A Basic Overview of CCRCs
One of the decisions we all need to make in retirement is how do we want to be cared for in our later ages when we may need some assistance. I think for most people, they immediately think of long-term care insurance, which may help to offset the cost of skilled nursing care needs, but doesn’t address where or how care will be provided. An option that covers the where and how of care, and is becoming more popular today, is the Continuing Care Retirement Community or CCRC.
What is a CCRC?
Simply put, a CCRC provides a combination of independent living, assisted living, skilled nursing care and memory care all on one campus. In the independent living stage, one would live in an apartment, condo, townhome or casita on campus, but would have the option of transitioning to one of the higher levels of care if/when the need arises. Assisted living is for those residents that need help with activities of daily living, including the management of medications, bathing, dressing and personal care, but do not require intensive medical or nursing care. Skilled nursing care is often Medicare-certified and provided 24 hours a day, seven days a week by licensed nurses. Memory care is provided for those with Alzheimer’s disease or other forms of dementia. The ability to transition from independent living through the various levels of care up to memory care within one campus is often called “aging in place.” I view the CCRC option as a combination of lifestyle choice and insurance for your long-term care.
Moving to a CCRC is a proactive choice as one needs to make the decision when they are healthy and able to live independently. If you wait to make a decision after you have had a significant health issue, there is a high probability that you could be declined admittance. Since a CCRC is taking on a lot of potential risk by absorbing the cost of your long-term care needs for life, they tend to be fairly scrutinizing on the types of residents they admit. They typically do a thorough review of your personal health history and your overall financial situation prior to approving your entrance to the campus.
Potential Benefits of a CCRC
1) Provides maintenance free living – many times all interior and exterior maintenance of the property you are living in is covered. This typically includes housekeeping and possibly laundry services.
2) Dining program – often at least one meal per day is provided in a dining setting providing the opportunity to socialize with other residents.
3) Transportation – may be provided for physician visits, shopping and outside entertainment.
4) Wellness programs – on site gyms, often pools, outdoor recreation and many times a variety of fitness classes.
5) Social interaction – activities and programs to encourage social interaction.
6) Golf or other amenities – some of the higher end CCRCs may be affiliated with a golf course.
7) Future health care – the knowledge that no matter the level of care needed, it is provided in the same place with staff you are familiar with.
8) Tax advantages – typically a percentage of your initial entrance fee and your regular monthly service fee can be deducted as a medical expense.
9) Estate planning/potential refund of the entrance fee – depending on the contract chosen, you may have an option to receive a percentage of the initial entrance fee returned to your estate/heirs.
Contract Types and Fees
When you join a CCRC it is a permanent long-term financial decision. You need to sign a contract along with possibly providing a substantial entrance fee. Some of the higher end CCRCs rival many luxury resorts and their fees are reflected in the type of property and amenities they provide. CCRC entrance fees can range from $30,000 to $1,000,000. In addition, there is a monthly fee typically ranging from $1,000 to $6,000.
Most people use some or all of the equity in their home to pay for their entrance fee. Below are the three most common types of contracts. The contract you choose will define all terms of care to be provided, services to be provided, the entrance fee, monthly cost, inflation rate, any other costs you may have to pay in the future, cancellation or refund options, any insurance requirements, and a description of the CCRC’s responsibility should a resident become unable to pay fees. Some CCRCs have a Benevolent Fund, which helps to cover the cost of care if a resident is no longer able to.
Type A or Life Care – this is the most expensive option, requires a large entrance fee and monthly fee, but also provides an unlimited lifetime of care with minimal risk to cost increases other than an annual inflation adjustment to the monthly fee. The monthly fee usually varies by apartment size. Refundability of the entrance fee to your estate varies by CCRC and can range from 0% to 90%.
Type B or Modified – this contract offers a set of services to be provided for a set length of time. After expiration, services can be provided but for higher monthly fees. The initial entrance fee and ongoing monthly fees are typically lower compared to type A contracts. Similar to type A contracts, refundability of the entrance fee to your estate varies by CCRC and can range from 0% to 90%.
