‘We are blessed’: My mother, 72, gets $11,000 a month, not including income from retirement savings. Should she get long-term care insurance?
Dear MarketWatch,
I, like many older millennials, am trying to help my mother navigate her retirement.
We are blessed to be in the place we are in, but could use some recommendations. My mother is 72, single and is, overall, in great health. She loves to travel, volunteer and donate to causes she loves, like her church. She owns her home outright in the San Francisco Bay Area, which is valued at over $1 million.
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She worked for 25-plus years as a county nurse and, as such, she has a healthcare plan and a great pension, both for life. She has another $500,000 between her 401(k) and IRA, which she has yet to touch. Including Social Security, her monthly income is around $11,000, not including her retirement accounts (she will need to start taking RMDs from them soon).
That said, she is debating what to do with her retirement accounts, and is trying to decide whether long-term eldercare insurance would be worth it, given her health and income. Her financial adviser recommended she consolidate the 401(k) and IRA and use that money to buy an annuity. But I am not certain of the terms.
They also recommended purchasing a long-term eldercare insurance package. They say the terms of the insurance would be premiums for five years at $20,000 a year. This $100,000 would be guaranteed and “refundable” after the five years. When care is required, the policy would pay out around $4,000 a month.
The way I see it, with her income coupled with the free healthcare, she should be well covered to pay out of pocket for any long-term care or assistance she requires. Worst case, she could either rent out her home for another $5,000 a month or sell her home and have a $1 million in cushion. As for the RMDs, she doesn’t really need the money,
I recommended she put them into a CD ladder. She is very risk-averse, but was debating putting her 401(k) and IRA into the market with an indexed fund; again, she doesn’t really need the money. I know she wants to leave something for my brother and me, but we both have well-paying jobs, and do not need her money. We would rather she use it for herself.
Related: I own four homes and have $800,000 in liquid assets. I’d like to retire in two years. Can I do it?
Dear Reader,
Your mom is very fortunate — not just because of her nest egg, home and health, but for having children who have put so much thought into her financial wellbeing. Because of her current financial situation, she has a lot of options.
Regarding long-term care: You’re right that she could probably self-fund long-term care, as many wealthy individuals do, but that could be an expensive road. A 65-year-old today has a 70% chance of needing some sort of long-term care in their lifetime, according to the Administration for Community Living. About a fifth of people who do need long-term care will require that support for more than five years. And keep in mind, women tend to need care for longer than men.
You mentioned she could rent her home or sell it outright to use that money, but the latter would be a drain on her assets, and the former could become a headache if she needs to return home, or to have someone manage the property while she’s away. You don’t want to go from a point where she’s well-off and comfortable to a precarious, debt-riddled state. Selling the home is often considered a last resort, even for people covered under Medicaid.
Fortunately, you don’t necessarily need insurance to pay for long-term care, but it would be a good exercise to at least try and map out those expenses in the area, should it happen. For example, the average hourly rate for a home health aide in San Francisco is $24, whereas the monthly cost for assisted living is between $1,950 and $6,200, according to the American Association for Long-Term Care. The average cost for a private room in a nursing home is $300 a day, compared to $250 a day for a semi-private room.
Of course, insurance products are typically more expensive the older a person gets, and she may not qualify for everything, but it never hurts to shop around when you’re creating an action plan. Look at other products to compare to the adviser’s recommendation, such as a hybrid package that combines life insurance with long-term care. A hybrid plan pays for long-term care, the amount of which depends on the terms, but if that never happens, it can pay a death benefit when the insured dies.
Also, look into a qualified longevity annuity contract, also known as a qualified longevity annuity contract (QLAC). There are so many factors that go into picking the right one with the appropriate payout and payout date, and how much is used to fund the plan. Some QLACs will also allow a return of premium, according to Northwestern Mutual. You don’t have to go with the first (or even the second or third) product recommended to you — there are always choices.
QLACs may help your mother’s RMD issue. The money put toward these contracts doesn’t count toward RMD withdrawals, but by coming out of the retirement accounts directly, they lower the balance that affects the ultimate distribution required. Your adviser may have been suggesting something similar to this when he or she mentioned consolidating the retirement accounts.
Your idea to ladder CDs makes sense if she’s risk-averse. Treasuries are another possibility, as they are also low-risk. But interest rates may change your mind, as they may not be as high in the future as they are right now (and you don’t want inflation to eat away at the principal).
She’ll have to pay taxes on those withdrawals, whether she needs the money or not. Because she’s 72 and in good health, investing it in a conservative way could make sense as it gives her another layer of diversification. There’s no way to know for sure how long a person will live, but by investing for the long-term, she can have that money work for her should she eventually need it.
But there’s a caveat. Investing in the market only works if she is comfortable with it. She should still be able to sleep at night and be confident she won’t panic at any market movement, especially in a downturn.
