Ways to pay for long-term care

How to Cover Long-Term Care Expenses

Does planning for long-term care seem sensible for your retirement?

The answer: Many will not plan for an LTC until it is too late.

Where do you start?

Paying for Long-Term Care in Retirement

Each option has advantages and risks and knowing these will let you determine what your best plan of action is.

From Retirement Assets:

Without any coverage you will pay for LTC out-of-pocket. For most retirees, this is not the best option. If you are married, there is a good chance you and your spouse will both need long-term care. Essentially doubling your cost in LTC, you may consider shared care if you are married to save on costs.

Traditional Long-Term Care Insurance

This option is all-or-nothing. You either use the benefits or you do no end up using it. However, if you do not use the LTC insurance policy, your family/heirs do not typically see a death benefit payout. As a specialized insurance, you pay to have the insurance company cover out-of-pocket costs for long-term care. With the need for long-term care increasing, over the years policy holders have seen increases in premiums.

Life Insurance Policy with Chronic Care Rider

Life insurance can provide an upgrade. As part of your policy, many life insurance companies offer a rider that will help pay for long-term care. In the case you should need long-term care, your life insurance will pay out a fourth of the death benefit from your policy up to four years. Should you not use all the death benefit for your long-term care, your heirs will receive whatever remains after you pass.

These riders can also apply to permanent life insurance policies that will allow a portion of the policy to be invested; a portion that will grow and may be tax-free upon withdrawal.

Deferred-Income Annuities

While used more as a stream of income, deferred-income annuities may be used as monthly payments to offset the cost of long-term care. In some cases, you may be able to purchase a deferred-income annuity with long-term care coverage or a long-term care rider.

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underestimated retirement risk: medical costs

Do Not Forget Healthcare Costs When Retirement Planning

How are you to account for health care costs while retirement planning? Oftentimes, these expenses are underestimated. Even though Medicare Part A is free and covers hospitalization, the remainder of Medicare comes with premiums and the rest of health care and drug costs are out-of-pocket even with supplemental insurance.

Why are health care costs underestimated?

CPAs transitioning into retirement often do not consider that what they were paying in premiums is not the full amount. Thinking they need the same “take-home pay” folks forget that their employer was paying a good chunk of the premium costs when budgeting and the rest was coming directly out of their paychecks. Now, facing retirement, CPAs are responsible for out-of-pocket costs and the full premium.

Familiarization with Health Care Premiums

Having Medicare Part A helps immensely when it comes to health care costs, especially since it is free. However, you will be responsible for other premiums to help cover medical expenses.

  1. Medicare Part B: In 2022, premiums increased to $170.10 monthly. Note in the future this will increase.
  2. Medicare Supplemental Insurance: For coverage not offered through Part A or Part B of Medicare, supplemental insurance is available. This will help with medical expenses, but does not cover dental, hearing, or vision.
  3. Medicare Part C: Known as Medicare Advantage, these policies vary in coverage and price, but offer options including Part A, Part B, hearing, dental, and even vision. Furthermore, Part D (prescription drug coverage) is also included.
  4. Medicare Part D: As coverage for self-administrated prescription drugs, Part D requires a co-pay per prescription. Unfortunately, some drugs are not covered.
  5. Long-term care insurance premiums: Medicare only covers so much of long-term care costs after a certain amount of time, and even then, it will add up quickly daily. To make sure you are covered, building a LTC policy to your wants and needs is best. This is an important factor to consider for retirement planning because 70% of retirees experience a long-term care event.

How much could coverage and any out-of-pocket costs be then?

Knowing Total Health Care Costs

Adjusted for inflation, in 2021 multiple studies found that retirees were spending about $6200 on premiums and approximately $6500 on out-of-pocket costs for health care. For 2022, the projected amount for out-of-pocket costs is $7000. And with rising health care costs and inflation, the average expenses are predicted to increase by a minimum of $3500 by 2030.

