Paying For Your Care

Good Morning Relaxing Retirement Member,

If there is one issue I’m asked about more than any other, which I will continue to highlight, it’s how to deal with the financial risk of paying for extended stay health care, i.e. nursing home, assisted living, or care in your home.

The reason for this is all of the radio commercials we hear by elder care lawyers scaring them with messages like, “don’t let a nursing home take your life savings if you become sick and need care.”

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 thought I would take the opportunity again this week 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.

“Take Your Home”

Before we get into the risk, 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 who provide a service just like all other businesses in the world.  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.

What’s Your Financial Risk?

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.

However, on the flip side, the “financial” risk of caring for your health increases dramatically with age.

Here are a few facts to ponder for a moment on human longevity and the incredible advances we’ve made since the beginning of the 20th century:

  • The joint life expectancy of couples reaching the age of 62 (who are BOTH non-smokers) is 92! That means that the likelihood of one spouse reaching age 92 is very good.
  • Of those turning age 65, 69% of them will require some form of long term health care
  • 52% of those at age 65 will require care for at least one year
  • 20% of those at age 65 will require care for five years or more
  • The average length of stay for those who enter a nursing home is 2.5 years

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 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:

  1. “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.
  2. “What’s the probability that I’ll suffer this loss?”
  3. 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 many areas in and around the Boston area now exceeds $13,000 per month.

Given that the average length of stay is 2.5 years, that’s a total “potential” average risk of close to $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 $7,000 per month from your Retirement Bucket™ to supplement your pension and social security income.

However, if you get sick, and it costs $13,000 per month for care, you now need to withdraw $20,000 per month from your Retirement Bucket™.

$7,000 for income and $13,000 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’ll run out of money.

This is financially devastating for your healthy spouse who still needs the 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:

  1. pay for it yourself (personal funds or long term care insurance), or
  2. 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.

And, that involves relinquishing all control over 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 (government assistance), you have to have virtually no assets in your name for five full years.

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 in one fell swoop before funds can be placed in the trust.

For example, let’s assume that you and your spouse have $1 million in IRAs.  If your plan was to place your assets in a Medicaid Qualifying Trust, you will have to withdraw the entire balance of your IRA resulting in federal and state income taxes of over $400,000!

Yes, you read that correctly: over $400,000!

The reason for this is the majority of your IRA would be taxed at the highest marginal tax bracket (39.6%), and you would qualify for the additional 3.8% Affordable Care Act Medicare surtax.

If you do the math for a moment, that $400,000 that you will have to give up right away could have gone to pay for over 30 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.  In short, this means turning all of your investment holdings into 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 spouses if you chose the lower joint and survivor monthly payout.)

Incidentally, a question you may want to ask an elder law attorney is if they are licensed to sell insurance.  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 here.

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 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 next week as I demonstrate how to determine your specific needs, and evaluate a potential solution.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach
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I appreciate the trust you place in me. Thank you! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)