Does Medicare cover assisted living? Unfortunately, Medicare does not cover assisted living. However,  I’m going to show you an alternative way to pay for assisted living without draining your retirement accounts.

This strategy for paying for assisted living only works for couples where only one of the spouses is either currently in or will be going to assisted living. Or the assisted living is being received at the primary residence through In-Home care.

I probably don’t need to tell you this. You already know assisted living is expensive. According to the Genworth Cost of Care Calculator the national median cost for assisted living is:

• $4,917 a month for an assisted living community.

• $5,417 a month for 44 hours a week of in home care.

• $8,641 a month for a semi private room in a nursing home facility.

The cost of care really depends on the care provider and the type of care that you’re getting.  Keep in mind is that these are the national median costs. Your area could be less expensive it could be more expensive.  Regardless, assisted living is expensive.

The next question is…

• Medicare is not going to pay assisted living.

• Your family might be able to help pay, but it really depends on their income, assets and their financial ability to assist you.

• Medicaid might be an option.  I say might because you may or may not qualify depending on your income levels and asset levels.  The other thing to consider is Medicaid May lien the estate. When the last spouse has passed away, Medicaid has the ability to try and get back any funds that they have paid towards your Assisted Living.

• Most people end up relying on retirement savings to pay for assisted living. The issue with this option is it could completely wipe out a couple financially.

Another thing most people don’t consider with this option is what happens when one of the spouses passes.  If all the money has been spent on assisted living. What will happen to the remaining spouse when the other passes away? They could end up in a financial position where they might not be able to support themselves financially or even cover their daily living expenses

Here is the alternative way to pay for assisted living.

You could pay for assisted living with a reverse mortgage. There’s multiple reasons to consider this as an option

First and foremost, it can provide access to income tax free cash.  Providing a source of funds to help pay for care beyond your retirement account.

Second, instead of using retirement savings, you could use the reverse mortgage proceeds instead and leave the retirement savings alone. Doing this could allow your retirement account continue to grow as well as potentially reducing income taxes from drawing retirement savings.

The third reason is that you may not need any financial assistance from your family. Or if you still need some help, maybe it’s at a very reduced amount that they can actually afford to help you with.

Finally, you potentially have the ability to leave the remaining spouse with additional funds to supplement their income and cover their daily living expenses.

Let’s take a look at a scenario of Tim and Sarah

• They’re both 79 years old.

• They have a pretty decent income of $4,800 a month.

• They own their $450,000 home free and clear.

• They have $85,000 in retirement savings.

Typically this is not a couple that would ever consider reverse mortgage. But this scenario, it could really make a lot of sense for Tim and Sarah.

Tim has a high need for care, bathing, eating, going to the bathroom. Sarah physically and emotionally cannot take care of him on her own anymore. It’s become a health and safety issue for both Tim and Sarah.

Tim’s care is going to be $5,000 a month.  After paying taxes, Sarah is going to only be able to pay for about a years worth of care. To make things worse, after Tim’s death, Sarah’s going to lose $2,600 in household income.  Sarah really needs the money that’s in the retirement savings to supplement her own income once Tim has passed away.

Tim and Sarah reached out to me to look at the reverse mortgage as an option to help them pay for assisted living.

The first option is to get the reverse mortgage today as a backup in case all their retirement funds are spent paying for care. We’re going to assume that Tim passes away a year after he goes into assisted living. Because Tim has been in assisted living for a year, we were also making the assumption that Sarah spent the retirement funds to pay for Tim’s care.

When Tim passes away, she would start drawing $2,000 a month out of the reverse mortgage line of credit to supplement her income. That is what she needs Tim’s income goes away after his passing.

This scenario is represented by the following bar chart.

Numbers in illustration based on interest rates of 08/14/2023. Initial APR of 7.985%. The loan has a variable rate which can change each month. The rate is tied to the 1 Year CMT with a margin of 2.625%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.695% plus .5%. Estimated closing costs of $18,610. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend.  Assumes no payment made.  The content within this article is provided solely for illustrative purposes, the scenarios are fictional and similar results can not be guaranteed.

