My mother, 72, gets $11,000 a month, not including retirement savings income. Should she get long-term care insurance?

By | March 29, 2024

“She owns her home in the San Francisco Bay Area, which is valued at over $1 million.” – MarketWatch photo illustration/iStockphoto

Dear MarketWatch,

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Like many older millennials, I am trying to help my mother with her retirement.

We are blessed to be where we are, but could use some recommendations. My mother is 72, single and in generally good health. She enjoys traveling, volunteering, and donating to causes she loves, such as her church. She owns her home in the San Francisco Bay Area, which is valued at over $1 million.

She has worked as a district nurse for over 25 years and as such has a health care plan and a great pension, both for life. She has another $500,000 between her 401(k) and IRA, which she hasn’t touched yet. Including Social Security, her monthly income is about $11,000, not including her retirement accounts (she’ll have to start collecting RMDs soon).

That said, she’s debating what to do with her retirement accounts, and trying to decide whether long-term senior care insurance would be worth it given her health and income. Her financial advisor recommended she consolidate the 401(k) and IRA and use that money to buy an annuity. But I’m not sure about the terms.

They also recommended taking out a long-term elderly care insurance package. They say the terms of the insurance would be premiums for five years of $20,000 per year. This $100,000 would be guaranteed and “refundable” after five years. When care is needed, the policy pays about $4,000 per month.

The way I see it, with her income coupled with the free health care, she should be well covered to pay out of pocket for the long-term care or assistance she needs. In a worst-case scenario, she could rent her house out for another $5,000 a month, or sell her house and have a $1 million cushion. As for the RMDs, she doesn’t really need the money.

I advised her to put them in a CD ladder. She is very risk averse, but is considering rolling out her 401(k) and IRA with an indexed fund; again, she doesn’t really need the money. I know she wants to leave something behind for my brother and me, but we both have well-paying jobs and don’t need her money. We’d rather she use it for herself.

Related: I own four houses and have $800,000 in liquid assets. I want to retire in two years. Can I do it?

Dear reader,

Your mother is very lucky – not only because of her savings, home and health, but also because she has children who have paid so much attention to her financial well-being. Due to her current financial situation, she has many options.

As for long-term care, you’re right that she could probably fund long-term care herself, as many wealthy individuals do, but that could be an expensive path. According to the Administration for Community Living, today a 65-year-old has a 70% chance of needing some form of long-term care during their lifetime. About a fifth of people who need long-term care will need that support for more than five years. And keep in mind that women typically need care longer than men.

You said she could rent out her house or sell it outright to use that money, but the latter would be a drain on her assets, and the former could cause a headache if she has to return home, or if someone has to sell the property. managed while she is at home. away. You don’t want to go from a point where she is well off and comfortable to a precarious state full of debt. Selling the house is often considered a last resort, even for people covered by 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 to estimate costs in the area if this happens. For example, the average hourly rate for a home care aide in San Francisco is $24, while monthly costs for assisted living are 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 per day, compared to $250 per day for a semi-private room.

Of course, insurance products tend to be more expensive as a person gets older, and he or she may not qualify for everything, but it never hurts to shop around when creating a plan of action. Look for other products to compare with the advisor’s advice, 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 may pay a death benefit when the insured dies.

Also look into a qualified longevity annuity contract, also called a qualified longevity annuity contract (QLAC). There are so many factors that go into choosing the right one, with the right payout and payout date, and how much will be used to fund the plan. Some QLACs will also allow a premium refund, according to Northwestern Mutual. You don’t have to go for the first (or even the second or third) product recommended to you; there are always choices.

QLACs can help your mother’s RMD problem. The money put into these contracts does not count toward RMD withdrawals, but by coming directly from retirement accounts they reduce the balance that affects the final required distribution. Your advisor may have suggested something similar when he or she talked about consolidating retirement accounts.

Your idea of ​​laddering CDs makes sense if she is risk averse. Government bonds are another option, because they also carry a low risk. But interest rates may change your mind, because they may not be as high in the future as they are today (and you don’t want inflation to eat away at the principal).

She will have to pay taxes on those withdrawals whether she needs the money or not. Since she is 72 and in good health, it may make sense to invest it conservatively as it gives her another layer of diversification. There’s no way to know for sure how long someone will live, but by investing for the long term, she can put that money to work for her when she eventually needs it.

But there is a warning. Investing in the market only works if she feels comfortable with it. She should still be able to sleep at night and be confident that she won’t panic about market movements, especially during a recession.

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