Angie M. Stephenson, CFP®, CPA/PFS, has a depth of knowledge second only to her dedication to clients and Domani Wealth team members. She works with clients including individuals, families, trusts, and charitable foundations, coming alongside each to guide and manage detailed financial plans built to serve the client’s goals. As a founding member of the firm, her role also encompasses leading Domani Wealth as a member of its executive management team.
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As our clients move from pre-retirement years to early retirement years to later years, many things will shift—from risk levels, to income, to daily responsibilities.
And of course, as the population ages, health can begin to shift and decline as well.
In light of that, many clients will begin to have major discussions around healthcare options and costs, around transitioning their home life, and possibly including migrating to a continuing care retirement community (CCRC). Each of these conversations can be a turning point for both their personal and financial life, and as financial planners, it’s important we are well-versed in the nuances of these decisions.
Following are some points to equip financial planners in three specific areas: Medicare premiums and life changes, selling a primary residence, and considerations for transitioning to a retirement home. It’s likely most clients will experience decision-making around one or more of these as they work with a financial planner.
Medicare Premiums or Life-Changing Events
As clients face changes in their lives, if they’ve reached the age to be eligible for Medicare, their premiums will be set at a specific amount each month. This amount is based on the individual’s modified adjusted gross income (MAGI) from two years previous to the date the premium was set. However, income levels can change over time, often related to a life event.
In light of this, Medicare allows for an individual to file for a life-changing event, which can adjust their premium after one of the following events occur:
- Divorce or annulment
- Death of a spouse
- Retiring/stopping work, or reducing work hours
- Loss of pension income
This may seem like a small matter—some extra paperwork to fill out for a client and/or their financial planner. However, it can make a big impact in the life of a client as they are aging.
Medicare premiums per month can range from $148.50 per person in 2021, to $583 per person, based on the MAGI for recipients from two years prior. As you can see, that can be a difference of several hundred dollars each month of cashflow. Especially for a client who’s gone through a major situation altering their lives, they may have much reduced income because of some of these scenarios. A lower premium amount could have a reasonable effect on the amount of funds a client may have available to spend in their monthly budget.
This updated status may be changed multiple times for a client if they have lived through more than one of these situations.
The most common life event surrounds retirement. As wages from a paycheck come to an end, generally the retirement income from Social Security, investment earnings, and a possible pension plan will result in less income during retirement.
Divorces from older individuals are also on the rise, and that is another more common life event, with clients needing to file for a life-changing event to reduce an individual’s premium.
Taking advantage of communicating these life changes with Medicare may result in reasonable savings that improve a client’s cash flow to assist in funding their retirement.
Retirement Community Considerations
With changing health and different needs as clients age, another way to assist a client with a life transition and their financial plan may be moving to a CCRC. More than 10,000 people in the United States turn 65 each day, according to AARP, so these discussions will only become more common.
The benefit of these types of communities is their design to allow a resident to move into the community and remain there for the balance of their lives. These types of communities include four levels of living: independent living, assisted living, memory care, and skilled nursing care. With this approach, a CCRC will enable someone to have the care they need as their health may change as they age.
Financial planners often assist clients to walk through the layers of consideration to decide if a CCRC is appropriate for the client and, if yes, then to select a retirement community. Their health and day-to-day needs, possible medical care needs based on diagnosis and family medical history, and even the attraction of living in a planned community with amenities and no responsibility for maintaining the property will lead to these deliberations.
Considerations for Selection
Working with clients on a financial plan involving a transition to a retirement community requires thinking about future possible needs, financial considerations, and personal preferences. Your conversations should cover:
- Location and reputation of the retirement community, including healthcare rankings.
- Financial commitment and ongoing financial obligation.
- Amenities such as fitness centers, game rooms, art and libraries, gardening spaces, trip options and outings, continual learning opportunities, and social gatherings.
- Dining options and quality of food.
- Pet friendliness.
- Transportation available for personal outings.
- Family-friendly atmosphere for visitors.
- Religious and other groups or fraternal affiliations.
These and more will be part of the dialogue working through financial planning with clients related to retirement communities. Age, health assessments, life expectancy, and financial resources will all come into play. In turn, these items will help dictate what kind of contract may be best for clients to consider.
CCRC Contract Details
Different retirement communities host different levels of commitments and contracts. Not everyone will have multiple contract types available. Options may include:
- Type A Plan: Life Care. This has a higher entrance fee and monthly rental fee; however, clients will be allowed to progress through the phases of care without additional financial commitment for regular care. These entrance fees vary depending on the size of the home unit selected. Some of the larger home units can cost more than $500,000.
- Type B Plan: Modified Fee for Service. Generally, this plan has a lower entry fee than Type A, but it may only provide a limited amount of assisted living or nursing care in the fee. If more healthcare is needed, it is often provided at a discounted rate.
- Type C Plan: Fee for Service. This plan has a lower entry fee than A or B, but any healthcare needed is “pay as you go” at full market rates.
- A Rental Contract. This option has a minimal entry fee, reduced level of residential services and amenities, and healthcare at full market rates.
