A/B Conversations: CFP® Your Way Out Of It
A/B Conversations: CFP® Your Way Out Of It
Ep #125 - Is a Retirement Community For Me, Financially?
Demand for senior living communities is growing due to an aging population, longer life expectancies, and increased awareness of the benefits of community living. But there are a lot of financial implications to making such a move. Whether “downsizing” “upgrading” or adding the benefits of having skilled care for potential needs later in life – retirement communities aren’t cheap. Listen in as Adam and Ben share different planning considerations for retirees who may be looking to make a move.
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[00:00:00] Adam Werner: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now.
Hello there, Ben. How are you?
[00:00:33] Ben Haas: I'm excellent. How are you today?
[00:00:34] Adam Werner: Fantastic. It is a, as we're recording this, a wonderfully dreary beginning of fall day.
[00:00:43] Ben Haas: Yeah, well, tell you what, we're going to be complaining about shoveling snow in about two to three months.
[00:00:49] Adam Werner: So you bite your tongue.
[00:00:51] Ben Haas: The rain is not snow and, therefore fine by me.
All good. So, kind of excited for this topic today because, if we're, I don't know, 120, 130 podcasts in, I can't believe primarily working with retirees that we haven't gone through this topic of talking about retirement communities and senior living. Clearly, it's a growing population, right? Baby boomers retiring now having to think about, you know, longer lifespans, a lot longer life expectancy.
So there's clearly an increased kind of awareness to the benefits of what community living might look like. So let's just talk about it. What do we mean by it? What are the considerations? Our clients are starting to talk more and more to us about it. So let's, let's throw it out there to a podcast land.
[00:01:38] Adam Werner: Yeah. Yeah. I think you hit on it. It's, and I think most people know it as the baby boomer generation continues to age. I mean, that's, that's been a recurring theme of just, investment, the economy, investments, the economy markets in general thinking, you know, where, where are things headed and just that huge driving consumer force of baby boomers will certainly create these different ways of, of life.
Yeah. You know, generations past. So a big one of those I think is this idea of a retirement community. I'm going to live in my house. My entire life, I'm gonna, I'm gonna pass away there, or I'm just gonna stay in a nursing home at, you know, end of life as needed and pass away there.
There's now this other side of aging in retirement. And there's, I think there's two different where we see primarily that there's two different ways of approaching that there is what we're seeing in these 55 plus communities where you're essentially paying like an HOA fee, but you own the house, you own the property, you're closer to maybe people in your same phase of life, right, if it's a 55 plus.
There's the social aspect, there's benefits to having that space. But then there's the other portion where you may not necessarily own your house or own the land, but you have access within a community to care, or maybe it's long term care or just better access to health care in general, because a lot of that happens essentially on site, right?
You have a community that you're living in, and there's facilities kind of all baked in to that property. So two different ways of kind of going about it with different impacts financially, to clients.
[00:03:22] Ben Haas: And I think that's why we want to bring this up today, knowing that we have individual conversations, but more broadly to the listening audience.
Because these do have huge financial planning implications. You think about all the work that we try to do to project out for people, you know, here's what you'll need to live comfortably in retirement. We want them to have some sense of calm and peace in making that transition. But of course, oftentimes we're making assumptions looking backwards, right?
This is the home you've lived in for so long. People do talk about downsizing, right? That may be one of the reasons that they would consider making some sort of change in retirement. I don't want to keep up this property. There's a lot that goes into it. It may be labor intensive.
So, you know, that's one of the things, but let's talk about the considerations because there's financial implications to that. There may be certainly financial implications to those care communities. And all of that expands well beyond just. I think the emotional side of retirement that we've been talking about, you know, engagement, relationships, wanting to have meaning and purpose.
I mean, these are the things that that community may bring you, but let's talk about all the financial implications, the considerations that people should have as they start to plan for this and have conversations with us about it.
