Recently, we asked consumers and other advisors who follow our myLifeSite blog the primary questions or concerns they have about senior living in general, and CCRCs (aka life plan communities) in particular, and what they would like to learn more about.
We received hundreds of responses and a lot of great feedback to help guide the content we produce. Overwhelmingly, the most important topic among prospective residents of a CCRC/life plan community is financial clarity and affordability. Other top themes included comparing and evaluating the options, timing of the decision, governance and oversight, continuing care at home, and solo-aging. In the coming months, we’ll write content on these topics.
In today’s post, we’ll address a question that came up repeatedly: What if the inflationary increases to monthly service fees exceed increases to Social Security cost of living adjustment (COLA) and investment returns over a 10-20 year period?
Average annual increases
In a typical year, the average annual increase in monthly service fees at life plan communities has been in the 3-4% range, which is usually a point or two higher than the consumer price index (CPI). The gap reflects the model itself: Because life plan communities deliver housing, hospitality, and a continuum of healthcare under one roof, their costs are tied to labor-intensive care, where wages and staffing expenses tend to climb faster than the general price level. Fee increases therefore reflect the community’s cost structure more than a simple inflation adjustment.
It should be noted that the above range is a long-term average, and that during the post-COVID years, inflationary increases were higher. Today they are in the 4-5% range on average.
Keep in mind that all retirement communities and senior living providers raise their monthly fees over time. I have seen some rental retirement communities, also known as independent living communities, raise rents considerably higher than CCRCs in recent years.
Although I am not a CFO or finance director at a life plan community, my working hypothesis is that the entrance fee model of many CCRCs plays a role: The upfront fee helps fund reserves and long-term care obligations, which may give life plan communities more room to smooth their annual increases, while a rental community has to price rising costs into monthly rent as they arise. Rental communities generally have no built-in operational and healthcare reserve fund, so they rely purely on rent increases to catch up after a cost spike.
Other factors, such as shorter lease terms that allow more frequent repricing, may also contribute. Additionally, many CCRCs are nonprofits, with resident councils and required fee-increase meetings. That adds pressure to moderate CCRCs’ price increases.
>> Related: Retirement Savings: Planning for Both Medical Expenses and Long-Term Care Costs
Caps on monthly service fees
Over the years, we have observed a handful of CCRCs that cap their maximum annual fee increases, though this practice remains uncommon. Most communities aim to keep inflationary increases as low as possible while maintaining prudent financial management because they know that high fee increases are viewed negatively by residents and prospective residents alike.
However, most CCRCs hesitate to cap allowable increases, fearing it could put them in a difficult position if high inflation persists for a long time.
Planning for monthly service fee inflationary increases
If you’re considering a move to a life plan community or any type of senior living community, accounting for monthly fee increases is an important part of the financial planning aspects of the decision.
If monthly service fee increases exceed Social Security COLA or increases to other income sources, it can be more problematic for some people than for others, depending on how much they have in cash, savings, and investments.
For example, suppose your Social Security benefit brings in $3,300 monthly, totaling $39,600 annually. With a 3.5% cost-of-living adjustment, that adds $115 each month, or roughly $1,400 over the year.
Now suppose you pay $7,000 per month in monthly service fees ($84,000 annually) and face a 4% inflation adjustment. Your annual expenses jump by $3,400.
Assuming Social Security represents your sole source of fixed income outside of portfolio returns, you would face an annual shortfall of $2,100 in this example. Over time, this shortfall will compound, making it tougher and tougher each year to make up the difference.
But let’s also suppose you hold a combined $1 million across portfolio investments, savings, and retirement vehicles, earning a blended annual yield of 4%. That portfolio generates about $40,000 in investment growth over the year.
In this scenario, even though the monthly service fee adjustments outpace your Social Security COLA, your overall assets expand by $37,900 that same year ($40,000, minus the $2,100 gap).
This scenario shows that although monthly service fee increases outpacing Social Security COLA adjustments or other fixed income streams isn’t ideal, it may not cause serious financial strain for those with sufficient liquid portfolio assets. If you had another fixed income stream, such as a pension or rental income, the difference would be even less.
Of course, keep in mind that investments involve risk, and returns can fluctuate. The above scenario may not hold true in a year of negative market returns. That said, older adults generally take less risk in their portfolios. Furthermore, conservative instruments such as short-term bank CDs and government bonds are currently paying 4-5% or more.
>> Related: What’s Included in the Monthly Fees for a Retirement Community?
The effect of taxes and tax deductions
One additional thing is missing from the example above: taxes. Depending on your tax bracket, COLA increases may be subject to taxes. At most, 85% of Social Security benefits are taxed. Using the above example and assuming a 15% effective tax rate, the $1,400 Social Security COLA would net $1,221 after taxes.
But remember, too, that residents of many life plan communities may qualify for a tax deduction on a portion of their monthly service fees; it may be considered a pre-paid healthcare expense. For those who qualify, the deduction would likely offset the income taxes and then some.
>> Learn more about tax deductions on CCRC costs.
Putting senior living fee increases into perspective
Ultimately, effective financial planning isn’t just about covering immediate monthly expenses; it comes down to evaluating your overall net worth over your projected lifespan and aligning your strategy with your broader legacy goals.
Beyond ensuring you don’t run out of funds to pay for ongoing care, thoughtful long-term planning accounts for whether you intend to preserve a specific legacy — whether that means leaving an inheritance for loved ones, supporting charitable causes, or simply maintaining financial independence throughout your life.
This post should not be considered personal financial advice. Everyone’s situation is different. Talk with your financial and tax professional before making any decisions.
