Downsizing on Your Own Terms
According to the AARP, nearly 90% of adults over 65 want to remain in their current homes – even if it’s not practical. One reason is because Boomers have been working longer than earlier generations and feel they can still afford it. Some love working, but for many, they’re still recovering from the Great Recession of 2008-09 which cut their portfolios in half so close to their planned retirement date. You also have Millennial children living at home longer, so parents are reluctant to downsize. They also want to have room for kids and grandkids to stay over during visits – especially since families are more geographically dispersed than they used to be.
The Danger of Waiting Too Long to Downsize
Just know that the longer you stay in your home, the harder it can be to downsize if you or your spouse face a serious health issue that forces you to move. Also, you run the risk of trying to sell your home in a down economy or weak housing market and end up accepting a below-market offer. With reduced home equity on top of portfolio loss, your personal financial statement will look weaker. Unfortunately, that statement is one of the main things that continuing care retirement communities (CCRCs) look for when vetting new residents.
Bottom line: the time to start planning your move is several years before you intend to downsize.
The Signs It’s Time to Downsize There’s no perfect answer to this question, but here are some of the most common signs that it’s time to think about downsizing to a CCRC:
You are over the age of 62 – the minimum age for Social Security and admission to a CCRC.
Your kids are financially independent and living on their own.
Your expenses have decreased.
Your home is bigger than it needs to be for just the two of you and maybe a pet.
You’re no longer able to do many of the routine repairs and maintenance chores you used to do on your own.
Your balance and memory are not what they used to be.
You or your spouse need – or think you will soon need – skilled nursing or memory care.
Plan Early You want to start touring CCRCs several years before you think it’s time to downsize. Many of the higher-rated communities have long waiting lists. Also, people are living longer which reduces turnover of units.
Moving to a CCRC is not necessarily cheaper than staying in your home, but there are a tremendous number of benefits. Just know that in this part of the country, you should expect to pay an initial entrance fee ranging from $200,000 to over $1 million, and then $6,000 to $8,000 a month in maintenance fees. Also check to see if your entrance fee is refundable or non-refundable. If non-refundable, you could pay $300,000 to get in, and if you die the next year, the money’s gone and your family doesn’t get it. Or if you decide to move out, you don’t get it back. With refundable plans, you typically get back 50% to 90% of your investment, regardless of how long you stay.
Either way you need a large chunk of money just to get into a CCRC. Much of that down-payment can come from selling your home, assuming you have little or no mortgage. I know $6,000 to $8,000 a month sounds like a lot. But it covers all the maintenance and property taxes you would have been paying on your single-family home, plus you have built in meal plans, entertainment, social life, parking and even free transportation to shopping and medical appointments. Again, a CCRC may end up being more, but you’re paying for all the amenities in a facility that can age with you.
If You Outlive Your Money Yes, this can happen even for folks who are in very good financial shape when they move to a CCRC. For this reason, the communities not only require the large down payment, but also require you provide a financial statement to ensure you can cover the cost for a number of years. If you run out of money at some point, most facilities will not evict you unless they discover you have gifted away your money or otherwise spent it recklessly. They will accept the payment that Medicaid covers and will supplement the rest from their benevolence funds.
The best way to budget is to start planning early and to work with a financial planner. You want to make sure you can sustain the expenses of needing long-term care and/or living in a CCRC.
Real-world example I have a very healthy client in his 80s whose wife, unfortunately, is in a rehab facility at a continuing care retirement community. She will likely have to be there on a permanent basis due to the physical assistance she needs throughout the day. My client drives to see her every day and has been considering moving into the independent living section of the community so he can be with his wife full-time. The challenge is that my client is very strong mentally and physically and doesn’t feel ready to give up his independent lifestyle and spacious home. In one sense, it makes sense to sell his home since the real estate market is so hot. By doing so, he’d have plenty of equity to pay the CCRC entrance fee and take advantage of all of the amenities it has to offer. He’d also never have to move again as his care needs change. But moving is a big change for many retirees. Just as with investing, we can’t let our emotions or a hot market cloud our judgment and cause us to rush into a decision we’ll later regret.
Is long-term care insurance worth it?
Clients often ask us if they should buy LTC insurance. There’s no one size fits all answer to this question. Typically, we look at annual expenses, portfolio risk, and net worth to make a determination. For a married couple with $2.5 million in liquid assets, no financially dependent children and a reasonable distribution rate of 4% or under, we may recommend that they self-insure (i.e., pay out-of-pocket for unreimbursed expenses). They have the savings to cover it. However, if a couple has under $1 million, LTC insurance is usually too expensive relative to their net worth, and it will erode too much of their nest egg to make LTC worthwhile. But for those in the $1 million to $2.5 million range, LTC often makes sense. You have enough money that you want to protect, but not enough that it makes sense to self-insure without causing a financial hardship to the spouse still living independently.
Suppose one spouse must go into a skilled nursing facility, how is the surviving spouse going to continue living in their home and also pay for skilled nursing? As part of our planning process, we run those scenarios to see if the plan is strong enough to withstand that eventuality.
If you or someone close to you has about aging in place, please don’t hesitate to reach out. We’re very experienced in this area and happy to help.
DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth