Credit Card Strategies for Retirees

One of the essential tasks of a financial advisor is to help prepare an adult for their individual path to retirement.

The most important part of this preparation is creating a budget that will enable them to enjoy the fruits of their retirement, while staying within the boundaries of their regular income (pensions, Social Security) and investment income (non-qualified assets and IRA distributions).

Debt is a key component to take into account in successful retirement planning. One of the most common financial mistakes that retirees make is racking up too much credit card debt. When we review expenses for retirement, the first item we focus on is a person's debt; in particular, their credit card debt.

We analyze what is being purchased with credit cards. Are they necessary items or discretionary items?

3 sure-fire ways to avoid credit card debt

We recommend three tips to avoid credit card debt as you get older:

1. Pay your credit card balance in full every month. Credit cards should be considered a convenience. You should never have to incur high interest charges for carrying an unnecessary credit card balance. Aim to have your credit card usage reflect the amount of money that you already have in your budget and your checking account.
2. Do not use your savings ("nest egg") to pay off your monthly balance. Your savings represents a valuable source of funding for your future goals; it should not be used for paying down excessive living expenses.Keep track of the expenses incurred on your credit card.You do not want to be forced to liquidate any assets at an inopportune time to pay off this debt.
3. Don't forget about debit cards. If you really need the convenience of charging a purchase to a credit card, one way to control your expenses is to use a debit card instead. Each month, set aside a certain amount of money to put on your debit card. Because with a debit card, you can't spend what you don't have, this strategy helps keep your debt "in check."

Elder-friendly credit card options

When researching credit card options, it's recommended that you consider the following factors:

1. The interest rate being charged by the credit card company: This is an especially key point for those individuals who carry a balance every month.High interest rates can really put a pinch on your monthly budget, particularly if you will be living on a fixed income.
2. Late fee charges: Oftentimes, paying your credit card bill late can raise your annual percentage rate (APR)—the interest rate that the credit card company tacks on to your credit card balance. Make sure you know how much you will be penalized if you don't pay in a timely fashion.
3. Foreign transaction fees: If you plan on traveling oversees, foreign transaction fees can increase the cost of the items you purchase, over and above the difference in exchange rate in the country you're visiting.
4. Annual fees: Larger banks (for example Chase Freedom, Bank Americard Cash Rewards, Capital One Cash Rewards and Citi Simplicity Card) usually offer credit cards with no annual fees.
5. Rewards options: American Express or Discover typically tack on rewards options to their credit card offerings. With American Express, you can choose to receive points that can be used towards travel (to see the grandkids!) Discover has a five percent cash back feature that changes each quarter for different purchase categories. For example, you may get cash back on gas purchases made in July and cash back on restaurant purchases made in January.
6. Compare credit card features online: Some useful websites for comparing credit card features are: www.CreditCards.Com, www.bankrate.com and www.CompareCards.com.
7. Be wary of gimmicks: Credit card companies may offer uncharacteristically low fees initially, as an incentive to get you to apply. However, these starter rates usually disappear within a certain time frame and you can be hit with larger fees, penalties and interest rates.

It may help to prepare an expense sheet every year that includes income from your pension, social security and qualified distribution income.This small exercise can help you live within your income and budget and "keep you on track!"

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"Spending Down" to Medicaid: One Caregiver's Personal Journey

My uncle called me one day and said "Your aunt just got lost again and I can't take it anymore." Thus began my experience with the complexity of Medicaid (Title 19 of the federal Social Security Act), designed to provide medical assistance to those individuals who have minimal assets and inadequate income of their own. Some people have too much income and/or assets to qualify, so they must "spend down" or use up their own money to reach the eligibility levels.

Although I had been a financial planner and advisor for years, I had not come in contact with the Medicaid program personally or through clients, just through reading and seminars. I had learned that planning before acting is VERY important and that eligibility requirements vary by state. Those who specialize in this area, elder law attorneys, medical social workers, and state-employed case workers are your greatest resource to avoid delays and avoid creating periods of ineligibility requiring re-certification. They can keep you from running afoul of the more stringent divestiture rules, including a five-year look-back at transfers/gifts of assets, contained in the Deficit Reduction Act of 2005 passed by congress.

So uncle and I met with an elder law attorney to help map out a game plan. Self reliance and frugality (depression-era traits) had allowed uncle and auntie to save a little nest egg, but it wasn't going to last long at the cost of the care she required…and what about him? The attorney reviewed both the asset and income Medicaid requirements for our state.

