Nobody wants to spend their golden years playing shuffle board or languishing in a nursing home. They want fun, social connections and endless activities whether they are a book worm or social butterfly. They also want access to care if and when they need it.
But getting that doesn’t come cheap. The average cost for a retirement community is around $350,000, and that’s just the entry fee. The Monthly Service Fee (MSF) adds another $3,500 to $4,500 a month to the bill.
“Some range well into the millions,” depending on the size of the home and if continuing care is included, says Brad Breeding, co-founder and managing partner at myLifeSite, a website dedicated to providing older adults with information about senior living.
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Nonetheless, these retirement communities are gaining in popularity. For good reasons. Older adults are more active than previous generations and want communities that give them independence and access to care if necessary.
It doesn’t hurt that many older adults are sitting on sizable nest eggs in their 401(k)s and other retirement savings accounts. Add a long bull run in the stock market and inheritance to the mix, and it’s not surprising these communities are attractive to wealthier individuals.
Retirement communities typically come in two varieties: independent living retirement communities and continuing care retirement communities or CCRCs.
Independent living retirement communities, often referred to as 55+ communities, are house and apartment-style planned developments for older adults who can live mostly independently — without requiring assistance with daily activities.
Some independent living retirement communities offer a certain level of care for residents whose needs may change over time, although this typically doesn’t include skilled nursing or rehab care. Latitude Margaritaville and The Villages are two examples of independent living communities catering to active adults 55 and older.
A continuing care retirement community, also known as a “CCRC” or “Life Plan Community,” often combines independent living with a full continuum of care, including skilled nursing and rehab care, all provided under a continuing care contract.
Some CCRCs have found it difficult to maintain skilled nursing post-pandemic due in large part to increased labor costs and inadequate Medicare reimbursement rates, says Breeding. Valle Verde in Santa Barbara, California, is an example of a CCRC.
Retirees setting down roots in either an independent living community or CCRC typically get access to a range of amenities, including dining halls, fitness centers, swimming pools, recreation centers, transportation, housekeeping, entertainment and continuing education. Luxury retirement communities include all of the above plus wellness spas, high-end decor and upscale dining, among other perks.
With an independent living community like Margaritaville, you typically pay an “entrance fee” or buy-in payment and then a recurring monthly fee to cover the cost of your house, amenities, maintenance, meals and activities.
The same is true of CCRCs, but the monthly fee will change when you begin to need care. Within a CCRC, the monthly payments can be:
Fee-for-service: When you need care your monthly fee increases to reflect the going price of health care.
Modified: An off-shoot of a fee-for-service model, but the cost of care is discounted. Typically your monthly fee is more to reflect that.
Lifecare: Your monthly fee remains the same if you need healthcare services.
If you opted for a CCRC and changed your mind about living there, the refund amount will depend on the contract you signed and how long you have been a resident.
If you bail out before a predetermined period, which tends to range from around 30 to 90 days after moving in, you should be able to get a refund for the entry fee, although the rules vary from one CCRC to the next. After that, the refund amount can depend on how long you’ve been a resident.
Because terms may vary, reading the fine print is essential before choosing a senior living community. You should also check how healthy the community’s financial position is.
Tax smart ways to pay
Whether you choose an independent living community or a CCRC, how you elect to pay for it matters a lot. After all, it can impact your cash flow and the amount of taxes you have to pay. That’s particularly true for high-net-worth individuals.
“This is not a last minute decision,” says Jeremiah Barlow, head of wealth solutions at Mercer Advisors. “It’s planned for over time and the best way to pay for it is a well-diversified balance sheet of both tax-deferred and tax-free pools that you can draw from.” That will enable you to spread the taxes out so you are not taking a big tax hit in year one.
Let’s say you planned to sell your house and use the proceeds for the entry fees to a retirement community. If you realize a gain from the sale of over $250,000 as a single filer or $500,000 for a couple, it is taxed as long-term capital gains if you owned the home for over a year. If you made a $750,000 profit on the sale of your home, you could expect to face a sizable tax hit.
Some strategies to lower that bill include deducting closing costs, fees, and any major home improvements and engaging in tax loss harvesting.
Tax loss harvesting occurs when you sell investments at a loss to offset capital gains. If you are single and made $500,000 from the sale of your home but lost $250,000 by selling other assets, your tax bill would be much lower. Be mindful of the wash-sale rule when going this route. Under the rule, you can’t take the loss if you purchase the same or substantially identical securities within 30 days before or after the sale.
Another option to access equity in a home without triggering a taxable event is to recast or refinance a larger mortgage or utilize a home equity line of credit, says Barlow.
That could be particularly advantageous if there is a second generation who wants to live in the home and inherit it. “They could take on the payments and expenses until the parents pass away. This would create a step up in cost basis upon death of the parent,” says Barlow. That would reduce the capital gains tax when the home is sold.
Beyond selling your home to cover the cost of a retirement community, Barlow says combining funding sources can be a tax-smart way to pay for a retirement community.
“Roth IRA withdrawals can be advantageous since qualified withdrawals from a Roth IRA are tax-free, helping to avoid additional tax liability,” he says.
This works if you are 59 ½ or older and have held the IRA for at least five years. Roth distributions are tax-free, and because they are not considered investment income, they won’t raise your modified adjusted gross income. If you have money in a traditional IRA or 401(k) you can do a Roth conversion, which reduces required minimum distributions.
“If there is time to plan, it would be advantageous to proactively navigate these accounts with Roth conversions, so more assets are tax-free in retirement,” says Barlow. “Also, proactively planning for Social Security benefits is helpful by delaying taking these benefits, which results in an increase in the monthly benefit amount, providing a higher guaranteed income.”
A Health Savings Account (HSA) can be used for long-term care, which may include some retirement housing expenses. However, long-term care generally does not cover non-medical costs such as room and board expenses, notes Barlow.
Long-term care insurance can help
For adults who select a CCRC without a lifecare contract, which means they pay the market rate for care, they can use long-term care insurance to offset some of the costs. Even with a lifecare contract, the insurance policy can be used to cover some of the monthly fee, even though it has not increased.
Breeding says filing a claim for long-term care insurance usually occurs when you can’t perform two or three activities of daily living without the help from another person. How much is covered and at what amount will be laid out in the terms of your long-term care insurance policy.
Look before you leap
Use caution when deciding which retirement community to buy into and how you’ll pay for it. You can employ many strategies, so it’s essential to seek help from a trusted financial adviser or tax professional before you plunk down your hard-earned cash.
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