Most resident in assisted living communities depend on their after-tax annual incomes to pay their bills. Some also rely on contributions from family members. However, new methods of payment must be found if the senior housing industry is to serve more than just the small percentage of seniors who can afford private-pay assisted living on their income alone

Moore, Jim

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Marquette University Law School

Marquette Elder's AdvisorVolume 4Issue 2 Fall Article 3Spending Assets Prudently for Quality AssistedLivingJim MooreFollow this and additional works at: http://scholarship.law.marquette.edu/eldersPart of the Elder Law CommonsThis Featured Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted forinclusion in Marquette Elder's Advisor by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contactmegan.obrien@marquette.edu.Repository CitationMoore, Jim (2002) "Spending Assets Prudently for Quality Assisted Living," Marquette Elder's Advisor: Vol. 4: Iss. 2, Article 3.Available at: http://scholarship.law.marquette.edu/elders/vol4/iss2/3Spending Assets PrudentlyFor Quality Assisted LivingMost residents in assisted livingcommunities depend on their after-taxannual incomes to pay their bills. Somealso rely on contributions from familymembers. However, new methods ofpayment must be found if the seniorhousing industry is to serve more thanjust the small percentage of seniors whocan afford private-pay assisted living ontheir income alone.By Jim MooreJim Moore is President of Moore Diversified Services,Inc., a Fort Worth, Texas-based senior housing andhealth care consulting firm. He has authored severalbooks on assisted living and senior housing, includingASSISTED LIVING STRATEGIES FOR CHANGING MARKETS.Caution: The concepts outlined in this article havenot been universally accepted by the industry, per-sonal financial planners, or the consumer market-place. But we must find new approaches to solvingold problems by sometimes stepping outside thebox. If you utilize these ideas, do so with extremecaution-perhaps initially on a limited, experimen-tal basis.*he great majority of the assisted liv-ing communities developed in theUnited States over the last ten years arestructured to be on a private-pay basis.Most residents must rely on theirSocial Security, company pensions, and interestearned on their lifetime savings-in other words,their after-tax annual incomes-to pay their bills.Some may also get help from their adult children orother relatives. But other creative, prudent meth-ods of payment must be found if the senior hous-ing industry is to serve more than just the thirty tothirty-five percent of seniors aged eighty and overwho currently can realistically afford to pay pri-vately for assisted living.In order to have enough money to pay for otherdiscretionary purchases, a senior should ideallyspend no more than eighty percent of his or herafter-tax income on the assisted living monthlyfee. At today's rate, that rules out approximatelysixty-five to seventy percent of seniors aged eightyand over.However, many of those same seniors couldafford assisted living if they approached the costsimilarly to nursing home or continuing care. Thatmeans introducing innovative options such asproperly planned spending of assets.The Case of Mrs. BarkerConsider Mrs. Barker, an eighty-three year-oldwidow living alone in a home she has owned forthirty years. A recent heart attack and osteoporosishave taken their toll and left her frail, occasionallyforgetful, and in need of assistance with the activitiesof daily living. She has a modest after-tax income of14ARTICLE I Spending Assets Prudently For Quality Assisted Living$22,500 a year, or $1,875 a month. Figure 1 sum-marizes Mrs. Barker's situation.Mrs. Barker and her daughter, Kim, have con-sidered the options. Mrs. Barker could move inwith Kim and her husband Bill, or find a moremodestly priced residential facility (perhaps withsemiprivate accommodations). She could stay inher house (at relatively high risk) while accessingintermittent, marginally effective, and costly homehealth services. Ultimately, she might end up in anursing home, spending the assets she and her hus-band had accumulated over a lifetime. Eventually,she might be a Medicaid recipient.After considerable homework and soul-search-ing, Mrs. Barker's daughter concludes that TheGardens at Westridge, an assisted living communi-ty, is the most suitable place for her mother; Mrs.Barker reluctantly agrees. But eighty percent ofMrs. Barker's after-tax income is only $1,500 permonth, and The Gardens charges $2,500 permonth for basic services and a reasonable array ofassistance with the activities of daily living.