[00:04:34] Adam Werner: So I'll share all of this is clearly anecdotal evidence for us. From our, from our conversations with, with real humans the idea I think was very prevalent that I'm going to get to retirement. My kids are going to be, if I have kids, they're going to be grown. They're going to be on their own. They're going to be self sufficient.
I'm not going to need this big house anymore for the family. And you said it earlier, right? With, with larger properties, larger houses, there's maintenance, there's upkeep, cleaning rooms that you don't use or, or dealing with trees and lawns that you just, you're not using like you were when you had kids and a growing family.
The idea that downsizing from our, our family house to maybe something that's a little more set up for retirees that I think for a lot of people, that's still the mindset. But what we've seen, or financially at least. It ends up being a more of a lateral move from a cost standpoint. I think that the thought has always been, well, I'm going to sell this bigger house, buy something smaller, I'm going to be able to pocket the difference and that's going to help, that's going to be a part of my retirement plan.
I'm going to cash out some of this equity that I've built up over the last 30 years of owning this home. We haven't really necessarily seen that in our experience. It is more of a lateral move, but I think from our standpoint, that shouldn't be the driving force for many people getting into a 55 plus community, for example, should be more of the focus on the quality of life things that we kind of already talked about.
It's being around people in your same phase of life, not having to deal with all the upkeep of a property. You have, right? Yeah, HOA essentially handling a lot of that for you. So all that to say that that decision to downsize should be more focused on the value that they would get out of that personally.
You said meaning and purpose, all of the stuff that goes into retirement, that's not necessarily financial.
[00:06:34] Ben Haas: And I wonder without looking up any evidence of this, like you said, we have some of these conversations, how many of these transitions, these moves actually mean money's got to come out of pocket.
Right. These 55 plus communities are, I see them popping up around here, right? They're typically brand new construction. You know, if you've been living in the same home 20, 30 years, maybe that's not the newest property and what you may get for that may not equal what you're going to have to put out even just to move to something that's smaller, you know, so that, that will be a consideration here too. We often talk in financial planning with retirement planning, that's so much of what we've set aside is in that retirement tax bucket where we're going to end up paying income taxes when we make withdrawals.
And I would just, again, we have to plan ahead if people are starting to think about this stuff, you know, where do we have assets and where can we tap into assets that if you are going to make some sort of transition into a community that may cost you more money, where's that going to come from?
And let's try to be efficient with taxes on that.
[00:07:34] Adam Werner: Yeah, definitely.
[00:07:36] Ben Haas: I know we had planned for me to talk a little bit about not just the 55 plus community, as a living community, but, that idea that some of these, you know, communities do offer some sort of care, right?
It is almost like an age in place spot. So I don't know, should I, should I throw it back to you? Do you want me to keep going here?
[00:07:56] Adam Werner: Well, so, so yeah, I'll, I'll take the first, the first stab here. So the, well, this, let's just talk about potential cost of care in retirement for people that are, are maybe concerned about.
I don't know what my health is going to be like in the future. Long term care insurance is certainly as we shared earlier, this the baby boomer generation as they age. Long term care insurance is certainly one of those areas that we've seen evolve over the last 5 to 10 years. To try to maybe be a little bit more appealing for the baby boomers. I know we've done maybe some other standalone podcasts that maybe get into the nitty gritty but the idea behind, maybe a more traditional long term care insurance policy is I'm going to have access to a pool of insurance, a pool of assets that if I need care, that's what I'm going to tap into.
Oftentimes that traditional type of long term care was use it or lose it. So if I don't need care, then I've now paid out all of these premium dollars to insurance company. I don't get it back. There are now these hybrid policies that. Somebody is going to get the benefit out of those policies their life insurance and long term care that If you don't ever need it for long term care you pass away There is a death benefit that goes to your spouse your heirs.
It's not a use it or lose it type of benefit but that is certainly a way that some people may want to cover the What if I need long term care? How am I going to just cover that expense? Insurance is certainly an option.
[00:09:35] Ben Haas: Right. So thank you for bringing me back on track. So why? Yeah. Why? Why bring that up?