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Inflation Reduction Act of 2022 and retirement planning

The Inflation Reduction Act of 2022 and Its Impact on Your Retirement

As a watered-down version of the Build Back Better Act of 2021, the Inflation Reduction Act of 2022 is set to be signed by President this week. The bill is designed to reduce the deficit and lower inflation while investing in domestic energy production and lower prescription drug costs. On top of the deficit reduction projected to be more than $290 billion, this bill allows Medicare to negotiate lower drug costs and extends the Affordable Care Act program through 2025. The goal: lower consumer costs and help the nation reduce emissions long-term.

Once signed into law, how will my retirement be impacted?

Your retirement will be impact someway somehow.

The deficit reduction is intended to fight inflation by cutting the taxes Americans are paying. With the capability to reduce inflation, your retirement income will have more spending power, and we will eventually hopefully enter a period of deflation. However, there is a slim chance we will see a dent in inflation this year with this bill.

Since Medicare will be able to negotiate drug prices with pharmaceutical companies the savings will impact retirees directly. In addition, a $2000 out-of-pocket cap for Medicare enrollees buying prescriptions comes along with preventative vaccines being free.

Moreover, since the ACA program is being extended, the Covid-19 subsidies helping make insurance more affordable for some Americans. Good news: this is most applicable to those who had to retire early and aren’t eligible for Medicare just yet.

With the focus of the Inflation Reduction Act being partially on cleaner energy investments, business and consumers can participate in clean energy investment incentives, too. Businesses themselves can receive a tax credit for clean energy manufacturing, and another tax credit for wind and solar energy production. Consumers get to enjoy the tax credit incentives for greener options for investing in renewable energy and further tax credits for buying electric cars, new and used.

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Having An HSA While on Medicare

Health savings accounts can be tricky, especially when you are on Medicare. Not only do you need to meet certain criteria to have one, but you need to meet the same requirements to keep contributing to it.

One requirement to have an HSA is a high deductible plan, and you cannot have another health care plan. Since Medicare is considered another health care plan, and one that does not have a high deductible, you are not able to contribute to your HSA once you enroll with Medicare.

However, that does not mean you are unable to use your HSA along with your Medicare plan. You have stockpiled that money to help cover medical costs, and you are still able to use the HSA funds to cover expenses Medicare might not. Or to even help with Medicare premiums, copays, or deductibles.

How does an HSA while enrolled in Medicare?

To maintain and contribute to an HSA you need to be on a health plan that is a high-deductible plan. And you cannot be on any other medical insurance plan. This even means Medicare. Once you are enrolled in Medicare, you are not qualified to use your pretax dollars to contribute to your HSA.

You may be able to keep contributing if you are not enrolled in Medicare at 65. This takes special circumstances, being you are not yet retired or receiving SS benefits.

Is there a penalty for having Medicare and an HSA?

Fortunately, you will not face a late penalty if you have health care from your employer. This means, you have delay Medicare enrollment until you do retire. Retirement qualifies you for the Special Enrollment Period. The same rules apply if you are on your spouse’s employer’s health care plan.

However, if you turn 65 and do not have other coverage, you will be charged a penalty. Once you do enroll in Medicare, your Part B premium will be increased by 10% monthly for each year you did not enroll. Since you are also enrolling late without any special circumstance, you will have to wait until the Open Enrollment Period to sign up.

How can I use my HSA to help with Medicare premiums?

Since an HSA is for medical and healthcare costs, you can use the funds for qualifying expenses such as:

  • Part B, C, or D premiums
  • Medicare deductibles
  • Copays or coinsurance
  • Dental or vision
  • Over-the-counter medicines
  • Out-of-pocket costs

Can I pay Medigap premiums with my HSA?

You can, but you will have to pay taxes on the money you withdraw to do so. A Medigap plan is not a qualified medical expense, which is why you will have to pay taxes on the money taken out of your HSA to pay for it.

Are there tax penalties when using an HSA with Medicare?

You will pay tax penalties if your HSA contributions and Medicare enrollment overlap. The penalty amount will vary depending on your situation, circumstances, and how long they overlapped.

