Last week I wrote about the dilemma that many prospective residents of continuing care retirement communities (CCRCs) face when considering a community that offers a refundable entry fee contract: pay a higher entry fee and gain the peace of mind of knowing that some- or all- of the entry fee will eventually be refunded or, alternatively, save money up-front by choosing a standard, non-refundable contract with the understanding that if they remain in the community more than a year or two they will not receive any money back.  I also described a few of the key details and common stipulations related to refundable entry fees of which prospective residents should be aware before making a decision. (Click here to see last week’s post.)

Today, I want to summarize some comparative scenarios that I ran on our proprietary software system called DecisionGenie to help you gain an idea of when it might make the most sense to choose a refundable entry fee contract. Of course, these projections are purely hypothetical and there is no way I could run every type of scenario that a prospective resident could potentially encounter. Therefore, this analysis is only meant to give you some general direction in your planning. Ultimately you should consider working with a financial planning professional who can help you analyze your unique situation.

For my hypothetical projections I looked at specific contract data for a CCRC in North Carolina. For the sake of this post let’s call the community “Brightside” and let’s call our imaginary couple “the Goldens.” Brightside is a Type C, or “fee-for-service” retirement community. This means the Golden’s will pay the then-current market rate for care at such time when assisted living or skilled care is required. Residents of Brightside have three contracts to choose from. The standard entry fee contract for a two-bedroom deluxe apartment is $181,000. The entry fee for the exact same unit under the 50% refundable contract is $250,500. Under the refundable contract the Golden’s are guaranteed to never receive back less than 50% of their entry fee, or $125,250. The entry fee for Brightside’s 90% refundable contract is $320,000.

Mr. and Mrs. Golden are 73 and 72 years old respectively. They plan to move into Brightside next year; hoping first to sell their home. Currently, the Golden’s have approximately $810,000 in savings and investments, as well as another $300,000 in home equity. This brings their total assets to $1.1 million.

The following tables summarize the hypothetical scenarios I ran in DecisionGenie. There are three sets of five scenarios, for a total of fifteen scenarios. The only difference between each set is the hypothetical rate of return on the Golden’s assets. Each of the five scenarios within each set reveal combinations of various life expectancies and care needs, combined with the different contract choices. (The scenarios do not incorporate long-term care insurance or life insurance. They purely reflect the impact on assets.)

 

Table I:   3% Rate of Return on Savings & Investments

Entry Fees:

$181,000

$250,500

$320,000

 

Age(s) Assisted Living Required

Age(s) Skilled Care Required

 

Life Expectancy

 

Assets at Remaining at Last Life Expectancy

 

 

 

 

Standard Contract

50% Refund Contract

90% Refund Contract

Mr. Golden

83-84

85

86

$93,252

$119,589

$182,978

Mrs. Golden

85-86

87

88

 

 

 

 

 

 

 

Mr. Golden

None

None

86

$715,478

$739,872

$801,225

Mrs. Golden

None

None

88

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$346,593

$392,606

$450,904

Mrs. Golden

79-80

81

82

 

 

 

 

 

 

 

Mr. Golden

None

None

80

$859,713

$898,192

$973,764

Mrs. Golden

None

None

82

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$408,590

$412,321

$459,709

Mrs. Golden

None

None

90

 

Table I:   3% Rate of Return on Savings & Investments

Entry Fees:

$181,000

$250,500

$320,000

 

Age(s) Assisted Living Required

Age(s) Skilled Care Required

 

Life Expectancy

 

Assets at Remaining at Last Life Expectancy

 

 

 

 

Standard Contract

50% Refund Contract

90% Refund Contract

Mr. Golden

83-84

85

86

$93,252

$119,589

$182,978

Mrs. Golden

85-86

87

88

 

 

 

 

 

 

 

Mr. Golden

None

None

86

$715,478

$739,872

$801,225

Mrs. Golden

None

None

88

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$346,593

$392,606

$450,904

Mrs. Golden

79-80

81

82

 

 

 

 

 

 

 

Mr. Golden

None

None

80

$859,713

$898,192

$973,764

Mrs. Golden

None

None

82

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$408,590

$412,321

$459,709

Mrs. Golden

None

None

90

 

Table I:   3% Rate of Return on Savings & Investments

Entry Fees:

