Expert Interview with Terence M. O’Malley About financial principles of living in a retirement care community

As we prepare for life after retirement, we want to prepare for every contingency. This includes long-term healthcare, fixed rates, and a number of other factors to eliminate as many variables as possible in order to make sure you and your loved ones are well taken care of.

Terence O’Malley is an expert on a wide range of senior long-term planning, estate planning, elder law and financial issues. He took a moment to tell us about some of the particulars of continuing care retirement communities and how they differ from regular retirement communities, as well as delineateg some of the benefits.

Expert Senior Planning’s mission is to help seniors and their families understand the financial principles of living in a continuing care retirement community. What are a few of these financial principles, and why are they important?

The financial principles behind living at a continuing care retirement community (CCRC) are different than other senior living communities because of several factors:

  • The full spectrum of senior living is offered, from independent living to skilled nursing, memory care and hospice.
  • Residents can pre-purchase a long-term health care plan for life as part of their residency package.
  • “Life Care” at CCRCs are programs that minimize the risk of of paying exorbitant fees for long-term health care. These programs shift the risk of long-term health care to the CCRC by limiting exposure of residents.
  • There are tax benefits associated with residency at a CCRC.
  • Most CCRCs have refundable entrance fees as part of their care for life options.
  • No two CCRCs do it exactly alike; there are often contractual nuances unique to CCRCs.

On your website, you have a very useful list of questions for people to ask when considering a retirement community, such as “What accommodations, services, and levels of care are available only for additional fees?” First of all, can you give a few examples of what some of these extra costs may be? What effect can these surprise charges have on someone’s financial planning?

Extra costs can include increases in the frequency of residence cleaning, linen service, extra meals, premier cable TV, underground parking, additional storage, unscheduled transportation, and so forth. Without proper planning, the greatest impact is when it comes to assisted living or skilled nursing. If you don’t anticipate that you will need those services, you may find yourself paying monthly fees that “break the bank” so to speak. This is especially true for couples who may find that both of them require skilled nursing care. With LifeCare at a CCRC, you can receive long-term care for only the extra cost of two additional meals a day per person. That can literally save tens of thousands of dollars.

Another question you ask is “What happens if I need care that isn’t available at the community? What are the options? Who decides? Who pays?” Can you give an example of common medical care that is available in most retirement communities? What are some extras? Who DOES decide when extra care is needed if, for example, someone is unconscious or incapacitated? How can having a contingency plan save someone?

Not all communities offer the full spectrum of living, which would include long-term skilled nursing care and memory support/Alzheimer’s care. So before a senior moves into such a place, they have to ask themselves whether they are willing to have to move yet again if the need arises for those levels of services. Most communities have close relationships with other care providing organizations when residents are no longer a good fit at a community. Common medical care at CCRCs often means there is a walk-in clinic staffed by a physician who can deal with routine medical needs. There often is a pharmacy or pharmaceutical dispensary machine present on campus. There usually are registered nurses on campus 24 hours a day who can respond to medical emergencies as needed and who work out of the skilled nursing environment. Rarely, if ever, is a decision made unilaterally to require a resident to relocate. Communities work closely with families, physicians and their staffs, social workers and basically anyone who has an important relationship to the resident. Things like durable powers of attorney for healthcare, a living will, and a HIPAA authorization form help by making it easier for a person to allow others to help them make and maintain their dignity.

Rutgers University released a document earlier this year called “What Older Adults Need To Know About Money,” where they talk about topics like understanding Social Security. They cite a statistic where nearly 70% of Social Security beneficiaries claim benefits before reaching the full retirement age. First of all, can you break down the difference between early retirement and full retirement age? When is it a good idea to wait to receive benefits if it’s at all possible, and what are some advantages of waiting?

You can begin taking social security benefits as early as age 62, but your benefits could be permanently reduced by up to 30 percent. Full retirement begins for most people at age 66. If you are under your full retirement age and are still working, your social security benefits could be further reduced if you make more than the earnings limit of around $15,000. Taking benefits early could also reduce the amount of your spouse’s survivor benefit.

One popular approach is the “file and suspend strategy” to maximize social security benefits. This works well for married couples, one of whom has worked most of his or her career (wage earner) while the other has stayed home to raise children (stay-at-home spouse). In this case, both persons wait until their full retirement age to file for social security. The wage earner files first and then the stay-at-home spouse files. Immediately thereafter, the wage earner “suspends” his or her benefits, meaning that he or she won’t receive payments for the time being. This has no effect on the stay-at-home spouse’s eligibility for benefits. Then when the wage-earner turns 70, he or she can begin taking social security payments. Once that happens, the stay-at-home spouse becomes eligible to receive a spousal benefit equal to 50 percent of the wage earner’s full retirement age benefit. For each of the 4 years the wage earner suspended receiving benefits, his or her monthly payments increased by 8 percent.

Also, by waiting to take benefits the stay-at-home spouse’s survivor benefit increases should the wage earner pre-decease the stay-at-home person. Everyone’s circumstances are different; but generally speaking, the longer you wait to take social security, the more you’ll be paid monthly as a result.

In this same document, they discuss Continuing Care Retirement Communities, which can feature amenities like swimming pools, dining rooms, libraries, and beauty parlors. They state that some CCRCs have an entrance fee ranging from $20,000 to $400,000. How might someone go about deciding what amenities they need in order to find a retirement community that is within their budget?