Type C or Fee for Service – the initial enrollment fee may be low or zero, but assisted living and skilled nursing care are paid for at market rates. The monthly fee is usually determined by apartment size. Beyond the monthly fee, you essentially pay as you go and are charged extra when care is needed. Although initially this can be the least expensive contract, it can be quite costly if a resident eventually has extensive health care needs.
How to Find the Right CCRC
There are over 2,000 CCRCs nationwide, and no two are alike. The best way to evaluate a CCRC is to visit it in person, arrange a tour and meet the staff throughout the campus. If you find a particular CCRC that you are serious about, I would consider spending a few days living on campus to get a feel for daily life there. I would ask to interview a few of the residents and consider exploring all levels of the care provided from independent living to the highest level of memory care. I would also make sure to dine on campus and get a feel for the meal accommodations. This will also give you an opportunity to interact with any residents in a casual setting.
It’s a Big Decision
There is no overstating what a big decision moving to a CCRC is. You have to do your homework, ask a lot of questions and also thoroughly review the financials of any CCRC you are considering. You may find one that has the curb appeal, culture, health care offerings and amenities to fit your lifestyle, but you also need to make sure it is financially sound and has a high probability of being around for the remainder of your life.
CARF International provides accrediting to some CCRC communities. They have an incredibly rigorous examination process. It is not required that a CCRC be accredited, but it can provide some peace of mind if a CCRC you are considering is on the CARF accreditation list.
You should also consider reviewing the financial decision with your CPA and financial advisor. Your financial advisor can determine if the entrance fee and monthly fees are within your long-term budget and reasonable in comparison with your financial resources.
Since you are signing a continuing care contract, I would also have your attorney review the legal fine points of the contract as this is a lifetime financial commitment.
Other Resources to Consider
I lightly touched on the broad aspects of a CCRC in this article. If you are serious about a particular CCRC for your long-term care and lifestyle, I would also suggest visiting the resources below as they provide a lot of helpful information that could be valuable in your decision making process.
AARP – they have a great checklist of questions to ask when considering a CCRC. They provide a thorough list of topics to review such as: general community questions, the grounds and facility location, initial impression of staff and community, staff review, resident review, housing and meal program, medical services, personal services, social life and recreation, and overall financial considerations. Here is a link to their list of questions.
CARF International – they provide accreditation to CCRCs and have an excellent consumer guide to understanding CCRC finances. Here is a link to a pdf of their guide – CCRC Consumer Guide to Financial Performance-June 2016.
What Is Retirement Planning?
One of the most rewarding aspects of my job is helping my clients plan for and transition to a successful retirement. I work with clients from a wide range of personal and professional backgrounds, such as: corporate executives, real estate agents, widows and widowers, teachers, engineers, CEOs, professors, policemen, divorcees, TV directors, business owners, therapists, doctors, executive administrators, lawyers, nurses and retirees (or as some would like to be known, “semi-professional golfers”). They each have a unique set of dreams, personal goals and financial situations. As diverse as my client base is and regardless of their age, they all share one common characteristic: they would like to be able to retire with confidence and continue living the lifestyle they are accustomed to.
For some clients the transition can be very smooth and for others it can be a challenge. For a vast majority of my clients, their portfolio was accumulated over decades. They accomplished this by living beneath their means and continuing to save and invest over a long period of time. As the wealth accumulated over many decades, my clients gained confidence and financial security. Now at retirement, some clients struggle with the idea of having to start drawing down from their portfolio after a lifetime of building it up. In addition, some clients have concerns about not only drawing down from their accumulated wealth, but also how to coordinate it with their other retirement income they may be entitled to such as Social Security, pensions and deferred compensation. Whether you are still working or retired, we can add value and peace of mind through our Retirement Planning process. Let me walk you through many of the areas that fall under the umbrella of what I would call “Retirement Planning.”
Retirement Projections for Pre and Post Retirement Planning
Whether you are planning to retire one day in the future, or are already in retirement, one way to analyze your financial situation is to take a deep dive into the details via a Retirement Projection. To initiate this process, we will sit down together and I will ask you to provide me with more details around your short-term and long-term financial goals. This will include putting some numbers together as to what your financial needs are now and how they may look in retirement. Some of the issues we will discuss and questions I will ask you are:
- What are your annual expenses?
- How much do you expect to pay for healthcare prior to retirement and in retirement?
