A $350,000 account could be exhausted in just a few years if both members of a couple required semi-private rooms in skilled nursing facilities. However, that’s not necessarily what would happen. For one thing, most people don’t run up nursing home bills of that magnitude. Also, you may be able to get government assistance to pay nursing home costs while keeping your IRA intact. Long-term care insurance and other financial tools offer other ways to pay a nursing home without emptying your savings. If you are concerned about paying for long-term care, consider discussing it with a financial advisor.
Paying for Long-Term Care
Long-term care costs unquestionably are eye-catching. In 2021, the Genworth Financial Cost of Care Survey pegged the average daily cost of a semi-private room in a skilled nursing facility at over $94,000 per year. At that rate, if both members of a couple required a similar level of care, $350,000 in IRAs would only cover about two years’ worth of costs.
That doesn’t mean your retirement account will meet a similar fate. According to the federal Administration on Aging, about 35% of people spend any time in a nursing home, and the average stay is about a year. People are more likely to use other types of long-term care, such as assisted living and in-home aides, that cost less.
The government also steps in. Medicare, the national healthcare program available to most people over age 65, covers up to 100 days of nursing home care in most cases. If you need more time in long-term care, Medicaid, the federal-state healthcare program for people of limited financial means, will cover nursing home stays of indefinite length.
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Basic Medicaid Rules
You must have very limited financial resources in order to qualify for Medicaid. States oversee the program and rules vary, but in some you can only have about $2,000 in assets other than your home. The income limits vary but are also strict.
Some states don’t include IRAs when determining Medicaid eligibility, so if you live in one of these your IRA is safe. However, most do include IRAs as assets and in these you may have to spend nearly all the money in your retirement fund before you Medicaid will pay for nursing home care.
Meeting Medicaid Eligibility Tests
If you have too many assets, you may be able to satisfy Medicaid’s means test by gifting assets to a family member. However, you generally have to do this at least five years before you apply for Medicaid. If you don’t observe the five-year lookback period, Medicaid may include the transferred assets when determining your eligibility. If that happens, you may have to spend the money in your IRA to pay for nursing home costs until your assets decline enough to meet the Medicaid means test.
If your income is too high, a qualified income trust may be able to help. This is a type of trust specifically defined for Medicaid. It designates a portion of your income to only be used for medical purposes. You can deduct this portion from your income in order to meet Medicaid’s income limits.
Other Ways to Cover Nursing Home Costs
In addition to Medicaid, private long-term care insurance can provide financial protection against nursing home costs. This coverage can be costly and hard to get. But if you have a policy, the benefits can pay for all or most of the costs of a nursing home stay, allowing you to leave your IRA intact.
Other ways to pay for a nursing home include annuities, life insurance and health savings accounts. Your home can also be a source of money through home equity loans and reverse mortgages.
Talk to a financial advisor about making a plan to reduce risks in your retirement.
Bottom Line
A long stay in a nursing home could deplete your IRAs, but there are ways to avoid or minimize this risk. If you can qualify for Medicaid, the government will pay all or most of the nursing home charges. Long-term care insurance offers another possible option, as do home equity loans, reverse mortgages, health savings accounts and other tools.
Tips
- A financial advisor can help you come up with a way to protect your retirement savings from risks including the costs of long-term care. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You probably won’t have to pay for a nursing home, but you definitely will have to pay for food, lodging and other essentials of ordinary living. SmartAsset’s cost of living comparison calculator shows you how much you could save by moving to a less costly location.
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