Source: Sherman Publications

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Raymond James A column by James Kruzan
Can you afford to live on that?

October 27, 2010

Recent studies suggest that about 40 percent of all people who reach 65 will spend some time in a nursing home.

One in four will spend more than a year in a nursing home. One in 10 will require nursing home care for five years or more. Those same studies put the national average cost for a year of nursing home care at about $79,935 and this number can run higher in major metropolitan areas!

Can you afford nursing home care? Take this test and see.

First, add up all your annual sources of income from pensions, social security and the like. If you are married, add both spouses' income. To that figure add all investment income from interest, dividends, rents, etc. From your total income, subtract the annual cost of a year in a nursing home in your area.

If the difference between your income and the cost of a nursing home is a negative number, you've got a real problem.

Principal will be required to pay both the nursing home and to pay the living expenses for the spouse still at home.

If the number is positive, ask yourself this question: "Can I live on that?"

If you must spend principal, how long will your assets last? Remember if you consume principal this year to pay the nursing home, there will be less to invest to produce income next year.

If there is less to invest, your investment income will probably go down. If your investment income decreases, you'll probably need to consume more principal next year to meet costs.

This is the start of an accelerating downward spiral.

Nursing home costs have to be paid. Either you or someone else must pay them.

There are only three possible sources of funds other than you; your family, the government or an insurance company. Could your family afford to shoulder the burden of your nursing home costs? Even if they are able and willing, would you ask them for help?

Contrary to popular belief, there is a national government program to provide funding for nursing home expenses. It's called Medicaid.

Medicaid is a welfare program for the poor. In order to qualify for long term care under Medicaid, you either must be poor or become poor. Medicaid should be a last resort.

The best way to manage the risk of an extended nursing home confinement is through insurance.

Not only will you have coverage, but you'll also have choices about where you receive care. These choices can help preserve your independence and dignity.

Purchasing a cost effective policy requires careful planning and investigation.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances.

Before implementing any significant tax or financial planning strategy, contact your financial planner.

James B. Kruzan, CFP, is a Registered Principal and Branch Manager for Raymond James Financial Services, Inc., Fenton and Clarkston.