Planning Financially for a Move to a CCRC
Category News & Blog | Time | Published September 29, 2021
Every so often I get asked about financial guidance on moving to a continuing care retirement community (CCRC or “life plan community”). Although I no longer provide one-on-one financial planning advice as in my previous career, I thought it might be helpful to write a post with some key considerations when planning financially for a move to a CCRC.
I’ll start by saying that this post should not be viewed as personal financial advice. You should review your unique circumstances and financial situation with an experienced financial advisor who also is well-versed in senior living options, especially as it relates to the options and nuances of CCRCs. If your advisor is not knowledgeable about CCRCs and related topics, they can learn a lot here.
Change in Month-to-Month Expenses?
Your income needs are the key driver of a retirement financial plan. So, one of the first places to start is determining your approximate monthly budget before and after your potential move to a CCRC.
If you don’t already have a clear picture of your average monthly discretionary and non-discretionary expenses at home, you’ll want to sit down and begin figuring this out. Don’t forget to account for unexpected home expenses that pop up throughout the year, often associated with home maintenance and repairs, such as a new roof, HVAC repair or replacement, siding, etc. Even though these are usually one-time costs, try to break them down to a monthly average for the sake of this exercise.
Next, assuming you’ve already narrowed down your choice of a CCRC and you know the monthly cost for the residence in which you are interested, you’ll want to compare your monthly expenditures in your current home to the monthly cost of living in the retirement community.
Be sure you also know what is included in the monthly fee at the retirement community and what costs extra. Since a lot of what you pay for at home today will either go away or be included in your monthly fee at the retirement community, you may find the difference isn’t as much as you first anticipated.
Adjustments to Your Income Strategy
After going through the above exercise, if you find that your monthly expenses will increase after moving to a retirement community, then you will need to determine whether you can afford the increase and, if so, the best and most tax-efficient way to generate the necessary income.
Some retirees and their advisors like to use a bucket strategy, meaning there is one fully liquid and safe bucket (account) with enough money to cover cash needs for one to two years. Then there is another bucket for the mid-term (5-10 years) and yet another for longer-term (10 years+). Each buckets may have more than one type of account, especially if you own tax-deferred accounts, such as IRAs, and also regular, taxable accounts. Funds in the last bucket can be invested a little more aggressively since it has a longer timeframe, but it usually shouldn’t hold more than about 50 percent of the total. Note: Some people may combine buckets two and three, but others prefer the organization that comes with having them distinctly separate.
The the concept is to refill the short-term bucket every year or two from the other buckets. The one you choose to draw from each time will depend on market conditions, tax rates per the type of account/financial vehicle, and growth or loss in those accounts.
You may wonder if having a long-term bucket is still appropriate for those moving to a CCRC since nationally the average age at move-in is around 80. CCRC residents are typically healthier overall compared to their peers so it is still entirely reasonable to plan for 10+ years. Furthermore, planning for a longer lifetime is a better way to help ensure your money will last.
No matter the type of retirement community, a CCRC or any other type of senior living community, there is a good chance that your monthly fee will increase over time. It’s probably wise to plan on about 3% per year, even though it could be less or more in any given year. Again, this is where you may need to services of a qualified financial professional.
As you consider your increased budget needs, it will be important to determine if you can pull enough money from the other buckets into the short-term bucket every couple of years without jeopardizing your long-term financial security. A quick back-of-the-napkin way to do this is to determine your anticipated average annual withdrawal rate from buckets two and three combined.
For example, after factoring in what you already receive from social security and/or your pension, suppose you determine that you need to hold another $100,000 in your short-term account to cover two years of expense ($50,000 per year). Although there is a fair amount of debate over withdrawal rates, a general rule of thumb is that a withdrawal rate of 3-4 percent is typically acceptable.
So, if we divide $50,000 by .04 (i.e., 4 percent), that comes to approximately $1.4 million dollars. Therefore, in this example, if you have $1.4 million combined in buckets two and three then you will know you are at least in the ballpark.
This is a simplified analysis, and there are other factors that you and your financial professionals will need to consider, including the inflationary increases I mentioned earlier. If you own annuities that generate a guaranteed amount of income per year, or if you utilize a bond-laddering strategy for income, then your advisor can also help you figure out how that fits into the picture.
Allowable Tax Deductions
As you are planning financially for a move to a CCRC, you should also take time to learn whether tax deductions are available for any portion of the entry fee and monthly fee. This can make a difference in your planning as deductions may be as high as 30% or more in some cases. Learn more about CCRC tax deductions here.
Using Proceeds from the Sale of Your Home
If you currently live in your own home and are moving to a CCRC, it’s likely you are planning to sell your home. (There has rarely if ever been a better market for selling a home than this one!) As you consider how best to increase the funds in your short-term cash accounts, you’ll want to determine if there will be excess proceeds from this sale beyond the amount of the CCRC entry fee.
Using the same example from above, if your net proceeds from the sale of your home were to exceed the entry fee by, lets’ say, $100,000, then you could fund bucket number one purely from these proceeds, thereby delaying the need for you to tap into your funds in buckets two and three. On the flip side, if your home proceeds do not cover the entry fee, then you’ll need to consider whether you can afford to pull the difference out of your accounts and the most tax efficient way to do so.
Sometimes we get asked about timing between selling a home and moving into a retirement community, especially if an entry fee is required by the retirement community. There are some short-term funding options available for this type of scenario, such as those available from my friends at Second Act Financial Services.
Factoring in the Cost of Long-Term Care
There is one important possibility to consider, which if not planned for, has the potential to derail everything else and that is the potentially exorbitant cost of long-term care. This type of care could easily hit $10,000 per month and even higher if advanced care is required.
Keep in mind that Medicare does not cover long-term care costs. It only covers medically necessary nursing care for a short period of time, and only if certain requirements are met. Medicare does not currently pay anything for non-medical care, such as assistance with bathing or dressing.
People pay the cost of long-term care in the following ways, often in combination:
- Self-insure (having enough in savings and investments to cover the cost)
- Home equity (either selling the home or accessing the equity through a reverse mortgage or HELOC)
- Long-term care insurance
- VA benefits (may not cover all the cost)
- Lifecare contract at a CCRC
A lifecare contract offered by a CCRC functions very much like an unlimited long-term care policy. Although there can be differences in how lifecare contracts work, the defining characteristic of a true lifecare contract is that the resident will continue to pay the same monthly service fee no matter whether they are living independently or receiving care services, typically including assisted living, memory care, and skilled nursing. This does not mean there won’t be inflationary increases or other ancillary cost, but monthly service fee does not increase for care services.
The reason this is important to understand is because even if it costs more per month to live in the CCRC, you could more than make up for it later if you require long-term care and have a lifecare contract, especially if you need it for longer than average.
Lifecare is not the only option available in CCRCs. Other contract options could make sense too, depending on your situation, particularly if you own a good long-term care insurance policy.
Analyzing the Benefit of a Refundable Entry Fee
So, what about that entry fee that you paid? What happens to that money? Well, in theory, the entry fee should keep the monthly fees lower than what they otherwise would be on an apples-to-apples basis. But beyond this, many CCRCs offer refundable entry fees, which can range up to 90 percent or even 100 percent refundable if you move out or at your death.
A refundable entry fee is typically higher than a traditional entry fee contract for the same residence. Therefore, if leaving an inheritance to your adult children is important, you’ll need to work with an advisor who can do accurate scenario comparisons to determine if a refundable entry fee is the best option.
Regarding entry fee refunds, you need to have a high-level of confidence in the CCRCs financial management and ability to pay the refund, and understand the contract stipulations related to the refund.
Planning is Key
A CCRC is a senior living option that provides residents with peace of mind, knowing they will have access to a continuum of care services should they ever need them. But there also are important financial considerations that go along with a CCRC move.
If you are considering a CCRC, I recommend you:
- Determine your current monthly budget, including discretionary and non-discretionary expenses.
- Compare your monthly expenditures in your current home to the monthly cost of living in the retirement community, ensuring you understand exactly what is and is not included in the CCRC’s fees.
- Talk with your financial advisor about the best and most tax-efficient way to generate any necessary income with “buckets” for both the short-, intermediate-, and long-term.
- Consider any potential tax-deductions you may qualify for related to CCRC entry fees and/or monthly fees.
- Determine how much you can expect to generate from the sale of your current home, if applicable.
- Talk with your financial advisor about your plans for covering the cost of long-term care, whether a lifecare contract could be beneficial, and whether refundable entry fee makes financial sense.
By Brad Breeding
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