After a lifetime of work, many older Americans have built up a substantial sum in assets. At the same time, they’re unlikely to accumulate much additional wealth. For that reason, protecting the assets they already have becomes especially important.
- Some retirement accounts are protected from creditors, while others are more vulnerable.
- Older people who still have mortgages on their homes can risk losing them through foreclosure if they miss multiple payments.
- Having adequate homeowners and liability coverage can help protect an older person’s home and other assets.
- To become eligible for Medicaid, older people often have to spend down most of their assets.
The Big Picture
Once they reach a certain age, people tend to have their wealth spread across a variety of assets. They may have retirement accounts, like IRAs or pensions, as well as money in non-retirement accounts. They may own a home or other real estate and have valuable possessions, such as art, antiques, or collectibles.
All of these assets can benefit from some sort of protection—against lawsuits, foreclosures, and sometimes the people themselves. This article discusses the two most significant assets many older people have—their finances and their homes—along with some ways to protect them.
Retirement accounts. Many older people have the bulk of their wealth in retirement accounts. That is a good thing from a safety standpoint. Assets held in retirement accounts are protected from creditors in many cases, although the rules vary according to the type of plan.1 Generally speaking, money that’s still in an employer plan, such as a 401(k), is off-limits to most creditors, while money controlled by the individual, such as an individual retirement account (IRA), has fewer protections. However, the rules differ from state to state, with some states shielding IRAs from most creditors as well.
Other kinds of accounts. Money that’s kept in non-retirement accounts, such as regular brokerage and bank accounts, is more vulnerable. If an older person is sued, for example, that money could be at risk. One way to provide some protection is to make sure that they are adequately insured. This means checking that any automobile and homeowners policies that they have carry an adequate amount of liability coverage.
An easy and relatively inexpensive option is to add an umbrella policy to provide additional liability coverage of $1 million or more. By bundling automobile and homeowners policies with the same insurer and adding an umbrella policy from that insurer, you can coordinate the coverage provided by all three policies.
Qualifying for Medicaid. Sometimes confused with Medicare, Medicaid is the joint federal and state health insurance program for low-income individuals, including older people.2 Unlike Medicare, Medicaid helps pay for most custodial care, which many people will need toward the end of their lives. Custodial care refers to help with everyday activities, such as bathing and dressing, in contrast to medical care, which Medicare does cover to some extent.3,4
The catch is that to qualify for Medicaid, beneficiaries must meet both income and asset requirements. That often means having to spend down their assets to a relatively low level. Certain assets (such as a portion of home equity and one car) are exempt, but others, including most bank and investment accounts, are considered “countable.” While the limits vary from state to state, in most states, a single individual must have no more than $2,000 in countable assets and married couples can retain $3,000.5
Given the high cost of nursing home care, people without a lot of assets may become eligible relatively quickly, at which point Medicaid takes over. Seniors with significantly more assets, or who hope to preserve an estate for their heirs, may want to consult a knowledgeable elder-law attorney, who can explain some more sophisticated strategies, including asset protection trusts.
WARNING: Long-term care insurance can help cover nursing home bills and other expenses, but it’s costly, and many older people with preexisting conditions are already uninsurable.6
Long-term care insurance. For people who are unlikely to qualify for Medicaid or who don’t want to deplete their assets to become eligible, buying long-term care insurance is another option. A comprehensive long-term care policy will cover many of the costs associated with in-home and nursing home care. However, by the time older people are truly older, they may be uninsurable due to preexisting conditions, such as using a walker or needing help with the activities of daily living.7 In the 2022 Milliman Long Term Care Insurance Survey, the actuarial and consulting firm reported that 47.2% of people ages 70 to 74—and 38.2% ages 65 to 69—were declined or deferred when applying for long-term care insurance.8
While those statistics may argue for buying a policy earlier in life, that is also a gamble. People who buy policies in their 50s, for example, face years of annual premiums, which could become unaffordable by the time they need the insurance—if, indeed, they ever do.
Financial scams. Another threat to older people’s wealth is, of course, scams. Scam artists like to prey on them because that’s where the money is—and age-related cognitive decline can be a factor as well. To help your loved ones avoid financial scams, it’s worth having an occasional conversation about the topic, if you’re comfortable doing that. This is obviously a touchy subject; some people will consider it patronizing and intrusive. Even if they discover that they’ve been taken advantage of, older people will often try to hide the fact out of embarrassment. If you believe that someone you care about is especially vulnerable to financial fraud, a lawyer can walk you through your legal options, such as obtaining a power of attorney.
IMPORTANT: If an older person hasn’t checked the coverage limits on their homeowners insurance in a while, now would be a good time to review them and make sure that they’re high enough to cover today’s repair and rebuilding costs.
Especially if they’ve lived in it for a long time, a home may be an older person’s largest single asset. As such, it deserves special protection.
