One day last week, there was a knock on my front door. I answered to my neighbors Sally and Chuck who were looking sort of sheepish. They asked if I would settle a long running discussion for them.
Sally has been proposing that they learn about long-term care insurance. She is 53 and Chuck is 54. It is time, she feels. Chuck varies between being disinterested and totally negative. He felt his health would never change and thus he did not need a way to pay for care. I inquired what his plan is if on a long shot one day he needed care. He told me he would self-insure.
And so, our discussion began. We spoke of what is important to each of them, their health, their assets and their job futures. We looked at ways to pay for care, should either ever need some. The consensus was that their 401 K plans would be the best.
Sally and Chuck settled their differences themselves. Sally decided she would pursue a long-term care plan for herself and Chuck held his position to self-insure. Before they left I asked Chuck if he would like to learn a little bit about taxes. "Oh sure," he said.
We acknowledged that the 401K funds had not been taxed and that the tax was due when the funds are withdrawn. If the unexpected happened and Chuck needs care next week, he would have to pay tax on all the money taken from the 401K. It goes like this. To have $1000 to pay for care, Chuck would need to withdraw $1200 at the 20% tax bracket. There is more. Chuck is younger than 59 ½ which means he would pay a 10% penalty. This brings the withdrawal for every $1000 needed to $1320. Chuck had not thought about taxes.
I reminded him that his retirement plan was no longer a savings plan, but a spending plan at age 54. When he would recover, he could begin saving again. However, the amount of interest he earned each month would be significantly less because the balance that was invested was $45,500 lower than before. Hypothetically, Chuck had incurred $35,000 in care cost plus taxes and penalty his total cost was $45,500. Now he had a loss of opportunity cost which means he cannot earn interest on the money he had withdrawn.
Chuck was quiet. He thanked me for the lesson in taxes and wanted to know if they could come back again to learn how long-term care insurance could protect their retirement accounts.
Give me a call with any questions that you have about your own planning or for a loved one.
I invite you to share this article with your family and friends.
Watch for my article in the Fall issue of Westchester Senior Voice.
Peace and Good Health