(Approximately forty-five minutes of direct, hands-on care per day.)An Analysis of Mrs. Barker's FinancesTo be prudent, we can assume that Mrs. Barker'sSocial Security income of approximately $900 amonth will increase at only two percent per year,while the after-tax interest rate on her existing sav-ings portfolio of approximately $235,000 will con-tinue to earn a conservative five percent annually.We can also reasonably assume that The Gardensat Westridge's assisted living service fee ($2,500 permonth in 2002) will likely increase at about fourpercent a year. Figure 2 summarizes the situation.A most critical assumption is Mrs. Barker'sreasonable life expectancy. Based on lifeexpectancy tables for an eighty-three-year-oldFigure 1MRS. BARKER'S CURRENT SITUATION83 Year-Old Widow:- Statistical Life Expectancy: 6 YearsLives Alone in Her Home of 30 Years:- Current Home Value: $110,000- Mortgage paid offCurrent Health Condition:- Recent Heart Attack & Advancing Osteoporosis- Somewhat Forgetful & Frail- Needs Assistance With Approximately 3 ADLs- Considering Moving to an Assisted Living CommunityCurrent After-Tax Income of $1,875/Month, or $22,500/Year:- Social Security is $900/Month- Savings Portfolio of $235,000 (earns $975/Month at 5% after-tax savings)Can Afford to Spend 80% of Her After-Tax Income for Assisted Living:- $22,500 x .80 = $18,000/Year, or $1,500/MonthSource: Moore Diversified Services, Inc.-1 =1516 I Eawa1~~' AAhrraniFigure 2MRS. BARKER LIKESTHE GARDENS AT WESTRIDGEThe Gardens at Westridge2002 Monthly ServiceFee (MSF): $2,500/MonthlAnnual MSF Escalation: 4%Mrs. Barker's Options Appear Limited:1. Do nothing;2. Access home health care on a sporadic basis;3. Try to find less desirable, semi-privateassisted living accommodations;4. Continue to live at home at increased risk;or...GET CREATIVE!Mrs. Barker'sCurrent SituationA $1,000/Month incomeaffordability shortfallOnly her Social Securityhas a modest COLA2 of a modest2%/yearlWith reasonable allowance for assistance with Activities of Daily Living (ADLs).2 COLA = Cost of Living AdjustmentSource: Moore Diversified Services, Inc.female, and her personal physician's assessmentof her current health, Mrs. Barker's estimatedlife expectancy is six years. Of course, she couldoutlive her statistical life expectancy, so spend-ing of assets must be conservative. In any case,Mrs. Barker wants to leave what she can to herchildren.Putting Home Equity to Work PrudentlyFortunately, Mrs. Barker owns her home freeand clear. Its market value is approximately$110,000; thus, upon sale, she would netapproximately $100,000 after selling costs. (SeeFigure 3.)Through carefully planned spending of the pro-ceeds of her house-the liquidated home equity-she can fill the "affordability gap" in her incomeand pay for her residence at The Gardens. Herexisting $235,000 savings portfolio remains intactto serve as her final estate or act as a financialbuffer in the event of a very long life or unantici-pated expenses.Figures 4 and 5 illustrate Mrs. Barker's assetspending profile. If net proceeds from her homesale were $100,000, that would last for eightyears-beyond her life expectancy of six years. Ifher home netted $150,000, the spending profilewould last for about eleven years.16Elder's Advisor$110,000(10,000)$100,000Figure 3MRS. BARKER AND HER DAUGHTER GET CREATIVE1. The Plan: (in round numbers)Sell HomeSelling Costs @ 9% - Approx.Net Sales Proceeds2. Set up a "Declining Balance Fund" to Cover the Gap Between:a. 80% of Her Current After-Tax Income ($1,500/Month); and,b.The 2002 Assisted Living MSF of $2,500 (This Fund coversthe 2002 Gap of $1,000/month)3. Some Other Variables to Consider:Fund Earnings: 5% (After-Tax)MSF Annual Increase: 4%Source: Moore Diversified Services, Inc.Figure 4A PRUDENT SPENDING PROFILE CAN BE STRUCTURED TO EXCEED A SENIOR'S EXPECTED LIFERequired toCover a $2,500 MSF1Payment FromCurrent Income$2,000/mo1,7501,500Maximum Term of Senior'sSpending Using Only LiquidatedNet Home Equity of:2Spending AssetsPer Month3$500/mo7501,000$100,00011 Years98Prudent and individually planned assisted living asset spending models can deliver affordabil-ity with time spans that will likely exceed the statistical life expectancy of many seniors.Note At the end of the time span indicated above, Mrs. Barker still has the original prin-cipal value of her existing savings portfolio (reference Figure 1).1MSF = Monthly Service Fee2Reflects annuity model that considers the time value of money (interest earned).3Spending funding shortfall v. required base MSF of $2,500/month.Source: Moore Diversified Services, Inc.