Can You Afford a Retirement Community?

There’s a lot to consider if you’re thinking about moving into a retirement community. While they offer an abundance of resources that you can’t replicate at home, retirement communities typically are not cheap. It should be a top priority to determine whether or not you can afford a retirement community lifestyle.

It’s important to review both your current and future finances carefully so that you can properly evaluate the costs of retirement community living relative to the benefits you will gain. (For more from this author, see: Advice for Selecting a Retirement Community.)

Upfront Entrance Fees 

While some retirement communities simply charge monthly fees, akin to renting an apartment, most also require an entrance fee. These costs vary widely. When totaled up, they can approximate the price of buying a new home.

Most facilities offer different entrance fee options, based upon the refund feature you select. A zero refund upon death means cheaper entrance fees. Conversely, a higher refund at death results in heftier upfront fees. Most people prefer that some refund is paid to their family or heirs. However, if you don’t have family members or strong preferences regarding a legacy, then you might opt for a cheaper entrance fee with zero refund option, knowing that your entrance fee will be forfeited.

Most entrance fees are not refundable until death. If these terms are embedded in your contract, you’ll need to ensure that you have other financial resources and/or long-term care insurance to cover potential care costs if you get sick.

Retirement communities typically offer shortened contract timeframes for changing your mind and receiving a refund of your entrance fees. Refund amounts usually decline progressively, reaching zero after a stated period of time. It’s important to be certain about a community before committing, as you might be risking a large sum of money if you change your mind about becoming a resident.

Monthly Fees

Whether or not they require an entrance fee, all retirement communities assess monthly fees. These fees support the facility, resources and staffing that makes retirement communities attractive. Costs vary, but are typically several thousand dollars per month. (For more, see: How Retirement Communities Work.)

It’s important to evaluate if you can support the monthly costs of your chosen retirement community. Be sure to factor in cost savings e.g., no more home maintenance expenses, lower food costs (Are meals provided?), utilities (Are they included?), etc.

A portion of your monthly fees might qualify as medical expenses for itemized tax deduction purposes. As a reminder, the threshold for your aggregate medical expenses must exceed 10% of your adjusted gross income before a deduction is permitted. However, note that the medical expense deduction may be eliminated in future tax reform measures.

Everyone’s monthly expenses typically increase annually, but as a retirement community resident, those increases will no longer be under your control. We recommend reading the fine print to identify how fee increases are calculated, assessing recent annual cost increases and possibly negotiating an annual percentage cap.

Make sure you understand what’s included in your monthly retirement community fees, versus what’s extra.

Continuity of Care

A prime attraction of retirement communities is continuity of care should you become ill or injured. However, these services incur additional charges. Furthermore, Medicare only covers limited rehabilitation or nursing care. If you don’t have long-term care insurance, such costs become a personal expense. We recommend requesting cost schedules to determine if on-site care resources are within your budget.

Other Costs

In some retirement communities, real estate tax obligations are borne by the residents, whereas in others, they’re paid by the facility.

Common extra costs include transportation, activity and excursion costs, housekeeping, etc.

Will You Live as a Couple in a Retirement Community?

If you’re a couple, there are greater financial considerations related to retirement community living.

If one spouse requires care, these costs will add to your monthly fees. While there might be some fee adjustment if services are needed outside of your personal residence, it’s typically a modest saving, certainly far less than half. Make sure your finances can sustain both regular monthly expenses plus potential care costs for both partners.

Your entrance fee might only be refundable after the second spouse’s death. Survivorship income and asset availability are, therefore, essential considerations to ensure that a surviving spouse has sufficient financial resources to remain a resident.

What if You’re Single?

Most retirement community contracts are written assuming dual occupants are married, but that’s not always the case. Living with your partner in a retirement community is possible, but requires additional planning and contract negotiations to determine each individual’s share of the entrance fee and monthly fees, plus what happens when the first partner dies.

What if You Have a Blended Family?

If you and your partner each have children, your legacy plans might differ for your respective children. Special planning is required in your estate documents and retirement community ownership contract in order to ensure that your wishes are honored.

The above points are not intended to be comprehensive. Choosing a retirement community is a uniquely individual decision and everyone’s finances are different, particularly as you contemplate a move to a retirement community. We recommend updating your long-term financial planning projections to explore your financial security under varying scenarios, before committing to a retirement community. We also firmly recommend exploring a specimen contract with your attorney. (For more, see: Top 10 Active Retirement Communities in U.S.)

 

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