Time to Start Planning for Long Term Care: Quasi HSA Looks Promising

I don’t think I am so different from most people. I was concentrating on saving for my retirement instead of worrying about planning for long term care. It seemed as something that may or may not be needed. I knew 100% that I would need to have a successfully executed retirement plan so that was my main focus. But after recently going through everything associated to a family member’s long term care issue I now see that I need to look at our options. It’s time to seriously begin our own planning for long term care.

Family’s Long Term Care (LTC) History

Time to Start Planning for Long Term Care: Quasi HSA Looks Promising
So Long Cowboy

When it comes to planning for long term care one’s family history should be looked at. Part of our procrastination toward all of this is because of our family history. Everyone has lived independently into their 70s to early 90s until something happened. A fall, a stroke, heart attack, cancer, etc. They then either passed at a hospital, suddenly at home, or after only a few months in a nursing home.

Our most recent family member’s long term care issue ended up the same way. She passed shortly after being released from the rehab center to the nursing home.

Nobody in the family had any long term care plans. Seeing a family history of elderly relatives spending years in a nursing home would certainly be an important issue to keep in mind when planning for long term care.

My wife and I aren’t yet age 60. We don’t feel like we are anywhere close to needing to do this. But anything can happen and having some kind of plan is better than no plan. Much can change in the coming years and decades. Remaining flexible and willing to reassess and make changes is a big part of our long term care planning.

Planning for Long Term Care Starts With Knowing the Options

To be honest, when my CFP brought up adding some planning for long term care my eyes glaze over and my brain shuts off. Just like it does during any life insurance sales pitch. What I am sharing is the various actions to consider doing and the available options for funding long term care. That and what I think is my and my bride’s best plan based on what we know today.

Power Of Attorney (POA)

I believe this is a must-do for anyone planning for long term care. As long as my wife and I are around we have each other’s back. But what if something happens to the both of us? Having someone already listed as our POA will allow for the handling of our needs. We are going to have our daughters listed. After all, someone has to be legally able to execute our plan.

This should also cover things if my wife and I are separated by one’s death. The “still of this earth” should still be covered by the POA and there’s one less thing to think about setting up. We are going to set this up ASAP.

Living Will / DNR

Officially make our wishes known with a living will. I would not want to languish in a vegetative state (coma) in long term care nor bankrupt my wife paying for it. A DNR can be an option once of advanced years or ill-health. Set the conditions that align with your values.

The 800 Pound Gorilla: Paying For Long Term Care (LTC)

There seems to be just a few ways to pay for long term care if and when the time comes. It’s expensive so lets start with some financial numbers. According to what the 2016 Genworth study found, the national median nursing home cost for a semi-private room is $6,844 a month. Some states and/or cities are higher and others lower.

Long Term Care Insurance Policy

The last quote I got when this was pitched to me was about $1,700 a year a piece. So hand over $3,400 (2 x $1,700) a year for the rest of my and the bride’s lives until needed, or not needed. From some quick online research that amount falls in line with the average cost of $3,381-per-year (combined) for a 60-year-old couple buying LTC insurance.

This then provides us both an Initial policy benefit of $164,000 a piece in today’s dollars. That policy benefit amount is based on a daily benefit of $150 with a 3 year benefit period. Coverage value will increase annually because a 3 percent compound inflation growth option would be included. 

Life Insurance with a LTC Rider

You either pay a monthly insurance premium or hand over a chunk of money that can be used to pay for your long term care or a death benefit. An example I found (nerdwallet) is where a 60-year-old female nonsmoker pays a single $100,000 premium. That pays for up to $579,888 in long-term care benefits, (around six times her premium). Long-term care benefits could pay out for up to six years, at up to $8,054 per month. If the long-term care part of the policy is never used it would pay a death benefit of $193,296 to her beneficiary.

Fixed Annuity with LTC Benefits

Annuities are complicated. Hybrid annuities that combine a deferred fixed annuity with an LTC benefit are really complicated. When trying to figure this out I found a decent example (bankrate). 

A 60-year-old man purchases a $50,000 long-term care annuity that fully matures in 20 years with 5% inflation protection compounded annually with a 200% coverage maximum and a six-year benefit period.

The initial long-term-care coverage maximum is $100,000 (2 X the $50,000 premium he paid). Without inflation protection it could be three times the premium paid (3 x $50,000= $150,000).

If no withdrawals are made over 20 years at a 3.5% compound interest rate, minus annuity administrative fees, there would be $265,330 available in long-term-care insurance under the 5% inflation-protected scenario. Or a monthly maximum of $3,685 to help pay the high costs of long term care.

If long-term care is never needed or used, then the annuity can be redeemed for its accumulated value when it matures at 20 years or left to continue accumulating interest with the long-term care policy part also remaining intact. When this person dies, the heirs will inherit the greater of the accumulated annuity value (if there have been no withdrawals), or the single premium paid initially minus the amount of any long-term care paid out.

Self Fund

This is how most people who are not on Medicaid pay for their long term care needs. It certainly is how my family has handled it. Money comes from savings, retirement income, and investments. It comes down to looking at any and all income or asset sources to pay for long term care. The money to fund long term care will have to come from Social Security, pensions, annuities, savings accounts, 401k, IRA, Roth IRA, stocks and bonds.

Because of the high cost of nursing home care it can really slam a retirement portfolio. Especially if the stay turns into a long stay. Even if in one’s long term care plan opted to include one of the other annuity or insurance options, it may not pay enough or for long enough. So having invested assets to use for funding shortfalls will still be necessary.