$181,000

$250,500

$320,000

 

Age(s) Assisted Living Required

Age(s) Skilled Care Required

 

Life Expectancy

 

Assets at Remaining at Last Life Expectancy

 

 

 

 

Standard Contract

50% Refund Contract

90% Refund Contract

Mr. Golden

83-84

85

86

$93,252

$119,589

$182,978

Mrs. Golden

85-86

87

88

 

 

 

 

 

 

 

Mr. Golden

None

None

86

$715,478

$739,872

$801,225

Mrs. Golden

None

None

88

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$346,593

$392,606

$450,904

Mrs. Golden

79-80

81

82

 

 

 

 

 

 

 

Mr. Golden

None

None

80

$859,713

$898,192

$973,764

Mrs. Golden

None

None

82

 

 

 

 

 

 

 

Mr. Golden

77-78

79

80

$408,590

$412,321

$459,709

Mrs. Golden

None

None

90

Analysis

Of the fifteen scenarios, the 90% refundable contract resulted in the highest remaining balance at the last life expectancy eleven times.  The standard, non-refundable contract was the optimal contract for the remaining four scenarios. The 50% refund contract did not prove to be optimal in any of the 15 scenarios.

Of the eleven scenarios where the 90% refundable contract was the optimal choice, five were in the 3% rate of return set, which represents all of the scenarios for that set. It was also the optimal choice in four of the five scenarios in the 5% rate of return set. Yet, it was the optimal contract in only two of the five scenarios in the 7% rate of return set. The life expectancy of both spouses was age 82 or less for each of these two scenarios. 

The four scenarios where the standard, non-refundable contract proved optimal (in bold) all fell within the second and third tables, which represent 5% and 7% rates of return respectively, with three of them in the 7% set. Returns at these levels may be a tall order for a retirement portfolio today. Also, in all four of these cases, at least one spouse lived a longer life expectancy (at least 88-years old in my example). The standard, non-refundable contract did not prove to be the optimal contract in any of the five scenarios under the 3% rate of return category.

With the exception of one scenario, the difference in outcomes between the optimal contract and the least optimal contract ranged between 4% and 30%, with an average difference of approximately 9%. The one exception is fell in the 3% rate of return set where both spouses live a full life expectancy. In this one scenario the 90% refundable contract revealed a 95% higher outcome than the standard, non-refundable contract. Upon further analysis this was purely a result of timing. The results actually show that the Golden's run out of money in the last year of life expectancy under the 90% refundable contract, and come very close to doing so under the non-refundable contract. Yet, when the refund of $288,000 kicks in it bumps the ending balance up dramatically for the refundable contract.   

Summary

It’s easy to understand that choosing a refundable contract will generally prove more favorable over shorter time frames. In my examples above the difference in entry fees between the standard contract and the 90% refundable contract is $139,000. The 90% refundable contract will return $288,000. If I look at a seven year time frame, for example, I would have to earn almost 11% on the same $139,000 to end up with the $288,000. Yet, if I look at a 15 year time frame, I have to earn approximately 5%.

In my examples only it seems that the Golden’s would need to earn at least 5-7% on their money and at least one spouse would need to remain in the community for approximately sixteen years or longer before the standard, non-refundable contract would prove to be the optimal choice. If the Golden’s are do not feel the odds are in their favor for this to occur then perhaps they should consider the 90% refundable contract.

But wait…there’s more

Be sure to visit our blog next week for Part III of this series on refund options where we will see how life insurance could potentially impact the decision that the Golden’s make.

Disclosures

The pricing used for the above scenarios closely represent pricing for a real community. However, pricing models could differ drastically from one retirement community to another. You should consult with a representative of the retirement community you are considering for pricing information, as well as qualified financial planner who understands CCRCs. The projections or other information generated by LifeSite Logics' DecisionGenie regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual results, investment returns and are not guarantees of future results.  The estimated fees, costs and income taxes and other cash flow input assumptions may be materially different over the course of the related planning time horizon than the actual fees, costs and income tax consequences and other cash flows that will be incurred.  The information in this report is not investment advice and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments, insurance or strategies mentioned may not be suitable for all investors. Information and opinions regarding specific securities do not take into account individual circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments, or strategies.

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