The Tax Attic with Jerry Coon—April 29, 2010

Make retirement income last

There sure is a lot of concern and discussion these days about making retirement income and retirement assets last through all of a retiree’s retirement. A married couple at the age of 65 today can be expected to have one of the two reach the age of 92. With any luck at all, they could both easily reach 85. However, if they retired at the age of 62, this means the savings they accumulated over the 40 years they worked would have to withstand not working for another 30 years.

Jerry Coon, Enrolled Agent

Let’s analyze that 40 years of working and I think we will find that saying the couple accumulated money for 40 years is really not too accurate.

In the first working years, most people don’t save a whole lot of money. There is a whole lot more outflow to places other than savings accounts. In their 20s, it’s a time of spending money on children, accumulating money for a down payment on that starter home, purchasing something other than a 10-year-old vehicle, and paying off student loans. Let’s say that spending time frame lasts until our couple turns 32. This means they are really saving for about 30 years, age 32 to age 62. And what they save for, that 30 has to last for another 30 years, age 62 to age 92.
When you look at it like that, it’s easier to see why people do run out of money. In addition to the regular, everyday expenses that everyone has to deal with, such as property taxes, utilities, car-operating expenses, food, clothing, prescription and out-of-pocket medical expenses, there are wild-card, catastrophic type events that might happen to quickly to deplete much of the money saved throughout those 30 years.

Most of these catastrophic events are medical in nature. According to the Department of Health and Human Services, Americans age 65 and over have a 40% chance of being disabled enough that they would qualify to enter a nursing care at some point in their lives. At the age of 85, that figure increases to 55%.
We have the misguided understanding that Medicare or Medigap or Medicare Advantage policies will pay for this nursing care. This is not true. These policies might pay for short-term care or physical therapy for up to 20 days or might even pay for longer-term care for another 80 days, but for taxpayers with permanent disabilities, neither Medicare, nor Medigap nor Medicare Advantage policies are going to help. The taxpayers will be expected to either pay out of pocket for medical care or have insurance to help pay for the expenses.
Why should taxpayers spend the money for insurance? Why not just pay for medical care out of the money saved up? The answer lies in the cost for the medical care. Not only is it incredibly expensive, but the costs are increasing much faster than the rate of inflation.

In 2006, according to the Met Life Mature Market Institute, the average private nursing home room cost $75,190 per year, up 7.3% since 2004. Extra charges for seriously debilitating diseases such as dementia can up the ante tremendously. The annual average room in an assisted-living facility cost $35,616 in 2006, up 17.6% since 2004. Increases at the rates of 7.3% and 17.6% would most likely also be more than the returns on the investments the retired couple might have. It is doubtful that our recently passed National Health Care Reform bill will have any positive effect on these increases.

The good news, if there is any, is that the average stay in a nursing home or assisted-living facility lasts less than three years. Of course, the three years might still cost between $100,000 and $250,000 per person, or between $200,000 and $500,000 if both taxpayers end up in nursing care. How many taxpayers have between $100,000 and $500,000 set aside for nursing care? I don’t know what the average American has set aside for retirement at the age of 62, but I would be willing to bet a round of golf at the Cedar Chase Golf Course that it is a whole lot less than $500,000 and might even be less than $100,000. The money just isn’t there to pay for three years.

The alternative is to find a nursing facility that accepts Medicaid, spend all of the money saved on nursing care, and then apply for Medicaid. Medicaid then pays the nursing facility a pre-set monthly amount that the federal government sets. Of course, not all nursing facilities accept Medicaid patients. The pre-set monthly amount set by the federal government is substantially less than the $35,616 for assisted living or $75,190 for nursing care. It is so much less that many facilities choose not to participate.

An alternative that is becoming more popular is to buy long-term care insurance. Next week, I will go over the various long-term care insurance options. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action
Tax Service on Northland Drive in Rockford.
Contact him at

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