Medicaid

Oh yes, Medicaid. The long term care funding source of last resort. Thank goodness for Medicaid too. Most people aren’t able to save a big chunk for retirement to even consider LTC options. It is the safety net for everyone. Even if you do everything right trying to fund your LTC you can still end up on Medicaid if your money runs out.

Doing nothing to plan for long term care and thinking Medicaid is a great solution should be reconsidered. For one thing Medicaid is under threat. Just look at the last ACA repeal and replace effort. Medicaid cuts where high on the list.

Not only that but there happens to be 29 States and the territory of Puerto Rico that have what’s called Filial Responsibility Laws. Meaning that the states can recover money  from family members what is spent for nursing home care through their Medicaid. Your long term care bills could become your kids or sibling’s financial burden.

Family

For some, relying on their family is their only option. Not having enough money and unable to qualify for Medicaid leaves no choices. This is a tough one as it interrupts loved one’s careers and life. Some may lovingly offer to go into this but I wouldn’t want to plan on being a burden on my children for our long term care if I can plan away from that. Nor having them being stuck with the bill for our nursing home care.

I’m Planning for Self-Funding of Any Future Nursing Home Care With an IRA

At least that is my plan for now based on what is known today. Anything can happen over the next decades. The best planning for long term care can be uprooted with government policy changes or long term care changes. Part of my long term care plan is to revisit it and make any necessary changes.

I am hesitant about insurance products. I really hate the thought of depending on an insurance company coming through as promised. Especially after taking a big lump sum or decades of payments from me. I’m a bit cynical after my company weaseled out of pension promises. That and how some in government talk about the Social Security benefit I paid for as an entitlement they want to cut or do away with.

Creating a Quasi HSA with an IRA is the Answer for Me

What I believe to be my best plan is to set aside an amount of $175,000 to $200,000 within my IRA for long term care. It will be part of my long term portfolio bucket 3 and invested as such until we reach ill-health or old age when it it will be moved to bucket 2 and 1.

Taxes are the reason for using an IRA to pay for any long term care.

A quick look through IRS Publication 502 shows that long term care expenses are allowable for tax deduction. That deduction is limited to deducting medical expenses that are above a 10% of AGI threshold on schedule A.

When looking at any IRA balance it is never lost on me that some of that money isn’t mine. I have to pay taxes on it. This medical deduction allows me to use it for a needed expense but also making a big chunk of it tax-free by way of the tax deduction offset. In a way making my IRA a partially tax-free Heath Savings Account (HSA). A quasi HSA as I call it.

This however is not without other impacts. With the high cost of long term care the large IRA withdrawals will cause some of our Social Security to become taxable. The Social Security tax calculation is based on AGI that is before any deductions. The key is to limit IRA long term care withdrawals to only what is needed. That and using tax efficient strategies to keep taxable income as low as possible by also utilizing non-retirement and Roth IRA money.

Finding a balance between IRA withdrawals and the optimum taxable income amount will be the task at hand.

As I said, this is about planning which is based on what we know today. Everything will have to be revisited if the government changes how taxes are done through tax reform or other tax rule changes.

If our family’s long term care history is any indicator of what we can plan for then this should be enough along with other income (Social Security) and savings to cover our shorter length nursing home care. If not needed it’s all still part of our portfolio to pass on.

Of course this plan goes to hell if one of use languishes in a nursing home for years and years. But then other long term products have length limitations too. There are no guarantees for anything in life.

Last Words

It was much easier getting excited about saving for and planning for early retirement. Retirement is about freedom. There is nothing free about living the last of your life in a nursing home. There is something to be said about living independently and free until dying in your sleep.

Everyone’s situation is different. Family history, available portfolio, risk tolerance, etc., can be as varied as there are people in the world. In a way other than some legal issues around POA and Living Will I am not doing much. Money is just where it is. However I am now cognizant that I must leave a LTC chunk untouched in my long term IRA portfolio bucket and develop my retirement withdrawal strategy around it.

Comments would be very welcome. I would be interested in hearing what you have in your long term care plan and why you went the way you did.


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2 thoughts on “Time to Start Planning for Long Term Care: Quasi HSA Looks Promising

  1. Tommy

    Great rundown of LTC choices. I would add that I think of LTC as something to stave off a nursing home by getting LTC care at home instead of being on Medicaid in a nursing home.
    I bought a second-to-die insurance policy with taxable cash and an annual premium so that the monthly benefits never run out. The benefits will be tax-free and if I want a refund for my insurance policy I can get that too. The premium is “guaranteed” contractually not to increase. (I am skeptical too but the refund alleviates that concern.)
    If most of your assets are in an IRA you can do something similar-purchasing an annuity within the IRA that buys an insurance policy. Yes when the money leaves the IRA taxes must be paid annually but IRA withdrawals will eventually be taxed anyway.

    A drawback with self-funding is that the LTC event might not be decades later it could be sooner so that your assets might not grow by then. Also self-funding might bleed the rest of the portfolio if it lasts too long. The policies are more tax-efficient(your investment income is taxable-not tax-free), more robust and this policy has contractual guarantees not to raise premiums. And if never used this a death benefit for beneficiaries.
    The “worst” part about the policy is that it sounds too good to be true.
    (Like I said if it is false I have access to my lump sum without penalty).
    I never thought I would be a fan of LTC policies but that one is very impressive.

    Good luck and hopefully we never need the LTC benefits!

    James McGlynn, CFA, RICP

    1. Thanks James for the very informative comment. My thoughts are that if we go the way of family history we wouldn’t be in LTC for even a year so the set aside money would last. That’s if our family’s history actually predicts our probable LTC future. I will have to look into an insurance policy like you mention. Like I said, I’m making a plan based on what I know and I can never know everything or enough. Thanks again for sharing your LTC plan.
      Tommy

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