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(Updated March 14, 2018) Hollywood actress Betty Davis was quoted as saying, “Old age ain’t no place for sissies.” Unfortunately (or fortunately, depending on how you view it) more people are reaching older ages today than ever (such as Ira Chestnut, pictured at left as a high school basketball player in 1917-19, and just before his death at almost 100 years of age). We encourage readers of this article to consider long-term care insurance as a way to help pay for nursing home care, but a relatively new retirement savings plan offers an additional option for IRA owners younger than age 70 that think they might exceed the average life expectancy.
Retirement, Aging, and Long-Term Care Statistics
On March 13, 2018, Bloomberg.com published these statements in Alexandre Tanzi’s brief article entitled Graying Americans Will Outnumber Kids by 2035:
- 65 and overs expected to exceed number of children in U.S.
- Baby boomers, born in 50s-60s, will all be at least 65 by 2030
By 2035, Americans age 65 and older are forecast to outnumber kids for the first time.
The U.S. Census Bureau projects that the population of older adults will surpass children by almost two million in 2035, growing nearly five million to 78 million by 2035. The growth rate of the population of children, those under age 18, is expected to be slower.
This demographic transition is in the developing stages for the U.S., while the trend in other countries, notably Japan and some nations in Europe, is already well underway.
People often say things like “Americans are living longer” and “more and more people need nursing home care,” but what information supports those general statements? This is what we have found:
- Information published online by the US Centers for Disease Control and Prevention at: http://blogs.cdc.gov/nchs-data-visualization/deaths-in-the-us/) shows that the average US life expectancy increased from 47.3 years of age in 1900 to 78.8 years of age in 2013.
- Information published online by the US Department of Health and Human Services at https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html says,
The duration and level of long-term care will vary from person to person and often change over time. Here are some statistics (all are “on average”) you should consider:
Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years
Women need care longer (3.7 years) than men (2.2 years)
One-third of today’s 65 year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years
- The US Department of Health & Human Services Office of the Assistant Secretary for Planning and Evaluation stated in its Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief published online by the on July 1, 2015, and updated in February 2016:
Most Americans underestimate the risk of developing a disability and needing long-term services and supports (LTSS).
Using microsimulation modeling, we estimate that about half (52%) of Americans turning 65 today will develop a disability serious enough to require LTSS, although most will need assistance for less than two years.
About one in seven adults, however, will have a disability for more than five years. On average, an American turning 65 today will incur $138,000 in future LTSS costs, which could be financed by setting aside $70,000 today.
Families will pay about half of the costs themselves out-of-pocket, with the rest covered by public programs and private insurance.
While most people with LTSS needs will spend relatively little on their care, about one in six (17%) will spend at least $100,000 out-of-pocket for future LTSS.
- Many more statistics appeared in an online MorningStar article by Christine Benz on August 9, 2012, at http://news.morningstar.com/articlenet/article.aspx?id=564139, but the picture seems clear that both statements about living longer and people needing nursing home care are true.
Long-Term Care Insurance
Long-term care insurance help solve the nursing home expense problem for people who can afford long-term care insurance premiums. Unfortunately, many people delay purchasing the insurance until their health conditions disqualified them from coverage. Most other people just decide that the insurance is too expensive.
Long-Term Care Planning with IRAs
An ordinary individual retirement plan (IRA) contains money contributed by the plan owner from income on which the plan owner never paid income taxes. Earnings inside the IRA grow without triggering taxation until the plan owner begins withdrawing from the plan, and then 100% of every withdrawal is taxable as income.
If a retired IRA owner requires nursing home care, and if the cost of nursing home care is more than 7.5% of the IRA owner’s adjusted gross income (AGI), the portion of the nursing home care in excess of that 7.5% of AGI (the average annual cost of an Indiana resident’s nursing home care is more than $71,000) is a tax-deductible medical expense. Therefore, it is always advisable for an individual or a married couple to pay nursing home expenses out of IRA accounts before spending non-IRA funds.
Qualifying Longevity Annuity Contract (QLAC)
The IRS adopted new regulations in 2014 concerning a relatively new investment product designed for Americans that expect to exceed the average life expectancy. Ordinarily, an IRA owner is required to begin withdrawing from an IRA account when the owner reaches the age of 70 ½ years, but the required withdrawal pace is designed to nearly eliminate the IRA by the time the owner reaches age 90. The new investment strategy, known as a Qualifying Longevity Annuity Contract (QLAC), allows an IRA owner to transfer up to $125,000 from an IRA to a QLAC and set a required beginning date for withdrawals as late as age 85. This delayed withdrawal allows more time for a QLAC to grow on a tax-deferred basis and allows the plan owner to concentrate wealth to pay the cost of living through longer than average longevity.
Ask Your Financial Advisor
A healthy person cannot control the aging process or the cost of living an unusually long life. A wise person with long life potential will consider how to stretch financial resources to support a long life. We encourage people to speak with their financial advisors about all of these long-term care financial planning alternatives and choose a strategy carefully. Even the best laid plans may fail, but careful planners stand a better chance of achieving good outcomes than people who do not plan.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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