Ensuring insurance. As mentioned above, making sure an older person has sufficient liability coverage in the event of an accident at their home, or involving their car, is one crucial line of defense. An adequate homeowners policy will also protect them against unmanageable home repair costs in case of a fire or other covered calamity. If a homeowner hasn’t checked the coverage limits on their policy in recent years, now would be a good time to do so.
Factoring in mortgage debt. Paying off the mortgage before retirement was once a common goal for Americans. But many people today reach retirement age with years to go on their loans. The danger is that if a financial emergency strikes—such as a big, unexpected medical bill—they may fall behind in their mortgage payments and run the risk of foreclosure. In a foreclosure, the lender can seize the property and sell it. So, if an older person has a lot of mortgage debt and few other assets to draw on in an emergency, it could make sense to pay off the mortgage as soon as possible—or downsize to a less expensive home without a mortgage.
If someone periodically misses mortgage payments out of forgetfulness, setting up automatic bill paying through their bank could be an easy fix. That’s true for other regular bills as well.
The reverse mortgage option—and risks. Often advertised on late-night TV, reverse mortgages are pitched as a way for people ages 62 and older to draw on the equity they’ve accumulated in their homes without having to pack up and move out. Mortgagees receive monthly income or a lump sum, and the lender gets its money back, with interest, by selling the home after the owner leaves it permanently.9
While a reverse mortgage lender can’t foreclose due to missed payments (because there aren’t any), the homeowner is required to keep the home in good repair and to pay the property taxes. If those bills become too burdensome, there’s a risk that the owner could lose their home. And when they die, a surviving spouse could lose the home if care wasn’t taken to protect their rights.10,11 For that reason, among others, reverse mortgages shouldn’t be entered into without a careful analysis. Scam artists have also discovered the reverse mortgage—another reason to move carefully when considering one.
Medicaid estate recovery. In general, a person can keep their home while receiving Medicaid benefits, but after they die, Medicaid may attempt to recover a portion of what it paid for their care. Typically, however, their spouse (if they have one) can remain in the home until their own death. These rules, like many involving Medicaid, can vary from state to state.12 You can learn more about a particular state’s program at its Medicaid website or through the federal Benefits.gov website.
Why is it good to have much of your wealth in retirement accounts?
These assets are protected from lawsuits, in many cases. Note that 401(k) assets have more protections than individual retirement accounts (IRAs). The rules differ depending on the state where you live.
How long can an older person not live in their home and still keep their reverse mortgage?
If they stop living in their home for 12 consecutive months, the reverse mortgage comes due. Be aware of these rules if a medical condition means that the homeowner has to go into a rehabilitation facility or nursing home for a period of time.
What should someone do if they think they’ve been scammed?
They should listen to their suspicions, gather evidence, and report it to the authorities, if someone thinks a scam happened. The U.S. Department of Justice’s Office for Victims of Crime has a special National Elder Fraud Hotline, (833) 372-8311, to report abuses and scams.13
The Bottom Line
Ideally, a person’s later years should be a time to enjoy life, not to worry unduly over financial matters. By being aware of these potential dangers and taking smart steps now to avoid them, you can help the older people in your life—or yourself—keep crucial assets safe and sound.
This article was originally published in Investopedia on February 7, 2023, and written by Greg Daugherty.
2. Image courtesy of iStock
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1. U.S. Department of Labor, Employee Benefits Security Administration. “FAQs About Retirement Plans and ERISA,” Page 13.
2. Medicaid.gov. “Medicaid Eligibility.”
3. Medicaid.gov. “Institutional Long Term Care.”
4. Medicare.gov. “Nursing Home Care.”
5. U.S. Administration for Community Living. “Medicaid Eligibility,” select “Financial Requirements—Assets.”
6. National Association of Insurance Commissioners. “A Shopper’s Guide to Long-Term Care Insurance,” Pages 1 and 19 (Pages 6 and 24 of PDF).
7. National Association of Insurance Commissioners. “A Shopper’s Guide to Long-Term Care Insurance,” Pages 4 and 19 (Pages 9 and 24 of PDF).
8. Broker World. “2022 Milliman Long Term Care Insurance Survey: Table 30.”
9. Consumer Financial Protection Bureau. “Reverse Mortgages: A Discussion Guide,” download PDF.
10. Consumer Financial Protection Bureau. “When Do I Have to Pay Back a Reverse Mortgage Loan?”
11. Consumer Financial Protection Bureau. “You Have a Reverse Mortgage: Know Your Rights and Responsibilities,” download PDF, Pages 13–14 (Pages 15–16 of PDF).
12. Medicaid.gov. “Estate Recovery.”
13. U.S. Department of Justice, Office of Justice Programs, Office for Victims of Crime. “National Elder Fraud Hotline.”
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