Some of these communities are built. So as you age in place, there is that care on the back end of it. So how does that work? You know, as opposed to buying a policy, some people think of these communities as like the all inclusive, right? You're, you are paying some sort of monthly. fee Think of that like rent.
Think of that like mortgage. It's probably a lot higher than both of those things, by the way, but all your meals, all your entertainment, the property of, and the care are included in that, right? It's all baked into that expense. So you kind of know what to expect. And if that point in time comes later in life where you do need some sort of assistance, right?
It may not mean that you're living in the same property that you started in, right? There may be shifting within that community, but they're, they're often times. is the opportunity then to make sure that you are cared for in that place. And I think that is why some people will look to these communities to as opposed to paying for the policy.
You know, in our minds, you may be paying for it over here, but it really is just all baked into your living experience.
[00:10:46] Adam Werner: Yeah, yeah. So the end, the end result may end up feeling very similar. It's just a different way of, of going about it. So to that end, what we've seen in I'll say these care communities, and we should preface this by saying the more this evolved, there's so many.
Yeah. Yeah. Yeah. Each community may have their own nuanced approach to how someone would pay to be a part of that community. But what we've seen is typically there's some sort of upfront buy in you're essentially pre paying for access to future care, maybe even along with a monthly cost in the meantime, until you would need said care.
But then even as part of that, you may have the option of retaining some level of interest. Throwing out a number, if that initial buy in is 300, 000, you may have the option to pay a different amount to get a larger percentage of that money back at your passing.
It's going to either come back to your spouse or come back to your heirs. So in that sense, it somewhat is like that hybrid policy where there maybe is a little bit of a life insurance portion to that. It's not necessarily considered insurance in that way, but it can act similarly. There's different percentages again, that you could get back to your estate that will change what that buy in cost may be but that could be another way to preserve maybe some of your total assets and you're not just giving it to this community and you're never gonna you or your family are never gonna see a dime of that again
[00:12:21] Ben Haas: Yeah, it's, it's funny because as you're going through that example, I'm thinking of different client conversations we've had and different communities will shape this different ways, but it's all the more reason why we have to really think ahead on what you really want to see happen and then be able to go through those options that they may give you.
I've just seen such a wide range of expenses. on what those properties cost, whether it's single, whether it's double, whether it's big, whether it's here or there, that retained interest, that may mean I'm going to, my entry fee is going to be much higher. Right. But if I prioritize having that money come back, right, that's, that's the clarity I want to make on some of these communities.
You don't own that property, right? You're paying an entry fee as if you'd like, you're buying it, but really what you're doing is you're buying that care. And that's where, okay, maybe the value of that can come back and we got to do some calculations on what matters to you. But that's going to take me back to my earlier point. That may require a significant amount of money to go in upfront.
And that's typically where we don't want to be taking huge lump sums out of retirement accounts that are going to drive our tax bracket up. So that can, has to be a consideration when we look at these entry fees.
[00:13:30] Adam Werner: Yeah, that's a great one because I think. Again, going back to that whole downsizing thought process, I have this property, my primary residence, if I don't have a mortgage, I may have several hundred thousand dollars, I'm going to sell my house, and that's going to be my entry to this community.
But to your point, depending on the community, depending on how their, their fee structure and that buy in process. You may need to come up with a large chunk outside of what you've sold your house for. And to your point, where we've seen a lot of these baby boomers may have done most of their savings in pre tax retirement accounts for 401ks, for 403bs, and the like.
Yeah, that can have a really big domino effect. Just to get into a community, if there are no other after tax resources, or savings to pay to pay for that entry. You're paying much higher taxes than maybe you have before and maybe more than is palatable to get to that end result So that's certainly one one aspect that can really be a huge factor in the decision making process. Yeah, hurdle. Great word.
[00:14:43] Ben Haas: Well, so speaking of hurdles, here's other things we found. You know, there are certain communities where, if they are providing that care, and you are paying for that care, then your need to have a long term care policy that you were referencing earlier kind of goes away.