  • You will be subject to back taxes on any contributions to your HSA made after your Medicare enrollment starts. Plus, your contributions will be added back to your annual taxable income.
  • You may be hit with an excess tax by the IRS if you have contributed after your Medicare enrollment date. Excess taxes will be an additional 6% (if not more) when you take it out of your health savings account.

The IRS strongly recommends those contributing to an HSA stop doing so six months before they enroll in Medicare. Once you are enrolled in Medicare, the IRS considers the 6 months before your enrollment as a period you had access to Medicare. Stopping before that 6-month period means you should avoid any penalties that could be assessed and saves money, too.

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Retirees are easy targets for scams

Why Retirees are Targeted Most by Scammers

Annually, an estimated 3.5 million retirees fall victim to financial exploitation. Scammers take advantage of elders due their vulnerability. Those who are 80+ are the most at-risk group for scammers. Ruthless and always on top of trends and the latest news, scammers will try to pull a fast one via the phone, targeted emails, or even through websites.

Why are seniors targeted more than any other age group?

Money, Money, Money

With decades of saving and planning, elders are more particularly targeted due to being the wealthier, more established society members. Also, more likely to have own their homes outright, elder Americans have approximately 1.7 times the wealth than the working middle class due to their savings.

Loneliness Leads to Vulnerability

Retirees are usually empty nesters, and oftentimes loneliness leads to isolation as family grows and friends get older, too. This makes the perfect breeding ground for con artists to build a relationship with elders especially telephone scammers. Elders are always happy to get a call and are more than willing to listen to their narratives. Once the scammer can gain the retirees trust they have an easier time exploiting.

Cognitive Issues

Unfortunately, with aging comes cognitive decline. Even though seniors are reporting scams more often than younger folks, they have a harder time remembering the little details necessary. What makes matters worse is that seniors do not realize that they were scammed until sometimes weeks after the fact. Memory loss presents first with haziness, and short-term memory is the first to experience issues.

Other Health Issues Make Easy Targets

Easy for health scams, seniors are more likely to have other health issues such as cancer, autoimmune diseases, and limited mobility. The health scams will target retirees with fake remedies for these issues since they are seen as personal.

Retirement Staples

As the baselines to retirement, Medicare and Social Security are very important to seniors to maintain their health and finances. If a call or email comes through for these programs talking about issues elders are very prone to panic. The panic-inducing targeting gets retirees to act out of fear for losing their benefits or insurance. Retirees are more likely to share their information to scammers when something that important is threatened.

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How ready for retirement are you?

Quick Check: How Ready for Retirement are You?

Retirement readiness is not an overnight success story. It is not a simple formula either. It takes dedication, hard work, and good strategies. Why? Because it is simply not just retirement savings. Below is a quick check to assess your readiness for your golden years whether you are 5-10 or even a year away from retirement!

Financial Wellbeing

As the biggest stressor of retirement, financial wellbeing is budgeting, savings, income streams, and planning. Here are some categories to review for your retirement planning

  • Housing, including utilities and maintenance
  • Healthcare costs (covered later)
  • Daily living: food, transportation
  • Entertainment and travel

Having an idea of where you stand now will help determine how much you should have for retirement assets.

Emergency Fund

Planning for the unexpected helps immensely when it comes to retirement readiness. When there is financial uncertainty, the emergency fund is the perfect security blanket. Advised to be kept separate from normal savings, the emergency fund should have roughly 3-6 months of living costs.

Debt Elimination

The less debt you need to pay in retirement, the better off you will be. Retires are often relying on fixed income streams, so beginning a repayment strategy now while you are still working would be ideal. If you can, paying down debts with higher interest rates would save a lot of money for you down the road.

Retirement Needs
As a CPA, knowing what you need and how you want to life your retirement helps set realistic goals and plans. This should include where you want to reside, what age you plan to retire, and even length of retirement. With longevity increasing by the day, it is estimated that retirement will last between 20-40 years for many. While evaluating your needs, this is a great time to also compose a timeline for when certain benefits/income streams begin.

