Active Adult Retirement Communities (also called 55+) are an attractive option for people who want to maintain an independent residence and lifestyle with minimal upkeep.  This type of community emphasizes leisure and recreation and typically has on-site facilities for socializing and pursuits like golf, tennis, swimming and exercise.  Residents must be independent as these communities offer no medical or personal care assistance.  Most residents of active adult communities are homeowners.  The initial cost of buying into a 55 and older community is usually the same as buying a home in the area.  In addition, most communities charge a monthly or annual fee to cover the cost of maintenance and amenities.

An option for those individuals who need or anticipate needing assistance with daily activities is Continuing Care Retirement Communities (CCRCs).   CCRCs are a residential alternative to retirement communities for older adults (usually 65 and older) that offer flexible housing options from independent living through assisted living and nursing home care.  CCRCs offer a continuum of services including meals, housekeeping, transportation, social and recreational activities and health-care services all meant to address the varying health and wellness needs of residents as they grow older.  Typically, all of the living options of the CCRC are on a single campus.  The emphasis of the CCRC model is to enable residents to avoid having to move, except to another level of care within the community, if their needs change and they require additional health care and supervision.

Whether a CCRC is the right choice is both a financial and personal decision.  Personal considerations are subjective and depend on what is most important for the individual or couple involved.   One of the main attractions of a CCRC is the peace of mind that comes from meeting one’s long term care needs in a single setting.  There is also the added bonus of no longer having to maintain a house.  A primary value for couples is the ability to remain together, or at least be on the same campus, if one spouse requires a higher level of care.  Of course, along with these advantages, there can also be some unique challenges.  Moving into a more institutional type setting is a major lifestyle change and some people experience a loss of freedom.

While personal considerations are very important, affordability often times becomes the deciding factor.  The cost of security and access to a continuum of long term care is expensive.  The two major fees involved are Entrance Fees and Monthly Fees.  Entrance fees are one-time, upfront charges for the right to enter the CCRC and use the full range of services offered.  Entrance fees typically are strongly correlated to the local housing prices in the area where the CCRC is located.  Other factors that affect the entrance fee are the newness of the facility, the size of the unit, the amenities offered and the type of contract.   There are four major contract types.

Life Care (Extensive) Contract (Type A):  This is the original full-service contract which establishes a standard monthly fee rate for all levels of care with only annual monthly rate increases allowed.  It guarantees care for life even if the resident’s funds become inadequate to cover the full costs of future services and care.  This contract is the most expensive.

Modified Contract (Type B):  This option involves entrance fees and monthly fees with a guarantee of access to higher levels of care usually at a reduced rate or for a set period of time before market rate fees come into play.  The entrance and monthly fees for the Modified Contract are usually less costly than the Life Care Contract, but the resident shares the risk of future care costs.

Fee-for-Service Contract (Type C):  This contract requires an entrance fee and ongoing monthly fees but does not include any discounted health care of assisted living services.  The resident receives priority or guaranteed admission for these services, as needed, but must pay the prevailing market rate.

Rental CCRCs (Type D):  Residents pay rent for housing and services but must pay prevailing market rate for any care required and there is no guarantee for access to health care services.  As there is no entrance fee, it offers the resident the lowest level of upfront expense.

Many CCRCs offer some type of entrance-fee refund.  Any refund due is paid to the resident if the contract terminates or to the resident’s estate upon his or her death.

It should be noted that entrance fees are not usually charged if a person enters directly into a CCRC’s assisted living or nursing level.

Monthly Fees

Monthly fees typically range from $3,000 to over $6,000 per month for independent living units depending on size and amenities.  In addition to monthly fees, there are other costs for routine living expenses (health and other insurance, medications, entertainment, etc.) that need to be considered when analyzing the adequacy of one’s income.

Income Tax Considerations

A portion of the non-refundable entrance fee and ongoing monthly fees in excess of 7.5% of AGI are deductible as medical expenses.   The IRS stated that it has no published position regarding the method of allocating fees between amounts properly deductible and not deductible as medical expenses. However, a 1976 ruling states that to the extent the retirement community can document a reasonable estimate of the percentage of its overall operating expenses spent for providing medical care, that percentage can be applied to the one-time and continuing payments to the facility.  The amount of operating expenses allocated to the facility’s cost of providing medical care to the taxpayer, spouse, or dependent qualifies as a medical expense in the year paid, even though medical services will be provided in future years.  Therefore, annually the CCRC should provide residents with a statement showing the percentage of operating costs allocated to medical care.  This percentage will be the same for all residents regardless of the level of care and is usually between 30 and 40 percent of the total monthly fee.

The Active Adult, over 55 Community and the Continuing Care Retirement Community are just two options when looking toward retirement living.  It is a very important decision that should be considered and discussed before the need arises.

By Dawn Badorini, MST

As seen in the July 2nd issue of Business West