Money Matters

It can be hard to separate financial issues from all the other issues associated with looking after your aging parents.
Where your parents will reside, who will look after them and so forth are all issues with a financial dimension--that is, how much will it cost?  But figuring out how to fund those costs can be considered separately. 


Reverse Mortgages

Reverse mortgages are an increasingly popular source of cash for the elderly these days.  Ordinarily when a person buys a home these days, they borrow some part of the purchase price in the form of a mortgage and then make monthly payments to pay the interest and gradually pay off the principal.  As time goes by they reduce the amount of the loan, and if they are lucky, the value of the house increases, so they build up a fair amount of equity--the difference between what the house is worth and what they owe the bank.   That equity represents value and a potential source of cash.  One way to access that cash is to sell the home, take the proceeds, pay off the loan and keep the balance.  But that approach has several downsides.  First, it leaves you homeless!  Second, selling a house is expensive with transfer taxes and real estate commissions.

And moving and buying a new place, even if it's a lot smaller, is also a headache.  So some years ago bankers figured out that instead of collecting mortgage payments every month, they could advance homeowners money, increasing the mortgage balance, and use the equity in the house as collateral to make sure they eventually got paid back.  The process reverses the conventional monthly flow of cash, hence the name "reverse mortgage."

That's the theory.  Here are some practical details.  The federal government--HUD and FHA--provide some guarantees and have decreed that borrowers must be at least 62 years old.   The banker-lenders want collateral to back the loan so you need to start off owing no more than 60% of the value of your house on your current mortgage.  When you close on your reverse mortgage, you will pay off your current mortgage and the new reverse mortgage will replace it.  As the months go by the percent of the equity you own in the home will shrink.  As long as you live in the home, you will not be required to pay off the mortgage.  Because the program is backed by HUD/FHA, you will never owe more than the value of the house--the lenders use mortality tables to calculate your life expectancy (and therefore the number of monthly payments you can expect to receive), and after including in interest costs, divide that into the equity in the home to determine the amount of the monthly payment.  If you outlive your life expectancy, the government picks up the tab.  If you die prematurely and there is still equity in the home, your heirs inherit the house and get the equity. If you decide to sell the house and move into an assisted living facility, nursing home, or whatever, the mortgage gets paid off at the time of the sale, just like any mortgage.

Some other points: the monthly payments are not taxable (you are borrowing the money not earning it).  The interest rate you are charged on the money borrowed is noticeably lower than the interest rate of a typical conventional mortgage (because of the government's role and because you buy mortgage insurance at the time of the closing of the loan).  You can use the money for any purpose.  According to an survey conducted by AARP and HUD, here is how payments have been used:

Arguments against a reverse mortgage: no matter how you cut it, a reverse mortgage eats into a parent's assets and reduces the size of their estate.  In a very real sense then it is the next generation that is taking the financial hit.  Rather than accumulate a big loan balance with a lot of compounded interest expense some baby boomer children of aging parents elect to pay the expenses of their parents out of their pocket. 



Medicaid

There is a lot of confusion among baby boomers about Medicaid.  Many think it  provides benefits like home health care which it does not cover.  Medicaid is a joint federal-state program that provides health insurance coverage to certain categories of low-income individuals, including children, pregnant women, parents of eligible children, seniors and people with disabilities. Medicaid was created to help low-income individuals who fall into one of these eligibility categories "pay for some or all of their medical bills."  Medicaid helps eligible individuals that have no medical insurance or poor health insurance. While the federal government set out the main rules under which Medicaid operates, each state runs its own program. As a result, the eligibility rules differ significantly from state to state, although all states must follow the same basic framework.

Each state operates its own Medicaid system, but this system must conform to federal guidelines in order for the state to receive matching funds and grants. The federal matching formula is different from state to state, depending on each state's poverty level. The wealthiest states only receive a federal match of 50% while poorer states receive a larger match.

Medicaid planners typically advise retirees and other individuals facing high nursing home costs to adopt strategies that will protect their financial assets in the event of nursing home admission. State Medicaid programs do not consider the value of one's home in calculating eligibility, therefore it is often recommended that retirees pursue home ownership. By adopting the recommended strategies, many seniors hope they will quickly qualify for Medicaid benefits if the need for long-term care arises.



Social Security and Medicare

Most of America's elderly receive social security benefits and there is a lot more about it in a separate section of the BBRC website.  But a couple of specific points are in order.  If both your mother and father are alive, and they are receiving a monthly payment because your father worked and contributed to social security, for planning purposes it is important to know what will happen if he dies leaving your mother a widow.  She will continue to receive benefits as a surviving spouse but the amounts will be less than when both were alive.  To find out what that amount is a visit to your local social security office is in order where they can look up your account and give you the numbers.  The news may not be good but it is useful to know ahead of time and plan accordingly.