The cost of nursing homes is ridiculously high. The national median cost if nursing home care is $8,900 for a semi-private room and $9,800 for a private room. These are national median costs. Half of nursing homes are going to be more expensive and half of them are going to be less expensive.
No matter which way you look at it, nursing homes are super expensive.
Which leads to the question of how are you going to pay for nursing home care?
The bad news here is that Social Security will not pay for nursing home care or memory care. In fact Social Security does not pay for any long term care whatsoever.
Medicare might pay for nursing home care, depending on the type of care that is needed. For example, Medicare will pay for up to 100 days of skilled nursing home care.
Skilled nursing would be after somebody has been discharged out of the hospital because they don’t really need to be taking up a hospital bed but they still need some care for changing bandages, checking wounds, administering medication, rehabilitation etc.
However, Medicare does not cover any custodial care. Medicare does not cover in-home care, assisted living, or memory care.
Now, if you’re one of the few fortunate people that has long-term care insurance. More than likely, you’ll have coverage for nursing home care. In fact, depending on the amount and type of coverage, your long-term care insurance policy might pay for some or all of your nursing home care costs.
Most people living on Social Security are going to pay for nursing home care with retirement savings or with Medicaid.
The first option is Medicaid. You may or may not qualify for Medicaid depending on your income, assets and where you live. Generally, Medicaid will require you to spend down your assets before you qualify for assistance.
On top of this, Medicaid does have the ability to recover nursing home costs they covered through the assets of the estate. Some states even can lien the entire estate to recover funds. It is best to research your state and speak with an estate planning attorney.
The issue with paying for nursing home care with your retirement savings is the fact that it can completely wipe out a couple financially. Because not only are you pulling money from retirement accounts, but depending on the type of retirement account, there could be tax consequences as well.
Using a Reverse Mortgage to Pay for Nursing Home Care with Social Security
This strategy only works where only one of the spouses will be going into nursing home care.
I will be showing you a scenario of how this could work. This is only one scenario and everyone’s situation will be different. However, it can give you some good ideas and clarity around why you may want to consider getting a reverse mortgage if your spouse needs to go into a nursing home.
Scenario:
- Jim and Stella are both 76.
- They have $3,800 a month of income from Social Security.
- They own their $450,000 home free and clear.
- They don’t have any money in retirement savings.
Stella has dementia and she’s become a flight risk. Emotionally and physically, Jim can’t take care of her any longer and it’s become a health and safety issue for both Jim and Stella.
- Stella’s care is going to be $9,950 a month at a nursing home and they cannot afford to pay for nursing home care.
- Stella qualifies for Medicaid however Medicaid will require Stella’s Social Security income to go towards the cost of care.
- There is one exception to that is the minimum monthly maintenance needs allowance. That will allow Jim to keep $465 of Stella’s social security check.
- Jim will have a monthly income or household income of $2,465 a month while Stella is in the nursing home.
- When Stella passes Jim’s going to lose that $465 and he’s only going to have $2,000 in household income.
Jim is going to be financially strained both while Stella is in nursing home care and also after she passes.
Jim called me about getting a reverse mortgage as a way to supplement his income both during Stella’s stay at the nursing home and after Stella passes away.
Medicaid benefits, qualifications and requirements are going to vary from state. You really need to consult with your state’s Medicaid agency and an elder law attorney uh before proceeding with a reverse mortgage.
I presented Jim a couple different options for Jim.
The first was to start drawing $1,000 a month from the reverse mortgage once Stella enters into the nursing home. This scenario is represented by the bar chart below.
The blue bar represents the home’s value assuming a 4% appreciation rate.
The orange bar represents the loan balance. We can see that loan balance is increasing over time. The reason the loan balance is increasing is for two reasons. First Jim is drawing $1,000 a month out of the line of credit to supplement his income. Every time he draws money it gets added to the loan balance.
Second, we are assuming that Jim is not going to make a monthly mortgage payment towards the reverse mortgage. Because Jim’s not making a payment towards the reverse mortgage the interest and mortgage insurance are getting added to the loan balance. (Jim still has to pay his property taxes and his homeowners’ insurance.)
The green bar represents his line of credit. He’s starting off initially with a $166,000 line of credit. We can see this line of credit is growing over time. That may sound weird especially since Jim is pulling out $1,000 a month or $12,000 a year to supplement his income.
The reason that that’s happening is because any funds available on the line of credit are actually growing at the current interest rate plus a half a percent. In other words, Jim is pulling out less than the growth that’s happening in that line of credit. That’s why that line of credit is growing over time which is pretty awesome.
The second option is for Jim to draw out $1,250 a month once Stella enters into the nursing home. This is represented by the bar chart below.
The numbers are basically the same except for the loan balance is growing a little bit faster and the line of credit is actually getting reduced because now Jim is pulling more money from the line of credit than the growth that is happening.
However, he still has an estimated $92,000 available in his line of credit in 15 years. In 15 years, Jim would be 91 years old. Jim would more than likely need at least some in-home care and would likely have other expenses such as yard care and maid service. All of which he would be able to pay for with funds from the line of credit.
Those are just two different options Jim has when it comes to the reverse mortgage. Jim has the ability to draw as much or as little as he wants when he wants.
Jim could draw more than these two options, but if he draws more the money is not going to last as long now there are some. And vice versa, if he draws less the money is expected to last much longer.
I mentioned earlier that it is best to speak with your state’s Medicaid office and an estate planning attorney in your state, here’s why.
Most states do not consider reverse mortgage proceeds as income. That’s beneficial especially when couples are trying to qualify for Medicaid. The issue is that the proceeds from the reverse mortgage can count towards asset requirements if they are not spent and accumulate in an account. Generally a individual can only have $2,000 of liquid assets and a couple can have $4,000.
In other words, if you pull money out of your reverse mortgage, you’ve got to spend it because if that money stays in your checking or savings account it can count towards the liquid assets which could then disqualify you from Medicaid. It’s important that if you draw money that it gets spent.
If your spouse needs nursing home care and you only have Social Security income. There are several reasons to consider the reverse mortgage.
- Replace Lost Income – Generally Medicaid is going to keep the majority of the spouses income that will be going into nursing home care. A reverse mortgage might be a good way to replace that lost household income.
- Financial Stability – Once household income is lost, the remaining spouse could end up unable to live comfortably, cover their daily living expenses, or even end up in poverty. The reverse mortgage could be a good way to ensure that the remaining spouse has the funds to take care of themselves financially.
- Peace of Mind – Losing a spouse is difficult enough. Add the stress of losing income and the situation can become unbearable. Having the reverse mortgage in place could take the financial pressure and fear out of the equation.
Want to see if a reverse mortgage would be a good fit for you? Give me a call and let’s discuss your situation. I can put numbers together for you and run your own custom scenarios.