Imagine the scenario where you've done good proactive planning and maybe you were trying to transfer that risk of long term care expenses and you bought some sort of policy or you have some hybrid insurance, but now you want to go into one of these communities.
That can be a hurdle because some of those communities will say, well, we don't accept insurance. You don't need insurance, right? You're paying us to do that. We've seen other communities that have modified contracts that maybe would work with an insurance company on that. So, just another thing to bring to light, planning requires exploring a lot of different things other than, well, what's their entertainment and what's their food service like?
[00:15:38] Adam Werner: Right, right. And another aspect I think we've seen too is, again, depends on the on the community that care community, but sometimes there is like a pre screening from a health perspective.
[00:15:50] Ben Haas: Oh, sure. Yeah.
[00:15:51] Adam Werner: To even qualify to have that buy in to even qualify to be in that community for the option to buy in.
[00:16:01] Ben Haas: Yeah, right.
[00:16:01] Adam Werner: It can be another hurdle that for people that are at this age, right? We've if you're getting to the point of, you know, 55 plus or, you know, these care communities, I think, are more targeted to maybe 65 70 plus. Odds are there may be some health history there and you wouldn't want to find that out way too late in the process and then find out, Oh, well, I've, I've avoided long term care insurance up to this point because I was focused on this care community, but now I'm not eligible because of my health.
That would, that would be a scenario we want people to avoid. Yeah, what an awful situation that would be.
[00:16:36] Ben Haas: And I mean, hopefully the listening audience kind of gets it. These communities are not not there to be nonprofit, right? And so the actuarial tables and the medical tables, right? They're there to make sure there is a great pool of people that aren't going to require all of those care resources at the same time.
We've seen that same same thing. 1 other consideration or potential hurdle. These are popular and I know we started this podcast by saying, I think more of these communities are going to pop up, but, as they are popular, we know and have certain clients that are on waiting lists, right?
There, the availability of a property isn't there right now. But they're paying some sort of ongoing fee just to be on that list, to be able to move to the type of property they want when it pops up. So again, all, all things that just take, I think some time, some planning, a lot of conversation and, you know, some good exploration of resources.
[00:17:33] Adam Werner: Yeah. And like everything else, it's going to come down to, in these terms of communities and the baby boomer generation, just continuing to age, it's going to come down to supply and demand. And because these companies are for profit companies, I'm guessing these costs moving forward are not going to go down.
So, yeah, to your point there, even though we're seeing maybe more and more of these communities pop up, there may still continue to be way more demand than there are supply, and that could be an interesting dynamic for retirees moving forward, too.
[00:18:07] Ben Haas: Yeah, I think what I'm, what I'm excited about is to engage in more of these conversations earlier in somebody's financial life.
Right. I think we know that there is in retirement planning, a lot of focus on just getting to that date to circling that date on the calendar. And we want people to have confidence getting there, but we've seen the other trends too, where kids, grandkids are all spread out now, right? It's, it's not maybe where things were 20, 30 years ago, where, mom and dad are aging, but son and daughter will, will be there to help them and help them maintain some independence, right? If that's not as possible, just based on location, all the more reason to have kind of that next backup plan that says, you know, here's where I may think about aging, uh, in retirement. And I hope we shared some insight here just to get the conversation started on, on different things that people should be thinking about.
[00:18:59] Adam Werner: Yeah. And we're happy to have that conversation. It's from our standpoint, it's just explore your options. Give some education on even what's out there and then, yeah, let's do some planning, figure out what's possible and what a client may even prefer later in life.
[00:19:16] Ben Haas: You got it. Well, thank you as always for your insights on the topic.
[00:19:21] Adam Werner: Thank you.
[00:19:22] Ben Haas: Catch you next time.
[00:19:24] Adam Werner: See ya.
[00:19:25] Ben Haas: Bye.
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.
Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.