How to pay for assisted living
Almost nobody pays for assisted living with one source of money. They work through a sequence, and the sequence matters, because spending the wrong asset first can cost you eligibility later.
Assisted living averages $5,830 a month nationally, or about $69,960 a year. Across a median stay of 22 months, that is roughly $128,260 of spending — which is why the order in which you draw down money decides whether it lasts.
1. Monthly income first
Social Security, a pension, an annuity, and any rental income form the base layer. This money keeps arriving whether or not you spend savings, so it is always spent first. For most single retirees that income covers a meaningful share of the bill but not all of it; the shortfall is the number that actually has to be solved. The calculator computes exactly that gap.
2. Savings and investments
Cash, brokerage accounts, and retirement accounts come next. Two cautions. Withdrawals from a traditional IRA or 401(k) are taxable income, and income counts against Medicaid eligibility, so a large withdrawal in the wrong year can disqualify an applicant. And selling appreciated assets creates capital gains. Sequence withdrawals deliberately, with a tax preparer or financial planner.
3. Long-term care insurance
If a policy exists, read four things before assuming it will pay: the daily or monthly benefit, the benefit period (in years or dollars), the elimination period (how many days you pay before benefits start), and whether it is reimbursement (pays actual bills) or indemnity (pays a cash amount). Reimbursement policies typically require an invoice; indemnity policies pay the stated amount regardless. Many policies bought before 2005 exclude assisted living entirely, and most require the insured to be unable to perform two or more activities of daily living (bathing, dressing, eating, toileting, transferring, continence).
4. Veterans benefits
Wartime veterans, and in many cases surviving spouses, may qualify for VA Aid and Attendance, a monthly pension supplement paid to those who need help with daily activities. It is needs-based: VA looks at income and net worth, and the current benefit rates are published by VA. In-home care is also available through VA programs for eligible veterans. Apply through a VA regional office or an accredited representative — never pay a private company to "file" for VA benefits, which is prohibited.
5. Home equity
For many families the house is the largest asset, and it is usually exempt from Medicaid while a spouse still lives there. Options include selling and using the proceeds, a reverse mortgage if the owner is 62 or older and remains in the home, or renting it out for monthly income. Selling can have a large tax advantage: up to $250,000 of gain on a primary residence is excluded from tax for a single filer, or $500,000 for a married couple filing jointly.
6. Life insurance and annuities
Term policies can be converted to a life insurance settlement or surrendered for cash value. A life care benefit or accelerated death benefit rider lets the owner draw on a policy early to pay for care. Existing annuities create income; converting one to a Medicaid-compliant immediate annuity is sometimes used in spend-down planning, but only with professional advice.
7. Family contributions
Adult children frequently cover the gap. Do this in a way that respects the five-year lookback: money paid directly to a community for care is generally treated differently than money given to the applicant. Keep records, and do not gift assets to children in an attempt to qualify for Medicaid sooner.
8. Medicaid, after a spend-down
Medicaid is the largest payer of long-term care in the country, but it is means-tested. In most states a single applicant must fall at or below $2,982 of monthly income and $2,000 of countable assets. Assisted living is covered through home- and community-based services waivers in many states, with waiting lists and limits on how many people can be served. The spend-down rules matter enormously — read them before you liquidate anything.
The tax deduction most families miss
Assisted living costs can be partly deductible. If a resident is certified by a physician as chronically ill and receives care under a written plan of care, expenses for medical care and personal care qualify as medical expenses. Those are deductible to the extent they exceed 7.5% of adjusted gross income. For a resident paying $5,830 a month, a substantial share of the annual bill can fall above a typical retiree's threshold. Ask the community for an annual statement that breaks out care services.
Keep reading
Medicare vs. Medicaid · Assisted living vs. nursing home · Medicaid spend-down rules
How to pay for assisted living FAQ
Does Medicare pay for assisted living?
No. Medicare does not pay for assisted living rent, board, or personal care. It covers short-term skilled nursing and skilled home health after a qualifying hospital stay, up to 100 days.
What income level qualifies for Medicaid long-term care?
In most states a single applicant must have monthly income at or below $2,982, which is 300% of the federal SSI rate of $994 per month, and countable assets of no more than $2,000. Some states set different limits.
Can you deduct assisted living costs on your taxes?
Often, yes. If a resident is certified as chronically ill and receives care under a written plan of care, the portion of the cost attributable to medical and personal care can count as a deductible medical expense, which is deductible above 7.5% of adjusted gross income.