- How often do you buy a car and how much do you typically spend?
- Do you expect to travel? If so, how often and what amount do you typically spend on vacation?
- If you have minor children, are you saving for college, how much, and what type of university do you expect them to attend?
- If you are still working, how much are you saving in tax deferred retirement options such as a 401(k)s, 403(b)s, Roth IRAs and IRAs and how much are you saving in your taxable accounts?
- If you own a home, what types of extraordinary expenses do you foresee in the future such as a new roof, new A/C units, new windows, remodeling updates, or any other general ongoing home maintenance?
- Do you have an interest in charitable gifting now or while in retirement?
- Do you have adult children or grandchildren that you financially assist?
What types of income sources do you expect in retirement such as:
- social security benefits
- pension income
- deferred compensation
- real estate rental income
- annuity income
- working part-time in retirement
- any potential inheritance
- stock option proceeds, such as from RSUs or Non-Qualified Stock Options
Once I have all of the above data I will put together a detailed projection of your expected income, expenses and growth or drawdown of your investment portfolio from now through every year until your age 95 or 100. This detailed annual projection provides a great trend analysis of what the future may hold for you. Although there are a lot of detailed numbers within the projection, I am most interested in the long-term trend. Is your portfolio growing over decades, going sideways or depleting? If it is depleting quickly, what can we do to make a change in the long-term trend?
If we see a shortfall in the long run trend, there are usually 4 variables we can work with:
- You possibly work longer, or consider working part-time in retirement.
- You save more if still working.
- You spend less in pre-retirement or retirement. From a behavioral standpoint, the greatest impact you personally have over your retirement success is control over your spending.
- The last option, and one in which I do not usually recommend is that you invest more aggressively. I typically don’t recommend this as most of my clients can’t handle the excess risk that shows up during a bear market from having a more aggressive portfolio. Working longer, working part-time in retirement, saving more and spending less all have much greater impact compared to investing more aggressively.
For my clients that are in retirement and are in the “spend down” phase of their portfolio, you have probably heard me discuss the 4% rule. The 4% rule is a reference to a number of studies done over the years that have attempted to analyze and answer the question “what amount of your total portfolio can you withdraw consistently each year for the remainder of your life during all phases of bull and bear markets without depleting your portfolio?” Most of the studies have concluded that the maximum comfortable withdrawal rate is no more than 4%. Keep in mind this is the amount derived only from your portfolio. This does not include social security, pension income, real estate rental income, deferred compensation, alimony, annuities, or any other form of additional retirement income that you are entitled to. Here is what a 4% withdrawal rate looks like based on a handful of different sample sized portfolios:
|Portfolio Size||4% Annual Withdrawal||4% Monthly Withdrawal|
You can put your retirement at risk if you have income needs from your portfolio well above 4%. I know some of you are saying that 4% seems low and you are asking why you can’t spend more if your long-term target rate of return is expected to be greater than 4%. That’s a great question. The reason is, this is also the maximum rate of withdrawal that will provide you with a high probability of being able to safely weather all bear markets and allow for a lifetime of withdrawals to age 95. It is easy to survive on a 4% or greater withdrawal rate when markets are stable or moving up. Where this always catches up with clients that spend too much is during significant stock market downturns.
Let me provide you with an example. We typically experience a bear market every 5 to 7 years and it is not uncommon for the stock market to lose 40% during a bear market. A globally diversified portfolio will probably temporarily lose ½ of that, or 20% in a decent downturn. So let’s assume you had $1,000,000 heading into a bear market, you suffer a downturn of 20%, and you now have $800,000. Prior to the bear market you followed my advice and maintained a 4% withdrawal rate or $40,000 per year. The bear market has caused your withdrawal rate to now increase to 5% instead of 4% ($40,000 withdrawal divided by your new lower portfolio amount of $800,000). History has shown that your portfolio will usually recover from such a temporary loss.
Now let’s assume a more extreme spending example. Let’s say your withdrawal rate is 6% today, or $60,000 on a $1,000,000 portfolio. If you temporarily lose 20% due to a bear market, your withdrawal rate now increased to 7.5% ($60,000 divided by $800,000). It is difficult for your portfolio to rebound back to where it started as it now has to grow much higher than your annual 7.5% need from the portfolio. This will likely lead to a permanent loss of capital as each successive downturn in the market will cause your withdrawal rate to continue increasing due to your portfolio’s inability to fully rebound.
