Women in Nursing Homes there can be choices
A simple vow, “To Death Do Us Apart” that a woman and man make to each other when unifying their eternal love for each other but the question that every financial professional should be asking each and every one of their clients: Whose death?
The easiest way to describe the problem of health costs is through a simple story of Mary & John, the quintessential couple that we have all heard about.
You know that couple: they are the ones that have been together for 60 years. They built their home together, raised children together, worked together, fought together, loved together and retired together, again the quintessential couple.
Their goal in retirement is to have as much fun as possible while being able to provide for their children and grandchildren and hopefully be able to pass on the family home along with any assets they may have when the their time is up.
They want to live the dream of the perfect retirement after all of the years of hard work and sacrifice and looking at it from a distance they deserve it, just like everyone else who has ever given up something for someone else.
At first, for the first 10 to 15 years everything is going great. They are experiencing everything they could possibly have ever dreamed of, yes there are have been some bumps along the way and there have been a lot of unexpected expenses but they have weathered every storm and again everything is going great.
Unfortunately, one day in the future John happens to get sick and this time the illness is far worse than just a severe cold: it may be a chronic ailment that is robbing him of walking and or eating, it could even be something as serious Cancer or Cardiovascular Disease, either way John’s health is deteriorating and Mary is now faced with just another obstacle that they both have to get through.
Mary, like any loving spouse would do, decides that she will take of John and his quickly deteriorating health as John does his best to still active and contribute, because there is no way that John, in his mind, can’t overcome this.
As Mary begins her new role as the consummate wife, caregiver and nurse what also unfortunately starts to happen is her health also starts to decline. Since she is spending all of her time tending for John she is not really focusing on the rest her needs like her health, diet and even sleep. Even the daily routines of paying bills and the general up keep of the house takes a backseat.
This where the real problem raises its ugly head: Mary is not sure about the finances as John was the one who made the big financial decisions. Yes, Mary most likely paid the bills, ran the budget and gave John an allowance each week, but the investments that they built typically fell in the area of John.
Mary is now stuck in the situation of not really knowing what to do and like any smart person she seeks advice from their trusted financial advisor.
Their advisor does do her/his best to help. She gives Mary the typical advice that almost every Mary receives in time of crisis:
- Take a tally on all the investments
- Find any accounts, wills, trusts and deeds that they may have
- Create a distribution plan that will best suit the needs of Mary and John while mitigating any tax consequence they may face
This distribution plan most likely will be the most common plan used to date: first distribute any cash, then move to liquid investments like stocks and or bonds, then Roth IRA’s and finally tax deferred accounts like IRA’s and Rollover 401(k) accounts.
The rationale is to use what is taxed today and leave any investments that are “tax deferred” for later as this will allow them to grow even more while delaying any tax consequence for too.
So as Mary heeds this advice, she first uses the cash, then any stocks or bonds that they may have and as John’s health is worsening and the liquid assets have been depleted, she is now faced with using either any Roth accounts or Traditional IRA’s like their 401(k) plans.
The next problem: the advice that is typically given is to use that Roth account since it too is can be liquidated without any tax consequence as well.
By now John, unfortunately passes away and to Mary’s horror she finds that after all of that financial advice there really isn’t any Life Insurance on John as they both decided to by Term Insurance and invest the difference so Mary is now in the predicament of having a larger problem:
- Her health is now deteriorating
- She is now receiving even less Social Security as John has passed away and his benefit ceases
- She still has all of her current bills like water, electric, property taxes, groceries, etc…
- She does still have those tax deferred accounts but she is now in a lower Tax AND Medicare Bracket which means every withdrawal will increase her tax liability AND possibly her Medicare premiums too.
- She also has the house, but with John now gone and her no longer working she is in the predicament of not being able to tap any equity from her home.
Mary is now in the position of having to use even more of the assets in those tax deferred accounts to help pay for her wellbeing and her home and each time she makes a withdrawal she is in the unfortunate position of being in a higher tax bracket and a lower Medicare income bracket.
Those withdrawals are now being taxed as ordinary income by the IRS and she no longer has any write offs since the house is paid off, the children are gone and being single her tax bracket changes.
The goal to delay paying the government is now starting to back fire on Mary and on top of that Medicare is also counting those withdrawals as income too.
Instead of being in a Medicare income bracket of $170,000 as a couple with John her new Medicare tax bracket is lowered by half: her limit is now only $85,000, this is leading to even higher Medicare premiums which is leading to less Social Security income which is leading her to withdraw even more money from those tax deferred accounts…the vicious cycle has now begun for Mary.
Towards the end Mary is bleeding assets in every direction and just to stay in the house is becoming next to impossible, her only choice… a nursing home.
The dream of living in the home until the end and leaving her children with something in terms of assets are now over. She is now faced with having to try to qualify for Medicaid which means she will have to most likely give away any remaining assets she has left including her home and HOPE that there will be a Nursing Home somewhere in the vicinity of her family.
Does Mary have any choices left???
Does this story sound in any way familiar???
Well it doesn’t have to and doesn’t have to happen to any more Mary’s or even John’s, all that is needed is a simple revamp of distribution coupled with something everyone should have in one form or another – Long Term Care and a Reverse Mortgage. With these the ending for Mary is quite different.
By just changing their distribution of those assets along with having the equity from their home and some form of LTC the story could simply be:
Mary and John before entering retirement, they speak with a financial advisor who places some of their investments into a standalone Long-Term Care insurance policy from Genworth or Life Secure, or a “Hybrid” policy offered by One America or even something as simple an Annuity of Life Insurance product that has some form of a LTC insurance rider which will allow them to tap some monies for care.
They investigate a Reverse Mortgage where they can take the equity out of the home when they want. Yes, they may lose the house in the end, but Mary does have the option to stay there for the rest of her life and by the way, do the children really want to inherit another home they have to pay taxes on along with the other bills associated with owning a second home?
They start using those tax deferred accounts first while they are younger, healthier and in a higher Medicare and income tax bracket.
When John does finally get sick, instead of using the cash first, they opt to deplete those tax deferred accounts instead, they then move to those investments like stocks and bonds and remember John AND Mary both have some form of LTC, so Mary can afford to have professional care brought into the home for John so she can still maintain her lifestyle and her health.
When John does finally pass away, Mary still is in the position of having less Social Security but, what she also has is the equity from her home at her disposal from the Reverse Mortgage along with the right to live there. She also has some form of Long-Term Care insurance, the cash she never spent and hopefully those Roth IRA’s.
By the way, those Roth IRA’s, Long-Term Care benefits and the equity from the home are not considered as income by the IRS or even Medicare for that matter so her tax bill is lower and her Medicare premiums are standard.
MARY NOW HAS OPTIONS.
All John and Mary had to do is rework their financial plan and understand that just because one person passed away the vows they took on their wedding day never had to end: by John and Mary insuring their retirement and planning accordingly they can get to live happily ever after until death do “us” apart.