What Worries Retirees the Most?

Retirees don’t want to run out of money. However, homeowners over 62 who have considerable equity in their homes may want to look at a strategy that can minimize their money anxiety. A reverse mortgage will let them tap into home equity, by providing funds to keep them financially stable. Could the reverse mortgage payments take a bite out of their Social Security or Medicare benefits?

Motley Fool’s recent article asks, “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?” The article explains that reverse mortgages, also called home equity conversion mortgages (HECM), were created in 1980 to help seniors stay solvent, while remaining in their homes.

You know that in a regular mortgage, you pay the bank monthly installments. However, with a reverse mortgage, the bank pays you. You take out money against the equity in your home, and the loan doesn’t come due until you sell the home, move out of it, or die. The amount you can get is based on a formula that takes into account your age, the equity in your home, its market value and the interest rate you’ll be paying. You can get your reverse mortgage funds as a lump sum, a monthly payment, or a line of credit.

There are some drawbacks to a reverse mortgage. This type of loan can have big fees, including origination fees, closing costs (similar to a regular mortgage) and mortgage insurance premiums.  These fees can usually be rolled into the loan. It will, however, increase the amount the bank is entitled to receive once the loan ends.

A reverse mortgage isn’t for you, if you want to leave your home to your family. Perhaps they can pay off the balance of your HECM once you die or move out, but that could be costly. If you want to sell it (perhaps to simplify the splitting up of that inheritance), the share your heirs will receive from the proceeds may not be as much as you’d anticipated. If you’re having a hard time keeping up with the day-to-day costs of running the house, a reverse mortgage may not be the best option. However, if you’re just looking to add to your retirement income for peace of mind, it’s a decent financial planning tool to consider.

The good news is that it has no impact on your Social Security benefits, because the program is not means-tested. Therefore, the amount of income you have won’t affect your monthly benefit when you file. As a result, you don’t need to take Social Security into account when you’re thinking about this type of loan.

Likewise, Medicare is a non-means-tested program. However, a reverse mortgage can have an impact on Medicaid and Supplemental Security Income (SSI) benefits, because those are based on your current financial assets. If you’re receiving either of those, talk to an elder law attorney or estate planning attorney to discuss how a reverse mortgage might have an effect on your specific circumstances.

Reference: Motley Fool (November 1, 2019) “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?”

How Much Will Long-Term Care Cost?

The recent article from MarketWatch, “This is how much long-term care could cost you, and don’t expect Medicare to help,” reports that most people over 65 will eventually need help with daily living tasks, like bathing, eating, or dressing. Men will need assistance for an average of 2.2 years, and women will need it for 3.7 years, according to the U.S. Department of Health and Human Services’ Administration on Aging.

Many will rely on unpaid care from spouses or children, but over a third will spend time in a nursing home, where the median annual cost of a private room is now more than $100,000, according to insurer Genworth’s 2018 Cost of Care Survey. Four out of ten will choose paid care at home; the median annual cost of a home health aide is more than $50,000. Finally, more than 50% of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs, according to a study by Vanguard Research and Mercer Health and Benefits.

Note that Medicare and private health insurance typically don’t cover these “custodial” expenses. This means that such costs can quickly deplete the $126,000 median retirement savings for people age 65 to 74. People who exhaust their savings could wind up on Medicaid, the government health program for the indigent that pays for about half of all nursing home and custodial care.

People who live alone, are in poor health, or who have a family history of chronic conditions are more likely to require long-term care. Women face special risks, since they typically outlive their husbands and, as a result, may not have anyone to provide them with unpaid care. If husbands require paid care that erases all of the couple’s savings, women could have years or even decades of living on nothing but Social Security.

The earlier you start planning, the more choice and control you’ll have. Let’s look at some of the options:

Long-term care insurance. The average annual premium for a 55-year-old couple was $3,050 in 2019, according to the American Association for Long-Term Care Insurance. Premiums are higher for older people, and those with chronic conditions might not be eligible. Policies typically cover part of long-term care costs for a defined period, like three years.

Hybrid long-term care insurance. With life insurance or annuities with long-term care benefits, money that isn’t used for long-term care can be left to your heirs. These products typically require you to commit large sums or are paid in installments over 5 to 10 years, although some now have “lifetime pay” options.

Home equity. People who move permanently into a nursing home may be able to sell their houses to help fund the care. Reverse mortgages may be an option, if one member of a couple remains in the home. This type of loan lets them use their home equity. However, it must be repaid if the owners die, sold, or they must move out.

Contingency reserve. People with a great deal of investments could plan on using some of those assets for long-term care. Their investments can produce income, until there’s a need for long-term care, and then can be sold to pay for a nursing home or home health aide.

Medicaid spend-down. Those who don’t have much saved or who face a catastrophic long-term care cost that cleans out their entire savings, could wind up applying for Medicaid. Ask an elder law attorney about ways to protect, at least some assets for your spouse.

Reference: MarketWatch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare to help”