Healthcare & Insurance

Health insurance is a major factor for retirement, and unfortunately will be the biggest expense you will face in retirement. Not including long-term care, a newly retired couple will need a minimum of $300,000 for medical expenses alone. This number is predicted to increase yearly, too. Moreover, should you have a long-term care event, without coverage, you are looking at approximately another $140,000 annually.

Now part of health care costs is insurance. Medicare only covers so much, and that depends on the plans you go with. Other than Part A each Part or supplemental plan has a premium. You may need prescription drug coverage, which is where Part D of Medicare may help. Consider a supplemental plan under Part C. Do further research into what a private health insurance company may offer so you know what options you have and are able to get the best price for what you need. Long-term care insurance is another premium monthly, but it would help a lot should you need it. There are some options where you may add a rider to a life insurance policy to help cover the costs long-term care would entail.

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How Inflation Silently Robs Your Retirement

Even with careful retirement planning, one risk that is often not planned for well-enough is inflation. Inflation alone can hit retirement assets the hardest. The budget retirees begin with will change easily within the first 5-10 years—even 20 years down the road. It is most likely that inflation, assuming a rate of 3-4%, will cause daily living expenses to double within 20 years. Retirees should plan for this because, according to life expectancy statistics, folks live 20-24 more years.

That said, the following things should be taken into consideration when planning the silent killer of retirement:

  1. With aging comes more health concerns and more medical bills. Given that inflation will increase day-to-day life, it is predicted that health care costs and services will increase, too.
  2. Social Security benefits will increase for retirees. In 2020, benefits went up by 1.6% which was an additional $24 paid out; accounted when considering cost-of-living adjustments. However, the extra money from SS is offset by huge cost increases across the board. For example, medical services and cost go up; as does Medicare costs. SS should only be considered a baseline for retirement funds.
  3. As mentioned, living expenses are predicted to double within 20 years due to inflation. With inflation, spending power for retirement assets could drastically be reduced if not accounted for properly.

Tacking this silent killer and its concerns takes careful planning and risk managing.

With life expectancy, family medical history and personal medical concerns need to be discussed. Family history of heart disease and cancer will affect your life expectancy. This in turn will determine how long your funds will need to last. If your family members are known to pass away early on or live well into their 90s, this will also factor into how long your funds will need to last. Longer life expectancy means a longer time inflation will affect cost and standard of living.

Reviewing medical history in advance will also allow for the retirement budget to account for any major medical expenses that could arise. For example, a history of knee injuries could mean a knee replacement in your early 70s. Your occupational hazards could cause late-life conditions. If you spent your working years in a steel mill, you have a higher risk for COPD. Planning for these major medical expenses in advance will allow for inflation to be accounted for, for the money to be there if necessary. In retirement, folks spend $250,000-300,000 in medical costs alone.

To account for inflation a realistic budget plan should be set. This includes daily expenses, monthly bills, and additional spending such as travel and hobbies. Factoring into this budget, would be those said medical costs, too. Once a budget and cost-of-living expenses are decided, it is important to review how high inflation rates and the historically low interest rates affect other return rates and income during retirement.

Have a strategy addressing inflation in place. Begin with small withdrawal rates and increase as cost-of-living and inflation go up. During retirement, the small withdrawal rates will be a huge part of your income. Larger withdrawal rates will make deplete retirement funds much sooner—potentially running out of money before running out of retirement. If possible, during working years, saving more will go a longer way. Investing your future retirement younger will also help offset inflation. Consider different income sources: Annuities, long-term care policies, life insurance policies.

Creating an income strategy and working with a Retirement Risk Advisor is key to a safe and secure retirement. Discussing options that can reduce inflation and provide the best management for retirement will save you money and time and give you peace of mind.

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International Living During Retirement

After having a taste of the working life and some traveling, retirees often consider living on foreign soil. Panama and Costa Rica are the two most sought out locations for retiring outside the U.S. If you are thinking settling aboard is in your future, the following are items you should consider before moving out of the country.

