Financial Aspects of Elder Care Planning

When we’re young and vibrant, we think that we’ll never grow old.  We enjoy each day never thinking there might come a day when we’ll need help to get by.  When we think of elder care, we might picture a nonagenarian in a wheelchair living in a nursing home telling stories to the compassionate caregiver sitting by her side.  In truth, there is far more to the story than that.

Elder care planning has never been more important or more challenging than it is today.  While generations once lived together in the family home for life, the empty nest dominates today’s world.  Parents whose children have flown the coop to create their own households remain in their homes or move to a place where the sun shines 300 days a year.  Many move to be close to their grandchildren but establish their own living space.  Most enjoy their newfound freedom from the busy-ness of youth but it can eventually create challenges for them and their families.

As long as the happy seniors enjoy good health and have planned well for their financial future, everyone can live happily, doing whatever they’ve decided to do with their time.  It’s when the senior reaches the point where they can no longer care for themselves that the challenges can begin to mount.  This is when the family will know whether they’ve planned well or there are gaps in their elder care plan.

As is often the case with planning, money is a key element in an elder care plan.  Deciding who will provide the care is important but this can only be decided once the available funding is clear.  There are many factors to consider when deciding how much you need in order to retire and not worry about elder care costs.  Some advisers suggest that you should save 10 times your annual income by the time you reach 67.  Others say you need $1.8 million to your name by age 65 in order to fund a happy retirement.  The right number for you depends on the life you plan to lead in retirement and where you stand when you start to plan.  It also involves a clear understanding of the cost of your post-retirement housing, food, clothing, insurance, healthcare, dental and vision care, travel, and a potentially long list of other expenses.

When care becomes necessary, you will probably no longer be able to earn a living so your elder care plan needs to cover your living expenses at a minimum.  It also has to consider the possibility that long-term care may eventually be required.  There are several ways to prepare for this need.

1. Retirement accounts – An excellent way to prepare for elder care is to prepare for retirement.  Pensions, 401(k)s, IRAs, HSAs, annuities, and other accounts can provide a foundation that you can draw on when you decide it’s time to stop working.  How much you need depends on your lifestyle and location.  It takes a lot less money to live in Knoxville, Tennessee than San Francisco, California.  It takes a lot less money to take long walks by the lake than it does to play 18 holes of golf at Pebble Beach.
   
   Keep in mind that the benefit of these accounts is not limited to the golden years.  Some people want the YOLO lifestyle and to retire at 40.  Others love what they do and can’t imagine retiring even into their 80s and 90s.  Needless to say, a 40-year-old retiree needs a much larger financial cache to cover his lifetime of expenses than an 80-year-old does assuming the same life span.
   
   
2. Other Investments – Some people own rental properties and others develop small businesses.  Whether they are held for regular income or sold prior to retirement, other investments can help fund a person’s needs later in life.
   
   
3. Social Security – If you’ve paid into the system for enough quarters, you can apply for Social Security benefits anytime between the ages of 62 and 70.  The monthly payment will generally be 25-30% less at age 62 than it would be if you wait until your Full Retirement Age (FRA).  People born prior to or during 1956 reached their FRA by April 2023.  Those born in 1957 have an FRA of 66 ½ years.  The FRA increases by 2 months every year for people born between 1958 and 1960. 
   
   Those born in 1958 have an FRA of 66 years, 8 months.  Those born in 1959 have an FRA of 66 years, 10 months.  Those born in 1960 and thereafter have an FRA of 67.  If you wait to collect until after you reach your FRA, your monthly payments will increase by 8% for every year you wait until you reach 70.  There is no benefit for waiting to file for Social Security until after your 70thbirthday.  In any event, your benefit or expected benefit will increase each year by a cost-of-living adjustment that the Social Security administration announces each October.  Note that your benefit is based on your highest 35 years of earnings.  Thus, your benefit can increase if you continue to work after qualifying and/or filing for Social Security and you either didn’t already have 35 years of qualified earnings or you earned more in the current year than you earned in the 35thlowest of your prior years’ earnings.  If you continue to work after you file for benefits but before you reach your FRA, the benefits you receive can be reduced depending on the level of your earnings.  Once you reach your FRA, you can earn as much as you want without decreasing your Social Security benefit.  As we hear in the news regularly, all of this is subject to change.  Keep up-to-date on any changes that are made to Social Security to understand how the changes might affect you.
   
