If you’re considering moving into a continuous care retirement community (“CCRC”), you may find out that there can be a large entrance fee. If a community charges an entrance fee, it’s likely there are multiple options for you to choose from. Our post below attempts to explain the factors that you need to consider before making your selection.
We’ve identified a practical way and a strategic way to think about the entrance fee question. Practical, herein, means what works best for the payer. Strategic, herein, means the cheapest option.
Let’s set the stage: imagine a community that, regardless of which entrance fee option you choose, will charge you the same monthly rate. The three entrance fee options you have are: (1) you can pay $300,000 upfront, but it completely amortizes over 25 months; (2) you can pay $500,000 upfront, but it amortizes down to $250,000 over 25 months; or (3) you can pay $1,000,000 upfront, but you will receive only $900,000 no matter when you leave.
Practical people may choose to pay the entrance fee option that requires them to commit the least amount of capital. This allows them to spend the remaining amount on themselves, rather than having the community hold onto it until the end of their stay. A practical thinker may use the proceeds from the sale of his or her home to pay for the entrance fee, and then use their social security, pensions, and savings to pay for the monthly fee. The strategy of opting to pay for the lowest entrance fee makes sense to us for those who want to maintain as much discretion over their wealth as possible. In the example above, someone who chooses option (1) over option (3) has $700,000 more to spend on trips, gifts, charity, clothing, etc. On the other hand, option (1) is not necessarily the most economical option, because he or she may spend $300,000 on the entrance fee whereas someone who chooses option (3) will only have spent $100,000.
The strategic thinker is going to look at this as a math problem—which option is going to be the cheapest for me and my heirs? A strategic thinker is going to consider what he or she pays for the entrance fee and what he or she is going to get back, in addition to the opportunity costs. The opportunity cost, in this example, is what else could the tied-up money have been invested in. If the strategic thinker chooses option (3) over option (1), then he or she has committed an additional $700,000 in capital. That’s $700,000 in capital that is not earning a return in the market or in an investment such as a rental property. The lost earnings from that $700,000 should be taken into account when considering the actual costs of the entrance fee. Through our analysis, we can distill the entrance fee question into its most fundamental parts. For the above example, we assumed that the opportunity cost is 4% annually. The follow yields the per month entrance fee cost based on the number of months stayed:
The above chart shows the per month cost of the entrance fee according to the number of months that the person stays in the community. For instance, someone who stays at the community for 21 months who elects to pay via option (1), or the blue line, will have paid an average of $12,000 per month. $12,000 plus the monthly fee that the person pays to the community is the total monthly cost of staying at that community. Those that wish to estimate their life expectancy may use this information to choose the entrance fee that is the least costly. Additionally, someone who is trying to compare the costs of two communities, one with an entrance fee and one without, may use this analysis to do so.
At Senior Advisors Plus we serve both the practical and strategic thinkers. Call us and we will help you with your senior living search.