Coordinating Income from Your Portfolio in Retirement
During your working years, you became accustomed to receiving a paycheck every week, two weeks or month. My job is to help you “recreate” your paycheck in retirement so that we make the most efficient use of your portfolio and other income sources to match your ongoing lifestyle expenses. It is common that in retirement we set up a similar paycheck distribution system for you as that is what you are likely used to. Monthly seems to be the most common option as most of us pay bills on a monthly interval. For some clients, however, we also consider quarterly or annual distributions. It really just depends as to what works best for your situation.
Through our retirement planning process I will be able to determine how much you will need to draw down each month from your portfolio and coordinate that with any other retirement income sources you may have.
Net Worth and Tax Returns
Two key components of the retirement planning process are my annual calculation of your net worth and my ability to reference your annual tax return. Your net worth is the combination of all of your assets (not just your portfolio) less any debt or liabilities. A successful retirement is not just the management of your portfolio relative to your income needs, but it is also the management of your overall asset and liability picture. Generally we want to see your total assets increase and total debt decrease over time. If debt is heading in the opposite direction and continues to increase, it may be a sign we need to take a closer look at your annual expenses.
At the end of the 1st quarter of each year I send a mailing out to you along with your first quarter portfolio statements. Enclosed in the mailing is a rough draft of your net worth statement with areas highlighted in yellow for you to update and return to me. In addition, to the net worth update request, I also ask for a copy of your latest tax return. I purposefully send this request out at the end of the first quarter as it coincides with when your tax return is likely being completed. Please note that I am not a CPA and the purpose of my tax return request is not to double check the work of your accountant. However, your tax return does provide me with a general overview of your income tax exposure and marginal income tax rate, which helps me greatly when planning for any annual tax loss harvesting from your portfolio, determining what type of investments will be purchased ongoing in any taxable or non-retirement accounts and what your tax picture may look like throughout your working years and/or in retirement.
Whether you utilize a CPA or Turbo Tax, you will likely be able to send me a pdf of your tax return. Your CPA can email me a pdf copy directly or provide it to me in some other electronic fashion as long as you provide him/her with permission to do so. Another option is to mail me a hard copy with the return envelope provided in your 1st quarter mailing.
Social Security and Medicare Planning
There has been a lot of talk recently in the media about when is the best time to start Social Security. You can start as early as age 62 or delay it until as late as age 70. One of the benefits of delaying Social Security is that you will receive an 8% increase annually for every year you delay it. Delaying Social Security can be a good longevity insurance plan if you have concerns about outliving your portfolio. However, that needs to be balanced with the fact that you may be putting more drawdown pressure on your portfolio in the earlier years of retirement by delaying Social Security to a later age. Like many things in life, your decision about when to start Social Security will likely depend on your particular financial circumstances, as there is not a one size fits all answer. If you have any questions about this issue, let me know and we can look at this in more detail in our retirement planning process.
Approximately 90 days prior to turning 65 you will be eligible to enroll in Medicare. There are numerous health plan options related to your Medicare choices. Everyone has a unique health situation and the choices can be overwhelming. I have a health insurance contact who is a true expert with all of the various Medicare health plan choices. I have referred a number of my clients to him to help them with choosing the best Medicare health plan relative to their particular health situation. If you need help with making this choice, or you need to determine if there is another plan that may be a better fit for you, let me know and I can provide you his contact info.
As you can see from above, retirement planning is an ongoing process that starts with your personal financial goals and encompasses a wide range of financial issues from your portfolio, to your retirement income options including Social Security, net worth, tax situation and healthcare/Medicare options. Please contact me if you would like to discuss your retirement planning goals further. Together we can put in place a strategy that will allow you to maintain confidence and peace of mind throughout your retirement years.
Overview of Medicare Enrollment
One important area of planning for a successful retirement is to have adequate health care coverage. Health care costs have been escalating at over twice the rate of inflation for a number of years. For those wanting to retire prior to age 65, health care is typically one of the largest “bridge” expenses to cover until Medicare eligibility.