The blue bar represents the home value. We’re assuming a 4% appreciation rate.

The orange bar represents the loan balance. Initially that loan balance is $18,610 because we’re lumping the closing costs into the loan. Over time we can see this loan balance is increasing and it’s increasing for two reasons.

First we know that Sarah is drawing $2,000 a month out of the line of credit. Every time she makes a draw, she adds $2,000 to the loan balance.

The second reason it’s increasing is because we’re making the assumption that Sarah is not going to make a monthly mortgage payment towards the reverse mortgage. (she still has to pay her property taxes and her homeowner’s insurance) Because she’s not making a monthly payment the interest in mortgage insurance is getting added to the loan balance.

The green bar represents the line of credit.  Initially they’re starting off with a $181,890 line of credit.  Starting in year two, Sarah starts drawing $2,000 a month, $24,000 a year to supplement her income. Therefore, this line of credit is going to decrease over time as Sarah draws out money.

Now what’s really interesting is if you look between the initial line of credit and year five, the line of credit has only decreased by about $32,687 over that time. Sarah has drawn $96,000 from the line of credit during that time.

How is that possible she has drawn $96,000 from the reverse mortgage line of credit, yet the available funds in the line of credit has only gone down $32,687?

The reason this is possible is because any funds in the line of credit are growing at the current interest rate plus a half a percent. So, even though Sara is pulling money out of the line of credit, all of the finds left are growing. Basically, the funds are growing faster than what Sara is drawing out.

By the time Sarah’s 89 years old, she still has $68,662 available in the line of credit, even though she has drawn out $216,000 during the last 8 years from the line of credit. And her line of credit started with only $181,890 available.

If Sarah had to go into assisted living at this point, she could draw the funds out of the line of credit and prepay for several months of care. Then she could sell her house and then during that time and she could expect net about another $292,000 from the sale.

The other option is to get the reverse mortgage today, and use the funds from the reverse mortgage to  pay for assisted living first.

In this scenario, Sarah would draw $5,000 a month from the reverse mortgage to pay for assisted living. Assuming that Tim passes away in a year. Sarah would then draw $2,000 a month from the retirement savings to supplement her income. The retirement savings are expected last her 4 years.

Starting on year six,  Sara would start drawing $2,000 a month from the reverse mortgage because she would have spent the retirement savings by that point.

This scenario is represented by the following bar chart.

The orange bar represents the loan balance which we can see is increasing over time. We are assuming that Sara is not going to make a mortgage payment. (she still must pay her property taxes and homeowners insurance)

The green bar represents the line of credit which is decreasing over time due to using it initially to pay for assisted living care and then drawing from it starting in year 6.

Strictly from a number standpoint, this option makes more sense for two reasons. At the end of 10 years, the loan balance is lower and the line of credit is higher.

With the first scenario, her loan balance would be $340,729 and her line of credit would be 68,662.  In this second scenario, the loan balance is $40,407 less and the line of credit is $40,407 higher.

There are some pretty big benefits for Tim and Sara getting the reverse mortgage to help pay for assisted living.

1. The reverse mortgage introduces another source of funds to help pay for assisted living.

2. Having these additional funds allows them to do better planning around care needs and finances. They could bring in a CPA, financial planner, or an estate planning attorney to work together to figure out how best way to use the reverse mortgage to create the optimal outcome.

3. The reverse mortgage provides flexibility on where funds come from to pay for care so you’re not just reliant on your savings or retirement savings.

4. The reverse mortgage could provide access to additional funds that could create financial stability for the remaining spouse by replacing lost household income and assets.

5. The reverse mortgage can create peace of mind knowing that there is another source of income that could help the remaining spouse financially as well as provide additional resources to help pay for care that may go beyond what is expected.

Medicare is not going to pay for assisted living. The time to get a plan in place is now. Give me a call and let’s talk about your situation, needs and discover if this would be the right fit for you.