5 Smart Ways To Pay for Assisted Living Costs
According to the U.S. Census Bureau, adults age 65 and older are one of the fastest-growing populations in the United States. Aging baby boomers and an increase in life expectancy are contributing factors.
Many seniors will eventually need long-term care, including Assisted Living, and sticker shock is common. When they add up the la carte costs of living at home – utilities, taxes, groceries, maintenance, homeowners insurance, HOAs, visiting health care or personal support services, home modifications to ensure safe aging, entertainment and social outings – and compare the total to the community’s all-inclusive monthly fee, they’ll see community Assisted Living facilities can be a great value.
According to Genworth’s 2023 Cost of Care Survey, the median annual cost for an Assisted Living community is $64,2012, and this cost can be substantially more depending on where you live.
Fortunately, there are several financial assistance resources seniors can use to cover the cost of an Assisted Living community. If possible, meet with a financial advisor and your insurance agents to help you sort through and evaluate all of your options.
The following tips are a great place to start to help pay for living in an Assisted Living community.
1. Retirement Investments
Using funds from a pension, IRA or 401(k) to pay for senior living is a common strategy, but it requires careful planning to manage or avoid taxes and penalties and ensure long-term financial stability. Here’s how each can be used for senior living expenses:
- Pension
- How It Helps:
- Monthly Income: Pensions provide a steady monthly payment, making it easier to budget for senior living costs.
- Automatic Payments: These payments continue for life (or as per the pension terms), offering a reliable source of income.
- Tax Considerations:
- Pension payments are generally taxable as ordinary income, so plan for potential tax liabilities.
- Tips for Use:
- Combine pension income with other retirement funds (e.g., Social Security, IRAs) to cover senior living costs.
- How It Helps:
- IRAs (Traditional and Roth)
- How They Help:
- Withdrawals: IRAs can be tapped for large or recurring payments for senior living costs.
- Required Minimum Distributions (RMDs): For traditional IRAs, RMDs start at age 73 (for most). These distributions can be used for senior living without penalty.
- Tax Considerations:
- Traditional IRA: Withdrawals are taxable as ordinary income.
- Roth IRA: Withdrawals are tax-free if the account is at least five years old, and the account holder is over 59½.
- Tips for Use:
- Withdraw strategically to minimize tax implications (e.g., staying in a lower tax bracket).
- Consider consulting a financial advisor for advice on sustainable withdrawal rates.
- How They Help:
- 401(k)
- How It Helps:
- Funds in a 401(k) can be used for senior living, often through systematic withdrawals or rollovers into an IRA for more flexibility.
- Employer matching during your career may have built a substantial nest egg.
- Tax Considerations:
- Traditional 401(k): Withdrawals are taxable as ordinary income.
- Roth 401(k): Tax-free withdrawals if conditions are met (e.g., account is at least five years old, and you’re over 59½).
- Early withdrawals before age 59½ may incur a 10% penalty unless exceptions apply (e.g., disability or specific medical expenses).
- Tips for Use:
- Roll over the 401(k) to an IRA after leaving the employer to simplify management and expand investment options.
- Use RMDs (starting at age 73) to fund senior living needs.
- How It Helps:
2. Long-Term Care Insurance
Long-term care insurance is a policy purchased through a private insurance company to cover long-term medical care needs. This includes some, if not all, Assisted Living expenses.
Although these policies are good options for older adults, as with any health insurance policy, there are rules and requirements. Make sure you meet with your insurance professional before assessing long-term care benefits.
3. Veterans Affairs (VA) Benefits
If you or a spouse served in the U.S. military for at least one day during active wartime and meet financial criteria, you may be eligible to receive supplemental VA benefits that help pay for care and assistance, room and board, and other monthly costs associated with Assisted Living.
VA Aid and Attendance Eligibility
You may be eligible for this benefit if you get a VA pension and you meet at least one of these requirements.
At least one of these must be true:
- You need another person to help you perform daily activities, like bathing, feeding and dressing
- You have to stay in bed – or spend a large portion of the day in bed – due to illness
- You are a patient in a nursing home due to the loss of mental or physical abilities related to a disability
- Your eyesight is limited (even with glasses or contact lenses, you have only 5/200 or less in both eyes; or concentric contraction of the visual field to 5 degrees or less)
Housebound Benefits Eligibility
You may be eligible for this benefit if you get a VA pension and you spend most of your time in your home because of a permanent disability.
Note: You can’t receive Aid and Attendance benefits and Housebound benefits simultaneously.
4. Home Equity or Reverse Mortgages
You may consider selling your home and using the equity to pay for Assisted Living costs if you own a home.
Another option for homeowners is a reverse mortgage. A reverse mortgage is a loan homeowners take out against the value of their home.
Homeowners must be married, and the spouse must remain in the house. You can choose to receive payments in a lump sum, monthly installment, or line of credit.
While a reverse mortgage could work for you, it’s important to consider that the balance of the loan increases over time as does the interest on the loan and the fees associated. A reverse mortgage can have several downsides, including:
- High Interest Rates: Reverse mortgage interest rates are often higher than home equity lines of credit, and they can fluctuate over time. Interest is compounded, so you’ll pay interest on the interest.
- Fees: Fees associated with the loan are generally higher than with other financial products. These include origination fees, closing costs, and monthly servicing fees. You can roll some of these fees into the loan, but this can increase the amount you owe.
- Home Equity Depletion: As interest and fees are added to the loan balance each month, your home equity decreases. You might end up using up all your equity, leaving nothing for your heirs or the sale of your home.
- Impact on Benefits: A reverse mortgage can affect your eligibility for need-based government programs like Medicaid and Supplemental Security Income (SSI).
- Home-Related Expenses: You’re still responsible for property taxes, homeowners insurance, and HOA fees. If you don’t pay these expenses, your home could be foreclosed.
- Inheritance Issues: A reverse mortgage can complicate things if your home has sentimental value or is part of your family’s legacy.
5. Life Insurance Policy
In addition to death benefits, life insurance policies can be cashed out or sold to a third party to help pay for residency and care in an Assisted Living community.
Selling a life insurance policy to a third party, known as a life settlement, allows policyholders to receive a lump sum payment greater than the cash surrender value but less than the policy’s death benefit. In a life settlement, the buyer assumes responsibility for future premium payments and becomes the beneficiary, collecting the death benefit when the original policyholder passes away.
Notre Dame Health Care Can Help
Interested in the services and senior living services provided by Notre Dame Health Care? It may be more affordable than you think! Schedule a financial consultation with our experts. We’ll help you assess your retirement assets, Social Security benefits, insurance policies and options, whether a reverse mortgage is for you, potential Veterans benefits eligibility, your personal savings, and other payment options.
Schedule a visit or call us at (508) 852-5800.
