yes answer as insurance and annuity commissions are now a huge revenue source for elder care law firms.
I know this sounds like I’m throwing cold water on attorneys who recommend this method. I’m not. I’m simply presenting what’s missing from the commercials you hear on the radio.
The methods they propose are appropriate for a folks in certain situations as a last resort. However, it’s not for everyone.
My Recommended Option If You Have Time
If you still have time to “plan” ahead, and you don’t like the consequences of qualifying for the Medicaid, you can purchase money at a discount to offset your potential extended health care costs, and that’s what long term care insurance is all about.
Although I’m a believer in using insurance as a last resort after you’ve exhausted all of your other options, I’ve yet to find anything that does what long term care insurance does.
Long term care insurance is nothing but a tool to help you “manage” this huge financial risk.
- It can be used to protect your spouse’s lifestyle in case you get sick and need care,
- It can protect your assets that you’ve worked so hard to build up over your lifetime for your kids. And, finally
- It can provide you with options for your care. This is very important! If you rely on the government’s Medicaid program to pay for your care, then you’re at their mercy to determine what care you will receive and where you will receive it.
So, if you’ve reached this point, and you believe you’d like to push some of this substantial financial risk on to another entity like an insurance company, now you can begin to intelligently talk about long term care insurance.
Can you see how absolutely critical it is to go through the thought process we’ve walked through?
If you don’t do that first, and become crystal clear on your own unique situation, you will be at the mercy of any commissioned insurance agent or attorney who comes knocking at your door. Or, of an elder care attorney whose solution is relinquishing control of your lifetime savings.
And, that’s no position to be in.
You want to be in complete control so that you can custom tailor a plan that covers what’s most important to you personally.
Stay tuned as we will walk through how to determine your specific needs and evaluate a potential solution.