The ability to finance what could potentially be a twenty to thirty year retirement is a daunting task indeed. It will involve a great deal of planning and the ability to get the most out of all of your retirement assets. If the stock market holds up, interest rates return to historical averages, you maximize all of your pension options (including social security) and get control of your expenses then hopefully you can afford to retire comfortably. However what could derail all of this careful planning and send your retirement plan into a tailspin would be a severe health event to one or both spouses.
From a financial perspective, premature death is manageable with careful planning and sufficient life insurance. However, the more financially crippling health event could be the need for long term care services. If you had a severe health event (eg. heart attack, an accident or Alzheimer's) that you survived but now need care to assist with the activities of daily living (eg. feeding, bathing, dressing etc.), that can be enormously expensive. Whether you require care in a nursing home, assisted living or at home, the expenses could easily range from $6,000- $10,000 per month.
For most retirees, a protracted health event requiring long term care services could potentially wipe out their retirement savings. Then what? If you don't have private health insurance for long term care and your savings are wiped out then the only government program that will pay for long term care services is Medicaid. It's important to note that Medicare pays for medical expenses (eg. hospital, doctor visits etc.) but not for long term care expenses.
To qualify for Medicaid, however, your net worth has to be depleted to $2,000 or less. So, if a long term care event wipes out your savings down to $2,000 then Medicaid steps in. Or does it? Well it depends. Medicaid also has an income test. In my home state of New Jersey, if your monthly income in 2015 exceeds $2,199 you will not qualify for Medicaid even if you have assets worth less than $2,000.
Unfortunately and ironically, this "Medicaid gotcha" is often the result of receiving social security benefits. If your social security benefits alone, or in combination with other income sources, results in your monthly income exceeding $2,199 then, even though you may meet the $2,000 asset test for Medicaid, you will fail the income test to qualify for Medicaid benefits.
For example, let's say your monthly income is $3,000, your assets are worth $0 and a nursing home costs $8,000 per month. You meet the asset test of having assets less than $2,000 but your income is too high (above $2,199) to qualifying for Medicaid. Unfortunately, your $3,000 monthly income falls short of covering the $8,000 monthly nursing home cost. So now what?
Well, for New Jersey residents (and some other states) there's good news. As of December 1, 2014, New Jersey implemented a significant change to it's Medicaid program which effectively eliminated the income cap ($2,199 in 2015) for purposes of determining an applicant's eligibility for Medicaid. Basically, the way it works is any income you receive above the Medicaid income cap must be paid into a special trust called a Qualified Income Trust (QIT) or Miller Trust. By doing so you will now meet the Medicaid income test and Medicaid will pay for your long term care costs whether in a nursing home, assisted living or at home care. All the money that goes into the trust must be paid to the nursing home or assisted living facility etc. but at least the Medicaid recipient can now qualify for full Medicaid coverage to pay for long term care expenses.
Long term care benefits provided by Medicaid are truly invaluable, especially if you have a protracted long term care event (like Alzheimer's or dementia) in retirement, which is becoming all too prevalent these days. Knowing how to access all your eligible benefits in both the Medicaid and Social Security systems can make all the difference in providing for a comfortable retirement. At least now, the potential "collateral damage" caused by a healthy social security income payment will no longer disqualify someone from receiving Medicaid benefits.
Ash Ahluwalia, NSSA, CCSCA, MBA