The National Council on Aging (NCOA) estimates that 45% of older adults do not have the income to meet their needs. (1) Since the average cost of assisted living is $5,190 per month, (2) many seniors are struggling and rely on their families for support.
Imagine 55-year-old David trying to find care for his father, 83-year-old Frank. Although Frank has still lived independently, his health has deteriorated in the last few months and his doctor says he will likely need specialized care, which costs about $7,500 a month.
On paper, Frank is in a strong financial position to withstand life's challenges. He receives $4,000 a month from Social Security and a pension, and has a neat little ranch worth $300,000 with zero debt. But even in this “good” position, there is a $3,500 gap that needs to be filled, and that gap can quickly snowball.
David loves his father and wants him to be taken care of as best as possible, but he is not sure how this is possible. Here's our advice on how to navigate the cost of assisted living and senior care.
After crunching the numbers, the most obvious strategy is to sell Frank's house. Money from selling your home is the most realistic way to cover your monthly shortfall for years to come.
However, that doesn't mean moving $300,000 into a checking account is the end of the story.
To be on the safe side, David might consider investing $300,000 in a lump sum annuity that would immediately begin generating monthly income. Plans such as a Single Premium Immediate Annuity (SPIA) could provide Frank with a more stable cash flow for the rest of his life.
If Frank has other retirement accounts (such as an IRA), it is also possible to convert some or all of these funds into an immediate annuity.
But let's say Frank isn't ready to sell right now. There's another way to tap into that home equity while still living at home, with a reverse mortgage. While not for everyone, a reverse mortgage literally buys you time before making a permanent move.
Then there's Medicaid, which may not be as out of reach as David thinks.
Medicaid rules vary by state, but some assets, such as property, do not count toward eligibility. The trick is to understand how to legally “spend down” the assets, using the funds to pay for legitimate care expenses until you qualify for coverage.
In this case, a senior attorney could help protect Frank's assets while maintaining compliance.
Having considered all of these options, let's assume that David still feels emotionally obligated to use his own savings. Is this wrong?
While this is understandable from an emotional perspective, it is often an unwise financial move.
Supporting your parents doesn't always mean paying their bills, especially if it puts you in debt. Instead, David should focus on other options, as well as managing logistics, assisting with paperwork, and ensuring high quality care.
This hypothetical situation highlights a harsh but common experience for modern American families: Even if you've done everything right financially, aging can cost more than expected.
Moreover, long-term care cannot be an afterthought as longevity becomes the norm. The average life expectancy in the United States is now 78.4 years (3), and many seniors plan to live 30 years in retirement.
Opening a health savings account (HSA) or purchasing long-term care insurance in your 50s and 60s can open up much-needed liquidity during major life events. At the very least, crunching the numbers early can clarify the options available in the event of a major health-related transition.
Conversations about aging and finances can be sensitive, but it's better to discuss them in good health than wait for a full-blown crisis.
For adult children, set realistic and firm financial boundaries before contributing to a parent's care. It may seem cold, but helping your parents doesn't mean sacrificing your financial security and your retirement savings.
And if managing your finances seems too complicated, it may be time to consult a financial advisor to get a clear perspective.
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National Council on Aging (NCOA) (1); A place for mom (2); Peterson-KFF (3).
This article provides information only and should not be construed as advice. It is provided without any warranty.