Financial planners should work with clients to carefully consider which option may be best for someone seeking to shift into a retirement community as they age.
The contract is not the only financial consideration for financial planners exploring retirement community thoughts with their clients. The entire direction of moving into a retirement community needs to fit into a client’s overall financial plan.
- Tax savings. Are there any tax considerations that may factor into the various types of contracts? For a Plan A: Life Care option, a portion of the entrance fee may be considered a medical deduction for tax purposes. In addition, there can be a portion of the monthly fee considered as a medical deduction as well. In some cases, the medical expense deduction for an entrance fee can top $40,000 to $50,000 as an allowable expense. This is very important not to overlook the tax savings to better determine what your out-of-pocket, after-tax expense is expected to be.
- Home sale. Will the sale of the client’s principal residence provide enough liquidity to cover their entrance fee or pay for a large portion of it? In many cases, this can be a close swap and will allow a client to retain more of their liquid net worth.
- Insurance policies. Does the client have a long-term care policy that will provide financial assistance if they need skilled care services? In this case, it may be that Plans B and C will be a more attractive financial option for the client based on the additional long-term care coverage that they already have in place.
- Expenses. Calculate the expenses they are paying as a current homeowner. This includes real estate taxes, property insurance, utilities, maintenance and repairs, lawn and landscaping costs, etc. These expenses will be eliminated and can offset the ongoing costs of moving to a retirement community.
Assisting clients through retirement community evaluations as part of their life changes and adjustments to their financial plans means working through many layers.
Selling a Primary Residence
Another area of discussion as clients continue to age and financial planners are discussing ways in which their health may be impacting their daily lives may be selling of a principal residence.
For many individuals, the sale of a principal residence may have always been part of a long-term financial plan.
Those in retirement often have a large illiquid asset sitting in the value of their principal residence. In many cases, a client’s financial plan may reflect that in later years they will sell their larger family homes and use the proceeds for other retirement needs. These needs may include providing additional liquidity into their financial plans where the funds are invested and can be used to subsidize their retirement spending.
That same asset, once liquified, may be a financial means to pay for an entrance fee into a CCRC. Those individuals who may not want to consider such a location for living may instead use the reserve of funds to pay for the healthcare needs in their own home.
In some cases, the principal residence as an asset isn’t needed for liquidity, but, rather, a client may simply be looking to downsize as their home is too large as empty nesters with a lot of upkeep and costs to maintain as they age.
With the robust housing market thus far this year and very low mortgage rates, it may be a good opportunity to revisit where clients are in their retirement plans as it pertains to their homes. Those who have planned to sell their homes as part of their financial plans and use the proceeds for retirement needs or supplemental income may be considering accelerating those decisions to take advantage of the strong “seller’s market” right now.
Taxes are, of course, a player in this. The current tax law allows for a married couple to exclude up to $500,000 of gain from selling a qualifying principal residence and $250,000 for a single individual. In some cases, depending on how long an individual has owned a property and with the very strong real estate valuations currently, it may be possible that the gain on the sale of the house will exceed these IRS exclusion amounts. If this is the case, financial planners can counsel clients to reconstruct the tax cost basis in their homes. They sometimes forget or lose sight of the costs that may be added to their original purchase price. For many years, this may not have been a factor and people have forgotten to keep these records.
The following items can be considered in adding to the cost basis of a home:
- Improvements to the house such as additional rooms, updated bathrooms, decks, porches, etc. Any improvement that is permanently attached to your real estate should add to the cost basis.
- HVAC systems, hot water tanks, water treatment or softeners, etc.
- New flooring.
- Garage door openers.
- Appliances such as dishwashers, garbage disposals, stoves that stay with the house, etc.
- Wall coverings, weather stripping, shutters, alarm systems, doorbells, etc.
Many of those approaching or in retirement have lived in their homes for 30-plus years. The valuations may see these IRS exclusion levels exceeded, especially if your client is a divorcee now selling a home with a smaller exclusion of $250,000. We find that clients may not truly understand what can be added to the cost basis of their homes. Providing this guidance may save them significant tax dollars. These improvements are regular occurrences with home ownership and can add up quickly.
It certainly is a seller’s market right now. Houses are not staying on the market for long, and in many cases, sellers are not accepting contingency offers, and inspections are being waived. Houses are being listed, sold, and the transaction is closed from 30 to 90 days after the day of listing.
Based on low mortgage rates, more buyers than sellers are in the market, and many homes are selling above the list prices. With a client who has an older home that may not have been completely updated with recent construction styles, this may be the type of market where they may not be as negatively affected as they may have been with a lower home sale price in a different market.
If you have clients whose plan is to sell their homes in retirement, it may be an opportune time to prompt that part of their plan.
As financial planners, we help clients through many stages of life—from setting on a strong path to retirement savings, to a business changing hands. There are many moments in life requiring modifications to financial plans.
As clients continue to age and health concerns may begin to loom larger, many clients will need guidance on related matters, including health insurance costs and living situation changes. Financial planners can be the trusted adviser helping clients