With the rise of rental retirement communities in recent years, sometimes referred to as independent living communities or “independent plus,” I hear more comments from people who say they are looking for communities without a “buy-in.” When comparing rental retirement communities to entry fee life plan communities (aka, continuing care retirement communities or “CCRCs”), there are a number of aspects to consider. However, in today’s post I am going to focus solely on the financial aspect of the decision:
Is a rental retirement community less expensive than an entry fee community?
If you are a regular follower of my posts, you probably already know the answer…that’s right: It all depends.
>> Related: How Rental and Equity CCRCs Work
Looking beyond the first glance
Naturally, when a person looks at the cost of a rental retirement community compared to an entry fee community, which could cost in the hundreds of thousands of dollars, the first reaction is to assume the rental retirement community is the less expensive option. And while this may prove to be the case, the reality is that the difference may not be as much as it first appears. In fact, in some situations, an entry fee community could be less costly than a rental retirement community.
Before proceeding, I want to emphasize that the purpose of this post is not to convince you that one model is better than another. Instead, as with all my posts, the objective is to educate on the sometimes lesser-understood aspects so that you can make the most informed decision possible. There are other important aspects to consider besides just the financial component, and living where you are happiest is one of the most important things — even if it costs a little more.
Consider lifetime costs
The main reason why the difference in cost may not always be as big as it first appears is because a proper analysis must account not just for the cost today, but the projected lifetime cost. Here’s an example. Suppose you are comparing a rental retirement community to a life plan community with an entry fee of $300,000. Out of the gate, the rental community is ahead by $300,000.
However, let’s also suppose that this entry fee is 90 percent refundable if you ever move out or at death. This means you or your heirs would receive $270,000 when either of these occurrences takes place. Of course, $270,000 received in the future will not be worth what it is today. Nonetheless, this still makes a huge difference in the calculation and comparison.
Furthermore, let’s say that the monthly fee at the rental retirement community is 10 percent higher than the monthly fee at the entry fee life plan community. This alone could add up to a few hundred dollars per month difference.
Finally, let us assume that the entry fee community offers a 40 percent discount on the cost of care for services including assisted living and/or nursing care. This discount can translate to tens of thousands of dollars or more saved over the years if care services are needed.
>> Related: Can I Use My Long-Term Care Insurance in a CCRC?
The break-even point
When you begin to run the long-term projections taking into account various hypothetical assumptions — including things like years of care that will be needed in the future, growth rates, inflation, timeframe, and more — you’ll find that there is a break-even point somewhere along the way. If we were to assume that you will never need any care, then it is almost certain that the rental retirement community will look better from a lifetime cost perspective. However, the difference may be less than you think when you factor in the difference in monthly cost and the entry fee refund.
If we were also to assume a certain number of years in care, then the difference in cost shrinks further because of the discounted cost of care in the entry fee community. At some point, the entry fee community becomes a better deal financially. Of course, where the break-even point falls depends largely on the assumptions we make in the projection.
In the case of a couple, the break-even point may come even sooner since the discounted cost of care applies for both residents in an entry fee community.
>> Related: The Cost of a CCRC vs. the Value to Residents
What about entry fee communities with fee-for-service contracts?
At a fee-for-service life plan community, residents still pay an entry fee, but unlike the example above, residents pay the market rate cost for care services. In this case, the entry fee serves to keep the monthly fee lower than what it would otherwise need to be relative to the amount of services and amenities provided.
In other words, if you take two comparable communities, and one requires an entry fee while the other does not, in theory, the one with the entry fee should have a lower month-to-month cost. If this is not the case, then one of the organizations has mispriced, or there is a trade-off somewhere.
Even with a fee-for-service life plan community, the entry fee may still be refundable to some degree. Therefore, if you are comparing the lifetime cost of a rental retirement community to a fee-for-service life plan community, it really comes down to the difference in the month-to-month cost, differences in what you get for the cost, and the entry fee refund. Again, there will be a break-even point somewhere, but it depends on the assumptions used and it will likely be further down the line.
Other cost and care considerations
Among the many other factors to consider when comparing senior living options, it is particularly important to be sure that any life plan community offering entry fee refunds is well-positioned financially. Be sure you understand the contract stipulations and requirements for receiving the refund.
Also, be sure you know what levels of care are available for you in the future. Most, but not all, life plan communities provide residents with access to a total continuum of care, extending all the way to skilled nursing care and rehabilitation services.
On the other hand, many, but not all, rental retirement communities do not provide this full continuum. Some stop with memory care and assisted living, although in some cases, it’s advanced (high-acuity) assisted living. So, it is important to think not only about what services and amenities are important to you today, but also what you want to have available in the future if your situation were to change. There is a cost to having to move again in the future if your health declines, which may extend beyond just the monetary cost.