Preparation

            First and foremost: simplify your financial life where possible. Condense assets and prepare to do a lot of online banking. Make sure you have online access setup for your accounts and investments that will remain U.S-based.          

            If you can, find a community of American retirees wherever you are planning to settle. Those with experience retiring in the area are your best resource. This can be done by online social groups (i.e. Facebook) or by researching.

            Prepare to spend before you even get on the plane. While living expenses may be less per month in some areas, you may have to put several months’ rent down for a home. This could be up to $5,000. That does not consider travel there and moving belongings which could easily be another $5,000.

Credit History & Banking  

            What has been a determining factor throughout life for interest rates, mortgage, car payments? You guessed it! Credit score! The credit history you have built for decades will not likely transfer with you when moving aboard. If you can before, build up a credit history there—cell plan, lease, etc. It is recommended keeping a credit card or two from the U.S. active. This way you can use these for online shopping, travel expenses. This will keep your American credit score active.

            Unfortunately, it may be easier to build a credit history overseas than get a bank account within the country you settle. This goes for getting a credit card there, too. Why? The Foreign Account Tax Compliance Act (FATCA) was enforced beginning summer of 2014. This law requires foreign banks to report any accounts of U.S. citizens. Because of FATCA, extra fees are charged if foreign banks work with Americans. Many turn Americans away. In addition, U.S. citizens must file a Foreign Bank & Financial Account report for accountability.

            With the foreign banking laws, other laws have been put in place called “anti-laundering rules.” These rules require providing proof of funds when depositing between U.S. and a foreign account. For example, if you have a large lump sum deposited into your foreign bank account from a house or business sale, you will need to provide documentation of this sale for the money to be properly deposited.

            Another matter to consider is the exchange rate for currency. If you are using an ATM for your U.S. account, what you pull and receive will be based on that day’s exchange rate. The rate may change frequently and there will be fees associated depending on what account you are withdrawing from. Before moving out of the country, find cards that have small or no fees for foreign transactions and withdrawals.

Investments & Social Security

            Top advisors recommend keeping most investments within the U.S. This allows for better reporting and efficiency fund management. Having investments in the world stock markets are riskier, with an additional risk when it comes to the currency rate. By keeping investment assets U.S-based, funds are easily be distributed and oftentimes uninterrupted. Doublecheck that an international address will not a problem. Some agencies have policies that require an American address. Retirees that have moved out of the country have reported that policies have been paid out or closed due to this; this led to tax issues and messing up the three-bucket system. Research into your policies before moving.

            Unlike the issues that investments may have overseas, social security benefits are still paid out. The funds are directly deposited into bank account. The only downside is that Medicare is not given when living aboard.

Taxes

            Living aboard comes with a double taxation price tag. Depending on the laws and other regulations, you will have to file taxes for the United States and wherever you have settled. This is heavily dependent on your financial situation. Luckily, there are some tax breaks you may qualify for living on foreign soil: Foreign earned income exclusion and foreign tax credit.

            First, as of 2021, the foreign earned income exclusion permits $108,700 per individual. A married couple filing together potentially could exclude $217,400. This income exclusion does not apply to retirees who have zero income from working—401(k) and IRA distributions are not earned income. Secondly, the foreign tax credit allows qualified foreign taxes paid to offset U.S. tax liability. The credit is what American retirees rely on the most when living aboard due to itemization.

            Remember, if maintaining a U.S. address, state and local taxes may still be owed. Make sure when you are filing and claiming deductions and credits that you have converted the dollar correctly so no errors may result in major consequences.

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There’s More to Medicare Than Meets the Eye

Medicare is federally funded health insurance for seniors over age 65. You may qualify for the program if you are younger with qualifying disabilities (some end-stage diseases may qualify you as well).

Administered by the Centers for Medicare and Medicaid, this program is like the Social Security entitlement program. If you are a U.S. citizen paying taxes for a set time, you are eligible.

