Funding Senior Living In An Economic Downturn Article
By VICTORIA E. KNIGHT, Wall Street Journal
In these rough economic times, funding long-term care poses a challenge for seniors and their families. There are a range of strategies you can pursue, though.
Older Americans who had banked on selling their homes to finance care in assisted living facilities and retirement communities have seen their dreams go up in smoke amidst a housing market meltdown. At the same time, their investment portfolios have nose-dived.
For people without long-term care insurance, which is the majority, the financial hit can be hard if care is needed. The average cost of a private room at a nursing room runs $76,500 per person annually, while a one-year stay in a one-bedroom unit in an assisted living facility costs $36,000 and periodic care from a home health assistant at $18,000 or more per year doesn’t come cheap. While there are no easy answers, shopping around, switching the care setting, pooling family finances and looking at loan options can be conduits to affordable care.
Continuing-care retirement communities, which offer more health services as seniors age, typically require entrance fees of hundreds of thousands of dollars plus monthly fees. Cheryl J. Sherrard, a certified financial planner at Rinehart & Associates in Charlotte, says switching to a smaller apartment can be a money-saving strategy for older Americans who’ve set their hearts on moving into a specific retirement community.
"I’ve seen communities allow couples to move in with a percentage of the entry fee due initially, but a delay on the remainder being due for a period of six months after move-in," giving seniors wiggle to complete the sale of a house, she says.
"Retirement communities backed by nonprofit religious organizations can be a more affordable option," says Karen Schaeffer, president of Schaeffer Financial in Rockville, Md. (These communities welcome people of all beliefs).
Temple recommends asking independent and assisted-living facilities about "non-premium rooms" that can be real bargains, but generally aren’t advertised. Longer walks to the dining room and less desirable layouts or views account for the cheaper rates. Having a roommate might not be everyone’s cup of tea, but "companion rates" can shave $1,000 a month off rent for single seniors who are willing to share, he says.
Widening your geographic search even by just a few miles can produce more budget-friendly options, says Karen Altfest, vice president of L.J. Altfest & Co. Inc., a fee-only financial planning firm in Manhattan.
Family members can pitch in toward the cost of care in a variety of ways. For instance, individuals can make gifts of up to $12,000 per person per year without paying a federal gift tax. That exclusion amount will increase to $13,000 in 2009.
Another option is an intra-family loan. This could provide a mechanism for adult children to lend money to cash-strapped parents who need funds now to pay for care until they can sell their homes.
A reverse mortgage is another option. Reverse mortgages enable home owners aged 62 or older, who own their home outright or have a small mortgage balance, to convert home equity into cash without selling the house. The Home Equity Conversion Mortgage, or HECM, insured by the Federal Housing Administration and backed by the U.S. Department of Housing and Urban Development, or HUD, is the most popular kind. Lending institutions also offer their own proprietary products.
The amount you can borrow will depend on your age, how much your home is worth and current interest rates. For a HECM the limit is $417,000, proprietary products may allow you to borrow more.
Payments can be taken as a lump sum, in regular installments or as needed, or through a combination of these options. The accrued principle and interest comes due when the last borrower dies, sells the home or moves out permanently.
A big drawback of a reverse mortgage is the high fees, which closely mirror the closing costs on a regular mortgage. For this reason, says Sue Hunt, a housing counseling programs manager for Consumer Credit Counseling Service of Greater Atlanta, reverse mortgages tend to make the most sense for people who want to spend the rest of their lives in their homes and whose total income, including the loan, will be sufficient to cover all their future expenses, she says.
Another consideration is what, if anything, you plan to leave your heirs.
With any type of loan, it’s important to ensure you understand the fees, interest rates, repayment terms. For instance, an important safety feature of a HECM is that your payments from the lender are guaranteed by the federal government. Plus, if your home is sold for an amount lower than the value of the loan neither you nor your heirs will be liable for the balance, which isn’t always the case with proprietary products.
And finally, whatever financial strategy you’re thinking of pursuing don’t forget to run it by your tax adviser before you sign on any dotted lines.