For most people, their health insurance is provided through their employer. Or, if self-employed, they likely own a private health insurance policy. But once you reach age 65, you have the opportunity to transition to the federal government’s Medicare health care system. This article will provide a quick overview of some of the options available, answer some frequently asked questions and provide some resources to help you navigate the system.
Medicare consists of four main parts:
Part A – is hospital insurance and provides coverage for inpatient hospital services, care received in skilled nursing facilities, hospice care and some home health care. There is no premium cost for this coverage. However, there are co-pays, deductibles and co-insurance when seeking medical care.
Part B – is medical insurance and provides coverage for outpatient care such as doctors’ visits, laboratory and imaging tests, medical supplies and preventative services. There is a monthly premium which is automatically deducted from your monthly Social Security check. If you are not receiving Social Security benefits, your premium will be billed to you once a quarter. In 2016 the base premium is $121.80/month. You may pay a larger premium if your annual income is higher. You can learn more about your potential premium costs by reading the article I wrote titled “How Much Will I Pay For Medicare Premiums?” Your Part B coverage generally covers 80% of your covered care expenses after a deductible has been met.
Part C – is Medicare Advantage Plans, which are Medicare approved private insurer plans that typically provide medical coverage for Part A, Part B and often include prescription drug coverage. Many of these plans provide extra coverage and may lower out of pocket costs.
Part D – is prescription drug coverage. This particular coverage is optional and has a monthly premium that varies depending on the plan you choose. Similar to Part B coverage, those with higher levels of income may pay higher premiums. The link to my article above provides a chart of premium surcharges for Parts B and D based on income level.
What is Medigap insurance?
In addition to the options mentioned above, there are approximately 12 different private insurance plans which vary by state. These extra coverage plans are often referred to as Medicare supplemental insurance or Medigap. These policies are designed to fill in the coverage gaps found in Original Medicare Parts A and B. A large percentage of those receiving Medicare are also enrolled in one of these policies.
When to apply
If you are already receiving Social Security benefits prior to turning age 65, you will automatically be enrolled in Medicare Parts A and B. If you are not receiving Social Security benefits, then you have a seven month window to apply. You can apply 3 months prior to turning age 65, the month you turn 65, and up to 3 months after you turn 65. Your Medicare benefits will generally begin approximately one month after you enroll.
How to apply
You can enroll in Medicare Part A and Part B in the following ways:
• Online at www.SocialSecurity.gov.
• By calling Social Security at 1-800-772-1212, Mon to Fri from 7am to 7pm.
• In person at your local Social Security office. It is recommended that you call first for an appointment.
How do I determine if I should choose a coverage plan for Part C, Part D or a Medigap policy?
Because each person has a unique healthy history with specific health coverage needs, you may want to consult with a local resource to help you compare and contrast your options. Every state offers a free health benefits counseling service for Medicare beneficiaries. You can click on this link and search by your state for the local SHIP office (State Health Insurance Assistance Program). This is a valuable service available to answer all of your Medicare questions. You can also seek a private, independent health insurance broker that specializes in Medicare plans.
What if I don’t enroll on time? Is there a penalty?
If you don’t sign up for Medicare Part B (medical insurance) when you are first eligible at age 65, there is a 10% penalty for every 12 months you are not enrolled on time. The current base premium for part B is $121.80. Thus you would pay an extra 10% every month for this premium going forward. If you didn’t sign up for 2 years you would pay 20% extra every month for as long as you are enrolled in Part B.
What if I didn’t enroll in Medicare because I had health coverage provided by an employer?
Medicare does provide an exception if you are covered under group health care via an employer. You need to provide a “letter of credible coverage” from your employer when you sign up and they will usually waive the penalty.
Additional resources for your Medicare questions.
Besides the SHIP link above, or an independent health insurance broker, another option is to call Medicare directly at 1-800-Medicare or 1-800-633-4227. If you prefer searching for your answer online, you can go directly to www.Medicare.gov.
How Much Will I Pay For Medicare Premiums?
Note – some investors well below age 65 may not read this assuming it does not apply to them or Medicare is too far away. However, I think this is valuable information to understand because the federal government’s shift towards “means testing” will likely grow as a larger portion of the national budget transitions toward entitlement spending for Medicare, Medicaid, Affordable Care and Social Security in the years to come.