$125,00013 Years119$150,00015 Years121117ARTICLE I Spending Assets Prudently o ult sitdLvn18What Has Mrs. Barker Accomplished?To summarize Mrs. Barker's future prospects:* Mrs. Barker optimizes the quality of life forher remaining years with dignity, propercare, and optimum independence in a settingof her choice;* Her family lives free of guilt about her needfor care, with reasonable peace of mind;* A previously untapped asset, home equity, isput to work prudently, creatively, and cost-effectively; and,* Mrs. Barker still retains her original$235,000 savings portfolio for her estate oran emergency fund.Of course, there is yet another option: financialhelp from her family. This could be brought intoplay if Mrs. Barker encounters financial difficulty.Is Spending Assets "Financial Voodoo"Or a Dominant Trend?How much of this kind of spending is going on? It'shard to know, and evidence is difficult to obtain.Many assisted living owners/operators are engag-ing in "Don't ask, don't tell." That is, rather thanask about income and asset qualifications, theysimply inform seniors and their families what itcosts to live in their communities and then let themdecide whether they can afford it.Spending savings and assets has occurred in othersenior housing settings for many years. It is universal-ly accepted in nursing homes, where the governmentprovides Medicaid coverage only if a residentbecomes impoverished. About seventy percent of the1.6 million nursing beds are funded by Medicaid.Residents of continuing care retirement commu-nities (CCRCs) also spend savings in paying theirnonrefundable entry fees. Communities that chargeentry fees may offer only partial or no refund whena resident dies or moves out. Many retain a certainpercentage of the entry fee every month until reach-ing a refundability floor (usually fifty to eighty per-cent). For example, if the entry fee for a particularunit in a CCRC is $100,000 and the non-refund-ability rate is two percent per month, residents areessentially spending $2,000 of their assets everymonth until reaching a typical guaranteed refund-FIGURE 5MRS. BARKERS'S ASSISTED LIVINGSPENDING PROFILE$175,000$150,000Portfolio 3 - Beginning Balance $150,000-$125,0000$100,000$, Por 2 Pollo2- Beginning Balance $125,000$75,0000. $50,000FPortfolio 1 - Beginning Balance $100,000$25,000$00 1 2 3 4 5 6 7 8 9 10 11YearsMoore Diversified Services, Inc.| Eld r' Ad iARTICLE I Spending Assets Prudently For Quality Assisted Living 19ability floor of fifty to eighty percent. Some CCRCsallow residents to spend the remainder of theirentry fees to make up the difference if risingmonthly fees exceed their current incomes.Formulas depend upon state regulatory require-ments as well as contract terms.Another way to look at this situation is toobserve the effective monthly service fee. If aCCRC is charging $1,800 for a conventionalmonthly service fee, we can add to that the$2,000/month nonrefundable portion of the entryfee (spending), for a total effective fee of $3,800 amonth! (Of course, the CCRC resident need notkeep funds for the types of care promised in theCCRC contract, particularly nursing home care.)Figures 6 and 7 compare typical CCRC spendingwith planned assisted living spending.The Complexities of Qualifying IncomesSeniors who don't want to spend down theirassets should pay only about eighty percentof their after-tax income for assisted living,leaving the rest for other discretionary purchas-es. This modest discretionary income pool canbe used initially for modest lifestyle expendi-tures in the early stages of a senior's residencein assisted living. Later, as their lifestylebecomes more limited, these available fundscan be shifted to pay for advanced levels oftiered pricing as additional assistance withADLs is provided.Applying these tax and discretionary income fac-tors yields the following calculations:Monthly AnnuallyRequired MonthlyService Fee $2,500Adjust for 20 percentdiscretionary income $3,125Adjust for required pre-taxgross income:- 10 percent averagetax bracket- 15 percent averagetax bracket$3,475$3,675$30,000$37,500$41,700$44,115Figure 6COMPARISON OF ASSISTED LIVING SPENDING RATEVS. TYPICAL CCRC ENTRY FEE NON-REFUNDABILITY RATEAssisted LivingSpending/Monthl$500/mo$750$1,000Assisted LivingRate of Monthly Spendingl$100,0000.5%/mo0.81.0$125,0000.4%/mo0.60.8$150.0000.3%/mo0.50.7Versus...... A