It’s not only about you picking the right CCRC; the CCRC picks you as well. In other words, you have to financially qualify for CCRCs. They don’t want you to run out of money, so they apply a formula based on your age, your assets and your health to determine if you’re a good fit. If a senior is in good health, a typical formula is for a person to have monthly income of at least 1.5 times the monthly service fee of the CCRC and to have assets that are at least double what the entrance fee is. After those thresholds are met, it’s really a matter of how much value a senior wants to place on the amenities, hospitality and services. The key is, though, that if you don’t place a value on those things, then you will never fully appreciate the value of living at a CCRC.

Along those same lines, LeadingAge.org issued a document in 2011 about paying for aging services where they talk about about entrance-fee alternatives, ranging from traditional entrance-fee refund to refundable entrance funds. Can you shed some light on what options seniors have? What are some advantages and disadvantages of each?

A lot of people don’t understand the concept of an entrance fee. “Why do they need so much of my money upfront?” is a fairly common response to entrance fee-based communities. You have to understand that CCRCs offering pre-paid long-term health care plans are in many ways in the insurance business. Just like other forms of insurance, CCRCs pool residents’ money to live up to the contractual promises. Actuarial prognostication is required to ensure there is enough operating capital to provide those services. And just like other forms of insurance, sometimes residents don’t need the benefits they’ve paid for, but they’ve also enjoyed the peace of mind that comes when they know they’ve got those services if and when they ever need them.

CCRCs are creative at how they structure their entrance fee refunds. Sometimes it’s a straight percentage return of the entrance fee, sometimes it’s an amortization down to 50 percent of the entrance fee or even down to zero. It all depends. Generally speaking, the higher the percentage of the entrance fee that is returned, the higher the fee is in the first place. Entrance fees that are amortized tend to be smaller. Like most other things, it’s important to shop around.

At the website Seniorhomes.com, they offer a breakdown of some different monthly fees for CCRCs, which can range from $500 to $3000 depending on their service plan and whether or not they own their unit. What are some advantages of owning your own unit? How might someone go about funding that route if they were to decide to go that way?

Not all CCRCs allow the purchase of residences, and in fact most don’t. Owning your own residence comes with the same benefits as owning a single-family house. When it comes to living at a CCRC, most people fund the entrance fee by selling their largest asset: their house.

Then the monthly service fee comes out of monthly income from social security, pensions, 401(k)s, IRAs, annuities and other income-producing investments. Bridge loans are a helpful way to finance living in a CCRC if you want to move now, but your house is not quite ready for sale.

A bridge loan uses the proceeds from the sale of your house as security to pay off the loan. Many CCRCs have relationships with bridge loan lenders, and virtually all CCRCs have relationships with companies that specialize in assisting seniors in making the transition to a community much easier.

At the AARP website, they give an overview of continuing care retirement communities where they break down the different kinds of contracts that are available. What are some of these contracts, and how might someone decide which is the best option for themselves or their loved ones?

The creativity that goes into manufacturing a CCRC contract never ceases to impress me. They are all over the board, but historically speaking, there are three basic types of CCRC contracts: A contracts, B contracts and C contracts.

  • Type A – This is the most comprehensive contract and is usually most closely associated with the Life Care concept. Type A contracts are all-inclusive, covering not only your living costs (e.g., apartment, utilities, maintenance), but also assisted living, skilled nursing or memory care for as long as you live. The risk of care exceeding the price charged the resident shifts to the community. When you move from independent living to a higher care level, the monthly service fee remains the same except for the costs of additional meals and any special supplies needed for your care. Many CCRCs have modified this concept a bit so that if you require assisted living, skilled nursing or memory support, your monthly service fee is converted to an amount that is equal to the average of all independent living monthly service fees that are being charged at that time. Type A contracts almost always require an entrance fee deposit which is used to help fund the prepaid health benefit, and there is a monthly service fee as well.
  • Type B – Often called a “modified” version of Type A, this allows you to prepurchase the cost of assisted living, skilled nursing or memory care for a limited amount of time without any increase in your monthly fee. If you require care beyond the contractually-defined time period, say 120 days, then your costs for care will be higher than your normal monthly service fee, yet usually less than the cost of care would be on the open market. Type B contracts typically offer lower entrance fees and lower monthly service fees than Type A.
  • Type C – Often called “fee-for-service” agreements, these usually have lower entrance fees and monthly services fees because there’s no prepaid assisted living, skilled nursing or memory care. If you require those services, you’ll pay their normal costs with little or no discount. Unlike Type A and B contracts, these contracts don’t shift the expense risk of providing care; residents retain the risk. As the name implies, you pay a fee for services as they’re provided.

For people who are just retiring now, do you have any advice on how to begin planning for living in a CCRC? Why is it a good idea to begin planning early? Also, what are some options for people who are concerned about outliving their income due to inflation or other unexpected expenses?

The key is to not wait until there’s a medical emergency to move into a CCRC or any other type of senior community. It pretty much guarantees you’ll pay top dollar because you can’t afford the luxury of shopping around and because your health has now deteriorated. The community will most likely have to provide care services to you immediately; so you won’t qualify for and won’t get the benefit of a pre-paid long-term health care plan. You should anticipate that the monthly service fee at communities will increase 2-5 percent annually. But the good thing about that is that you know exactly how much money you will pay for your residence for the year. You won’t have some major unexpected house repair to pay for, and you won’t have to pay for upkeep and new appliances and all the other expensive stuff that goes along with house ownership. The best option for people who are concerned about running out of money is to qualify for a CCRC that has a benevolence fund, which is an account set aside to help cover the costs of residents who no longer have the resources to pay the full amount. Those are usually not-for-profit operations who have foundations to offset the costs of helping others. They do so because their mission is usually humanitarian-based. Besides, nothing is worse for public relations that a community that garners a reputation for turning seniors out because they are bereft of funds. CCRCs do all they can to avoid that result.

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