Can a CCRC Help the Pain of Paying for Long-Term Care?

Saving for your retirement and senior living goals is a lifelong endeavor for many people. Depending on your spending and saving style, you may have your money set aside into designated buckets for each spending objective. Mental accounting is the phenomenon by which we treat money differently based on where the money came from and how it will be used. This consumer behavior model heavily impacts the way people make financial decisions, including senior living and long-term care decisions.

Oftentimes, there also are differences in spending habits based on the mode of payment: cash versus credit cards, for instance. For better or worse, credit cards “decouple” the purchase from the payment — you buy now but don’t have to actually pay until later when the bill arrives. Compare this to cash, which you can tangibly see leaving your wallet.

By separating the purchase and the actual payment of that credit card bill, you lessen the so-called “loss aversion” by making individual purchases less significant. When the $1000 credit card bill arrives at the end of the month, you won’t be as concerned about that $50 you charged for the full-service car wash instead of getting the more frugal $15 basic wash. After all, $50 is a drop in the buck on a $1000 bill. But if you’d had to hand over a $50 bill to pay for that carwash at the time, you may have felt a stronger sense of loss aversion, possibly even compelling you to opt for the less expensive choice.

The pain of paying truly smarts

This is where willingness to pay (WTP) and pain of paying come into play, with research suggesting that it truly does “hurt” to spend money.

In 2001, MIT researchers examined people’s WTP, comparing payment by cash versus credit card. Using an auction for sporting event tickets, study participants were restricted as to which form of payment they could use: cash or credit card. The study participants that were required to use a credit card were willing to pay nearly twice as much for the tickets as those participants who were required to pay with cash. Put another way, the credit card group’s WTP was almost twice that of the cash group.

This study’s findings can be explained, at least in part, by the phenomenon called “pain of paying” — the emotional pain we experience when we spend money. But what is especially interesting is that that pain is more real than you might think.

Examining brain images, neural and behavioral scientists found that even anticipating spending money activates the pain processing regions of the brain. Now, this isn’t to say spending money creates true physiological pain, but it does create higher-order affective pain. This affective pain is enough to decrease many people’s WTP.

Reducing the pain of paying

The pain of paying that people experience can vary depending on their method of payment and the timing of that payment. Interestingly, if these two factors are tweaked properly, it can have benefits for a person’s finances and gratification.

MIT professor of management science and economics Drazen Prelec surveyed study participants’ satisfaction with visiting a health and fitness club by comparing a pre-paid monthly fixed fee versus by-the-hour payments. Survey respondents reported that the pre-paid monthly fixed fee would lead to higher satisfaction.

In other words, pre-payment for a repeated experience reduces those repeated reminders of the cost as compared to the pay-as-you-go model. It reduces the pain of repeatedly paying. This scenario might further reduce that pain if a credit card is used as the method of making those monthly payments.

Senior living community costs can hurt

All of this money talk brings me back to a topic we often discuss here at myLifeSite: the affordability of moving to a senior living community such as a continuing care retirement community (CCRC or life plan community).

Depending on the community and your CCRC contract type, you may have to pay a sometimes-hefty entry fee, which can be as high as a six-figure amount. Most CCRC residents also have a monthly service fee that typically covers the cost of the residence, utilities, property taxes, and a meal plan that includes at least one meal per day (additional meals can be purchased).

The monthly fee may also include other amenities and services like weekly housekeeping, events and classes, social opportunities, outings, transportation, and more. Again, depending on your contract, the monthly service fee may be set or could fluctuate should care services eventually be needed.

Oftentimes, seniors will pay for that entry fee using the proceeds of their home sale. This entry fee can create considerable “pain of payment” for some seniors. The monthly service fee, on the other hand, might be less painful since you have done the mental accounting to “label” that expense as a recurring payment for housing and services. It might even get automatically drafted from your bank account, so you don’t have to see the output of money, similar to the reduced loss aversion of a credit card purchase.

Reducing the pain of paying for a CCRC

There are other important factors to keep in mind when it comes to the cost of a CCRC and the mental accounting that can go with it.

First, depending on your contract type, some portion of your entry fee may be refundable to your or your heirs. So, while it might seem like a painfully large output of money up front, you or your heirs may recoup some or most of that initial investment. Keeping this fact in mind may help alleviate some of that pain of paying.

Second, depending on your contract, CCRC residents may also be able to deduct a portion of their entry fee and their ongoing monthly service fees from their taxes. The reason for this is because with some CCRC residency contracts, a portion of your entry fee and monthly fee may be applied toward future medical expenses. In essence, this portion of your fees is considered a pre-paid medical expense, and thus may be included as part of your annual medical expenses.

Always consult with your accountant or tax preparer, but generally speaking, if you itemize, any medical expenses over 7.5 percent of your adjusted gross income (AGI) are deductible from your taxes. With this in mind, the pain of paying for a CCRC may be further reduced.

Pre-paying for potential long-term care needs

The cost of senior living, including a CCRC, can be steep. But with a CCRC, it’s important to keep in mind what you are getting for that money. It is quite similar to the people in the MIT study who were paying in advance for their membership to the fitness club and thus were more satisfied than those who paid by the hour.

CCRC residents are essentially pre-paying to have ready-access to any level of care services that they might require down the road. This may also lessen the loss aversion of paying for long-term care, similar to paying by credit card.

Contrast that to people who remain in their current home and are perhaps unexpectedly forced to pay for long-term care services such as after a medical crisis. The emotional and monetary cost of this “pay-as-you-go” expense can be even more painful for them and their loved ones.

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