Conventional CCRC Entry Fee'sNon-Refundability (Effective Spending) Rateof 1.5% to 2.0%/mo.2'Typical source is liquidated home equity. (See Figures 4 and 5).2 1n some situations, the non-refundable portion of the EF is purchasing limited lifecare benefits.Source: Moore Diversified Services, Inc.ARTICLE I Spending Assets Prudently For Ouality Assisted Living i9| Eld w~rnFigure 7IS SPENDING SAVINGS REALLY A NEW CONCEPT?Spending Has Been Taking Place in For-Profit andNot-For-Profit CCRCs for YearsComparison of CCRC Entry FeeNon-Refundability vs. Assisted Living SpendingCCRC Entry Fee (EF):Refundability TypicallyCCRC EF SpendingCharacteristics ...Non-RefundablePortion of EFNo. of Months ofSpending@ $2,000/mo$100,000 (Typical Minimum EF)Declines at 2% per Month or $2,0001Guaranteed EF (Floor) Refundability Levels80%$20,00010 months50% 0%$50,00025 months$100,00050 monthsVersus Assisted LivingSpending CharacteristicsEquivalent No. ofMonths @ $1,000/month (Using MDS =Spending Model)336 months 52 months 84 months11n some situations, the non-refundable portion of the EF is purchasing limited lifecare benefits.2Average length of stay in assisted living: 24 months.3Refer to Figure 4.Source: Moore Diversified Services, Inc.,iner vsor-9 A A20ARTICLE I Snendin~ Assets Prudently For Oualitv Assisted Living 21Thus, someone who must pay $2,500 permonth, or $30,000 per year in after-tax dollarsfor assisted living service fees and still have twen-ty percent for discretionary purchases (withoutspending down assets) would actually need$37,500 in annual after-tax disposable income.That comes to about $42,000 to $44,000 in pre-tax income, depending on their individual tax sit-uations. The economics of prudent spending aresummarized in Figure 8.Increased Savings Portfolio:Another OptionInstead of spending down her $100,000, Mrs.Barker could add it to her current savings port-folio. Assuming that it earned five percentinterest, it would produce an additional after-tax income of approximately $5,000 a year, or$417 a month.Added to her $1,500 budget, this additionalincome would allow her to spend approximately$1,917 per month for The Gardens at Westridge.Obviously, this would still leave her short of thenecessary $2,500 by $583 per month.Approach Assisted Living Savings andAsset Spending With Extreme CautionThe concept of spending in assisted living needscautious, extensive market testing. The prudentapproach would be to implement spending of theliquidated home equity, but not a senior's exist-ing savings portfolio. Significant safety marginsFigure 8THE ECONOMICS OF PRUDENT ASSISTED LIVING SPENDING(How a Senior Consumer Can Cover a Shortfall Involving a $2,500 Base Monthly Service Fee)After-TaxMonthlyPaymentFromCurrentIncome$2,500/mo$2,000$1,750$1,500Amount ofSpendingPerMonth-0-$500$750$1,000BaseMSF$30,000per year$24,000$21,000$18,000RequirementsAvailableWith 20%DiscretionaryIncome$37,500per year$30,000$26,250$22,500Pre-TaxIncomeDiscretionaryIncome @ 20%Annual$7,500per year$6,000$3,700$3,175RequiredBeforeMonthly Spendingl$625monthly$500$310$265$44,115per year 2$35,3002$29,1653$25,0003MSF = Monthly Service FeelUsing a prudent spend-down model, annual pre-tax income requirements are signifi-cantly reduced by as much as $20,000.. .increasing the potential market.2Using an average tax bracket of 15%.3Using an average tax bracket of 10%.Source: Moore Diversified Services, Inc.ARTICl F I Snending Assets Prudentiv For Ouality Assisted Living 21I Elder's Advisorshould be deployed. These concepts are not with-out challenges, but their potential to expand themarket for assisted living is significant and worthexploring.Is spending a significant factor in assisted livingtoday? Probably not. But it will likely becomemuch more common over the next few years.A Final Word of CautionTo a casual observer, the Barkers' story might seeman ideal solution for a family. However, experiencedassisted living professionals know it's rarely-ifever-that simple.Spending savings is universally accepted andworks in nursing homes because the governmentcan be counted on to step in with Medicaid cover-age once a resident becomes impoverished. This isoften not the case in assisted living. Medicaidwaivers for assisted living are limited in number,and most owner/operators consider Medicaidreimbursement rates to be too low.22

Spending Assets Prudently for Quality Assisted Living

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Spending Assets Prudently for Quality Assisted Living

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