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Is Social Security Enough to Pay for Long-Term Medical Care?
Paying for long-term care haunts the older population. Many depend on Social Security benefits to help cover the costs of senior care and living choices. But is it enough? Let’s take a look at a few ways an adult can stretch the dollars received by the retirement benefit.
How does Social Security solve the dilemma of paying for long-term care? Since public programs and private insurance offer limits on long-term care options, older adults face financial misfortune when needed care becomes extensive.
The income of Social Security is commonly used for covering long-term costs of elder care. Recipients easily apply the benefits toward home care, adult day care, or residential care. But since the average amount of a Social Security check ranges between $1230 and $2045, can this be enough? It is especially difficult when 1 spouse requires residential care and the other remains living at home.
Few Disturbing Facts on Users of Social Security:
- 1 in 5 individuals (19%) rely solely on Social Security for income
- For 1 in 3 individuals (30%), 90% of their income comes Social Security
- More than half (56%) of the beneficiaries depend on Social Security for more than half of their income
The ultimate benefit Social Security offers is a regular source for income. It is guaranteed to increase over time, and continues for as long as a person lives.
According to Pamela Villarreal, expert for National Center for Policy Analysis, “As it stands today, there is no financial channel that fights inflation increases, longevity protection, investment risk, and spousal coverage like that of Social Security. Its benefits make it 1 of the most valuable sources of retirement income.”
Yet, beneficiaries must study the mechanics of Social Security to take advantage of its value.
In other words, do you really understand how Social Security benefits work? Most people receiving the benefit never learn to maximize its benefits. But, if you know that Social Security will be your main source of future income, you can better learn how to set it up to work in your favor.
Take Ms. Villarreal’s advice and apply this strategy to stretch Social Security benefits – you may find the answer on how to pay for long-term care costs by doing so.
Lay Out a Strategy
The first step in planning for Social Security to help pay for senior care costs is to avoid paying the high marginal cost of taxes.
1. Do not rush to collect the reduced benefits.
Delay drawing on it—put off Social Security payments. Drawing after 66 to 70 years of age will qualify you for lower income-tax rates.
This can be tricky because there is no general rule, but for those who expect to live longer, delaying benefits until 70 years of age is ideal.
Those who have not yet retired, place retirement savings into a Roth IRA since it is not subject to tax, nor is it included in the "other income" determination of the Social Security benefits tax.
There is no longer an income limit on households, or if the retiree has money in a tax-deferred retirement account; one can convert into a Roth IRA and pay current taxes on the amount converted. However, be mindful of the current tax rates. Conversions of large amounts may trigger a higher tax bracket and/or the new Medicare tax on unearned income.
The Roth IRA must sit for 5 years before funds are withdrawn. But once they are, those funds are tax-free.
2. Avoid collecting on spousal or survivor benefits.
If a retiree begins the worker, spousal, or survivor benefits before full retirement age (66 years of age), they are subject to earning limits.
What is the Earnings Test?
(a) When a retiree starts the benefits early, in every year leading up to the year to full retirement, $1 in benefits will be withheld for every $2 earned above the limit for that year ($14,640 in 2012).
(b) When a person reaches full retirement, benefits reduce $1 for every $3 earned above a higher limit ($38,880 in 2012). At that point, the earnings test disappears.
(c) When a retiree waits beyond the full retirement age, a Delayed Retirement Credit of 8% per year applies. If you wait until 70 years of age, cost of living adjustments (COLAs) apply and compound over time. For example, if you wait from 68 to 69 years of age and the government has declared a 3% COLA, and the benefit will grow 11% (8% Delayed Retirement Credit plus 3% COLA) for that year.
3. Learn ways married couples can better integrate benefits.
To create the right strategy for a given situation, it is important to understand the different types of benefits and when they might become available. Read more on Costly Social Security Mistakes.
Upon death: Delay Social Security and you will receive the greater of the 2 scenarios:
(a) His/her own benefit, including any COLAs; or
(b) The deceased spouse's current benefit, including any COLAs. (In this case, number 1 drops off whether it was a worker benefit, a spousal benefit, or some combination of the 2)
Pay Attention to Tax-Deferred Income
A retiree’s 401ks and other retirement plans have employer matches on contributions and earnings. These lead to tax-deferred income and all of it will be withdrawn and taxed.
Often, taxes are higher for retirees than the marginal tax rate paid on their earnings when working. So, a retiree will likely pay higher taxes.
For those with a very large retirement income portfolio, it is important to keep in mind the required minimum distribution that kicks in at 70.5 years of age. It could put a retiree in a higher tax bracket, no matter what.
Keep in mind, if you are in poor health or with a family history of early mortality, it may not make sense to delay Social Security until 70 years of age.
Ways to bridge the gap until higher benefits kick in:
- Tap into IRAs, 401ks, or other investments
- Go back to work full-time
- Get a part-time job
Take stock of your financial situation—this is the first step to know whether you can pay for long-term care costs. Keep track of your income and your expenses. Write down what you and your spouse earn and then your monthly expenses.
Assess what you have, what you owe, and what benefits you are receiving: medical records, additional compensation for you and your spouse, and statements from banks, mortgage companies, credit unions, credit card companies, other lenders, brokerage firms, or mutual funds.
Then build a budget. After you put together smart steps on managing the monthly Social Security Check, you will be in a better place to know if you can afford paying for long-term care expenses.
*This information is not intended or designed as tax advice. Consult with a tax attorney or a financial expert.
Carol Marak is a contributor for the senior living and health care market. She advocates for older adults and family caregivers by writing on tough topics like chronic issues, senior care and housing. Her work is found on AssistedLivingFacilities.org and HomeHealthcareAgencies.com. Find Carol on LinkedIn and contact her at Carebuzz@gmail.com.