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Managing Your Elderly Parent's Assets to Qualify for Medicaid

Asset TestAuntie, or any applicant, could not retain more than $2,000 in liquid assets, plus these exempt assets:

• The home: if the single applicant intends to return or if a spouse or disabled child live there (time limits may apply)
• Furnishings, personal belongings
• Car
• Pre-paid burial assets
• $1,500 face value life insurance

To prevent spousal impoverishment, Medicaid would allow uncle, the community spouse living outside a nursing facility, to retain the exempt assets plus:

• His own retirement accounts
• Community spouse resource allowance -- 50% of the "countable" other assets which for them included some CDs and mutual funds. There are minimums and maximums to contend with that can change yearly but are determined for each couple by asset values on the date of admission. Community/marital property laws are disregarded.

Asset Spend Down
Like many others, auntie would have to "spend down" her share of the countable assets. They had saved for a rainy day and it was pouring! In her case, we estimated that it would take less than a year and we were right! Eight months later she hit $1990. We had pre-paid her burial expenses and also had to cancel a life insurance policy with a face value of $5,000 and decrease coverage on another to the $1,500 limit.

Since Medicaid looks at the income needs of the community spouse, he was allowed to keep a "minimum monthly maintenance needs allowance" which was more than 50% of their monthly income. Uncle later sold the home and used the proceeds to move into a Continuing Care Complex.

Income Spend Down for Medically Needy
Some people might qualify from an asset standpoint but have too much income. There are benefits available for persons who reside in care facilities as well as those who do not.

The latter have monthly income that exceeds the income limits, but whose "excess" income is consumed by medical or remedial expenses. These individuals must "spend down" that excess income on medical bills to qualify for Medicaid. It is a similar concept to a deductible. For example if income is $250 over the limit, once that amount in medical bills is accumulated, Medicaid pays the rest.

That is the situation that my uncle found himself in several years later, having depleted most of his assets. We never did sell his old beater car though – he kept saying he was going to drive again. He never did, but it meant a lot to him to have a goal.

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Spending Down to Medicaid Doesn’t Have to Impoverish Both Spouses

One of the biggest worries of a married couple where one spouse needs to go into a nursing home is that the spouse who is still at home will become impoverished in order to pay their partner’s bills.

While it is true that the nursing home spouse may not have more than $2,000 in countable assets in order to receive Medicaid benefits, federal law permits the so-called “Community Spouse” to retain up to $115,920 in countable assets (cash, stocks, bonds, real estate in addition to the home, etc.). (Discover which Assets You Can Have to Still Qualify for Medicaid.)

 

In most states the Community Spouse may only protect 50 percent of the total countable assets of both spouses, up to $115,920. In other words, all countable assets—no matter whether titled in the husband’s name, wife’s name, or jointly—are totaled up and then divided by two.

 

The Community Spouse is then permitted to keep one-half of the total, up to $115,920. The other half—minus the $2,000 exemption allowed the nursing home spouse—must be “spent down” or otherwise disposed of, or converted to something that is non-countable.

 

The ’50 percent rule’in action

For example, consider a couple with a house, car, personal property in and around the house, jewelry, cash in the bank, and maybe an IRA or 401(k).

 

First of all, the house will be exempt no matter its value, as long as the Community Spouse is living there. One car of any value is also exempt, as is all personal property and jewelry. However, the cash and retirement accounts are countable (although there are a few states that exempt an individual’s retirement accounts once they are paying out the minimum amount required under federal tax laws). If that cash and the retirement assets total, say, $200,000, then the Community Spouse can protect only $100,000 (50 percent). If it totaled $300,000, though, the Community Spouse can protect the full $115,920, even though that is less than 50 percent of $300,000.

 

Exceptions to the rule

For couples who have very few assets, the “50 percent rule” will allow the Community Spouse to protect the first $23,184, even if that’s more than 50 percent of the couple’s total assets.

 

Some states do not follow the above “50 percent rule.” These states simply allow the Community Spouse to retain the first $115,920, even if that is more than half of the total assets of the couple.

Currently, these states are AK, CA, CO, FL, GA, HI, IL, LA, ME, MA, MI, VT, and WY (SC reduces the maximum to $66,480).

 

Once the protected amount is determined, the real work begins: how can you protect the extra assets so they are not merely spent down on the monthly nursing home bill?

 

This is what is known today as “Medicaid planning,” and it can get quite complicated. There are many options to protect the excess assets, such as investing in exempt real estate, purchasing a “Medicaid annuity,” using Medicaid's "Cash and Counseling" program to hire a family member for caregiver services, transferring money to a disabled child, using specialized trusts, etc.

 

Be aware that spending down to Medicaid is tricky. You cannot simply give excess assets to a child (unless they are considered disabled under federal law) or another family member without incurring a penalty period of disqualification from Medicaid coverage: the greater the gift, the longer the penalty period. The exact calculation varies from state to state, but all gifts made within the five-year period before the date you apply for Medicaid will count against you.

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