   
4. Medicare – Medicare coverage starts at age 65 unless a qualifying disability occurs at a younger age or you have creditable employer-provided coverage.  Medicare has several parts.  Part A is hospital coverage and premium-free if you worked enough quarters to qualify.  Part B is outpatient coverage that has a monthly premium.  For 2023, the standard Part B premium is $164.90.  Dental and vision services are generally not covered by Medicare Parts A and B unless related to a covered health need.  Also, Parts A and B do not cover all medical expenses so most people apply for a Medicare Advantage or Medicare Supplement plan.  Some Medicare Advantage and Medicare Supplement plans include limited dental and vision coverage and others do not so it’s important to select these plans wisely.  Medicare Advantage plans generally include prescription drug coverage.  Medicare Part D plans are available to Medicare Supplement owners to help cover the cost of their prescriptions.
   
   
5. Long-term care (LTC) insurance.  As discussed below, LTC insurance plans help cover the cost of certain long-term care.  If you decide to obtain LTC insurance, the sooner you apply for it the better.  Premiums partly depend on your age and, once a person has a serious health event, this option may no longer be available or may be available at higher prices.  Some people think that it is better to regularly deposit the premium amount into an income-earning account rather than applying for LTC insurance.  They believe that they can save enough over time to cover their LTC costs.  This theory does not account for the fact that LTC needs can arise at any time.  If you have LTC insurance, you can obtain benefits for a qualifying need after the contract’s initial waiting period has passed.  Thus, LTC insurance is not only useful in elder care planning.  It can help at any time in life.  Further, premiums for tax-qualified LTC policies can be deducted as medical expenses.  The cost of LTC insurance can be prohibitive, however, so it’s important to determine whether you can afford the premiums on an ongoing basis before you apply for it.  You should also weigh the cost of LTC insurance against the risk of needing long-term care to decide if it’s right for you.
   
   
6. Medicaid may be there if you run out of resources.  Nobody wants to rely on Medicaid and it can impact your estate plan if you become subject to its estate recovery rules.  Qualifying for Medicaid can be complicated and your choice of caregivers will be limited.  This article won’t go into the specifics of Medicaid since it is generally an option of last resort.

Since it’s been said that nearly 70% of 65-year-olds will eventually need long-term care services or support, we’ll go a little further into how LTC insurance policies work.  Note that women are said to typically need this type of care for an average of 3.7 years of their lives, while men average 2.2 years.

Under most LTC policies, there are two ways to qualify for benefits.  The first is when you can’t do at least two out of six “Activities of Daily Living” (ADLs) on your own.  The second is when you suffer from dementia or some other cognitive impairment.  You only need to qualify under one of these tests to receive LTC insurance benefits but each of them requires a doctor’s statement to support the claim.

The six ADRs are:

1. Bathing – The ability to clean and groom yourself.
2. Dressing – The ability to dress yourself including using buttons and zippers.
3. Eating – The ability to feed yourself.
4. Toileting – The ability to get on or off the toilet.
5. Continence – The ability to control your bladder and bowel functions.
6. Transferring – The ability to walk or get yourself in or out of a bed or a chair to a wheelchair.

To allow you to get the most appropriate assistance for your situation, LTC policies allow these services to be provided in:

• Your home,
• A nursing home,
• An assisted living facility, or
• An adult day care center.

There are many ways to plan for the need for elder care and many ways to obtain that care.  It’s best if you start planning as soon as possible so you can build a solid nest egg you can rely on over time.  The worst time to consider how you’re going to obtain and pay for elder care is the day that you discover that you need it.

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