Chances are a big
portion of your retirement savings are in pretax accounts like a 401(k) or IRA.
If you need to tap those accounts for costly care, you must realize that every
dollar is taxable. And you might be shocked at the tax rates that come with withdrawals
large enough to foot the bill.
by: Bradley White, CFP™, IAR March 19, 2019
For
the first time ever, the Long-Term Care (LTC) generation meets the 401(k)
generation. This is, unfortunately, giving a lot of people false confidence
that they can pay for their future care someday through their retirement
savings, only to eventually find the rude awakening from a tax perspective that
awaits them.
However,
there is something else that is a new major consideration for today’s retiree —
LTC planning. Not to get too hyperbolic here, but we are just now, for the
first-time, planning on a concept where we stop working and live 30 more years.
Please take a moment to truly let that sink in …
Medical
advancements have been staggering, and it’s a beautiful thing as far as how
long we are all living. This, of course, means it’s increasingly likely we will
live into our 80s and 90s, and thus need ongoing comprehensive skilled care in
one way or another. That cost of care goes so far beyond the concept of
“sticker shock” to today’s retirees. They literally aren’t comprehending it!
The
first thing to do is get educated on the topic. You need to understand:
1.
The major difference
between Medicare providing basic health insurance, and LTC costs that come out
of your pocket.
2.
The different options
you have for your care, and where you might need this care.
3.
The expected costs of
the various forms of care, and what they’ll look like when you might need them.
An Issue for Savers in the Middle
Once
you have a general understanding, you can now look at how this will (or will
not) work with your own retirement plan. If you, unfortunately, have not saved
any money for retirement, then the cost of care for you will most likely be
provided via Medicaid (which is currently very underfunded, with not the best
facilities in the world even if you did get in). If you’ve saved up several
million dollars in after-tax, non-retirement accounts, then the earnings alone
from your money mean you can self-insure and will be fine if this happens to
you someday.
I’m speaking to the retiree that has between a few hundred
thousand and a few million dollars, some or the bulk of which in pretax retirement accounts,
such as traditional 401(k)s and IRAs. This means I’m speaking to a massive
amount of you heading into retirement. So, let’s paint a picture here …
The
“it will never happen to me” mentality can plague many people, and it does not
fare well when a LTC event arises as it can drain your retirement savings. On
average nearly 70% of 65-year-olds will eventually need some form of
LTC, according to the U.S. Department of Health & Human Services
(HHS). HHS also estimates that 20% will need LTC for more than five years.
According to a 2018 Genworth Cost of Care Survey, the national median monthly
costs for adult day health care, assisted living facility and private room care
are $1,560, $4,000 and $8,365, respectively. But remember, inflation can impact
these median monthly costs, as well as the location in which you retire in.
Possible Tax Consequences
Tax
planning in retirement is something we focus on very much, because it’s the
first time in a person’s life they choose where they get their income from.
Depending on where they pull money from in retirement, it can mean drastic
differences in the taxes they pay. Every dollar you pull out of your pretax
retirement accounts is taxable income, and the more you pull out in any one
year, the greater chance that you vault yourself into higher and higher tax
rates.
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