Many of those aged 65 or greater with higher incomes are sometimes surprised at the amount they have to pay for Medicare medical insurance (Part B) and their Medicare prescription drug coverage (Part D). Unbeknownst to some, Medicare started means testing in 2007 to determine your Part B premium. In 2011, they also began means testing for Part D.
Means testing is another way of saying they are assessing your annual income and those with higher incomes will pay higher premiums.
Medicare uses a cost sharing formula with the intent that a tax payer will pay approximately 25% of their Medicare premium and the government pays the other 75%. The share cost for those impacted by means testing ends up rising from 25% to 35%, 50%, 65% and potentially 80% if their income meets the highest income threshold, as outlined later in this article.
How do they assess my income?
The income reported is taken directly from your 1040 tax return filed with the IRS. They use a Modified Adjusted Gross Income (MAGI) number, which is essentially your Adjusted Gross Income (AGI), line 37 of your 1040 and add line 8b (any tax-exempt income). Note, these are gross income numbers. Unlike on your tax return, they are not reduced by personal exemptions or deductions.
How often do they review my income?
This is reviewed annually. Typically there is a two-year time lag. For example, I am writing this in 2016, but Medicare likely reviewed your 2014 income (reported on your 2015 tax return to the IRS) to determine your 2016 premiums.
What could impact my income for the purposes of determining my Medicare premium?
There are a number of potential situations or events that could increase or decrease your income from year to year, thus impacting your Medicare premium:
- If you retire near age 65 with high earned income, your initial premiums may be initially higher until the 2 year time lag of tax returns shows a lower income in retirement.
- A large Roth IRA conversion could increase income.
- If you experienced a large amount of capital gains via stock sales or a property sale, you may have a higher MAGI.
- If you sold stock options near, or in, retirement that could drive up your income.
- If you take large IRA distributions in retirement, or beginning at age 70 ½ when IRA distributions are mandatory.
- If you receive large deferred compensation distributions in retirement.
- If you receive a sizeable annual pension distribution.
Do they inflation adjust the income thresholds?
The Affordable Care Act of 2011 eliminated inflation adjustments from 2011 to 2019. Thus the income threshold brackets will remain the same for a period of time longer. The end result being more and more Medicare recipients will potentially be forced to pay higher premiums as their income slowly increases via inflation and they are pushed into the higher Medicare income threshold brackets.
What are the additional Medicare Part B and D charges by income threshold?
|Married Joint MAGI||Part B Monthly Premium||Part D Prescription Drug Monthly Premium||
Total (B + D) Over Base Premiums Monthly
|<$170,000||2016 standard premium = $121.80||Your plan premium|
Up to $107,000
|Up to $214,000||Standard premium+ $48.70||Your plan premium+ $12.70||+$61.40|
Up to $160,000
|Up to $320,000||Standard premium+ $121.80||Your plan premium+ $32.80||
Up to $214,000
|Up to $428,000||Standard premium+ $194.90||Your plan premium+ $52.80||
|>$214,000||>$428,000||Standard premium+ $268||Your plan premium+ $72.90||
How do I pay for these additional monthly charges above base premiums?
The additional monthly charges will be deducted from your monthly Social Security check. If you are not yet receiving Social Security benefits, you will receive a separate bill for these charges each month.
What if I experience a life event that causes my income to go down?
Social Security will on a case by case basis consider reducing the monthly amount you pay over the base premium for certain life events, such as:
- You were married, divorced or widowed.
- You or your spouse stopped working or reduced your work hours.
- You or your spouse lost income producing property due to disaster or other event.
- You or your spouse had an employer’s pension plan impacted by termination, reorganization or cessation.
How do I confirm how much of a premium I will have to pay?
The Social Security Administration will automatically send you a letter notifying you of any additional amounts above base premium(s) you may be charged for Part B and Part D, with an explanation of their determination.
What if I disagree with Social Security’s decision about my monthly extra charges?
You have the right to appeal any of Social Security’s decisions by doing so in writing and filing a “Request for Reconsideration” (Form SSA-561-U2). You can find the appeal form online at www.socialsecurity.gov/online, request a copy through your local Social Security office, or call them directly at 1-800-772-1313.