The Four Parts:

Part A: provides hospital insurance

Part B: provides medical and preventative health care coverage

Together, Part A and Part B are known as Original Medicare.

Part C: Known as Medicare Advantage, this part provides the same benefits as Original Medicare, but is offered privately and can include hearing, eye, and dental coverage.

Part D: provide optional prescription coverage and is provided by private companies.

Both Part C and Part D are government regulated.

Enrollment

You will qualify for Medicare if you are 65 years or older. If you are younger with a qualifying disability or end-stage disease, you may also receive Medicare. Remember if you are first applying for enrollment, there is a specific 7-month window before you 65th birthday to sign up. Always make sure you are enrolled in Part A and Part B. If you qualify for Part B and do not enroll on time, you will be subject to penalties for as long as you are enrolled that will be additional to your regular monthly premiums.

Important Notes to Remember:

You cannot enroll in a Medicare Advantage plan or buy a Medigap supplement policy if you are not enrolled in both Part A and Part B.

It is best to begin looking into Medicare plans and coverage at age 64 so you know what is best for your needs and budget.

New to Medicare in 2022

Beginning in 2022, Part B premiums will increase $21.60 to $170.10. Factors to impact this rise are rising health care prices and related COVID-19 care and staff. In response to the pandemic in 2021, Congress lowered the Part B premiums as they were scheduled to increase drastically. So, to cut cost and help the public out, they kept the prices lower. This is the biggest factor as to why Part B premiums drastically increase in 2022.

Deductibles are also rising to $233 from $203. Even Part A deductibles are increasing by $72 to $1556. For Part D, the government capped the deductible at $480, but they may vary based on the drugs needed and copays.

In good news, enhanced Part D is being offered to help cover insulin costs. While this plan began in 2021, more are allowed to enroll in 2022 for this Part D benefit.

Continuing the good news, Medicare coverage is being extended in the telehealth dynamic by welcoming coverage for mental health services via telehealth.

For more information on Medicare, please visit www.medicare.gov and www.medicarecompareUSA.com. Want to hear more information instead? Go listen to our The Retirement Risk episode 4, “Understanding the Complexity of Medicare with Alex Sieler.”

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How to Face Your Retirement Risks: Think in Buckets

Since the old paradigm of retirement will do more harm than good in this current world, tackling the Top Ten Risks can be tricky.

Why won’t the old paradigm work? The first reason is folks nowadays live into their 80s when decades back that was not as common. Because retirement age back in the late 20th century was 55, many retirees waited until years past their retirement age to fully leave the workforce. Another major contributor to retirement plans back then were pensions. Social Security (SS) was on the table then, too. Folks could easily retire and enjoy their golden years off their employment pension and SS. Now, a lot of retirement is unfortunately up to the employees.

Beyond understanding SS and Medicare, balancing your assets over taxable, tax-deferred, and tax-free accounts is key to the success of your risk-free retirement. This is known as the Three Bucket System.

First and foremost, the taxable bucket is designed for emergency funds. Having 6 months of your living expenses in this bucket permits less risk. You are protected in case of emergency, and you are not exposing your savings to extra taxation.

The second bucket is tax-deferred and is a bucket folks overfill. While this bucket varies individually, there are some ‘rules’ to be mindful of. Your required minimum distributions (RMDs) should be low enough to not create provisional income (too much would cause your SS to be taxed). Secondly, you do not want them to exceed your standard deduction.

Filling the other two buckets means you can successfully begin filling the third bucket up: tax-free. The sooner you do this, the better off your risk-free retirement will do. Things that can be done for this bucket are Roth conversions or buying a life insurance retirement plan.

**We strongly encourage you to listen to our podcast Retirement Risk Show episode “Break Down the Top 10 Risks Facing Your Retirement” for a deeper dive into the information provided in this blog. For even more on the 10 Risks Top Ten Risks and strategies to reduce them during retirement, register for our webinar “Getting Safely Through Retirement.”

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