This is the 17th in a series of articles intended to demystify the experience of living in a retirement community.
Costs for an independent living apartment and meals for one person in communities researched for this series range from $22,000/year to $62,000/year, depending on the community and apartment size. For two people, the cost is generally increased by roughly the cost of meals for a second person. Occasionally, there is a relatively small additional monthly fee unrelated to meals.
So how can you cover the costs?
Retirement communities are typically happy to help you find answers to this question. They may have an expert on site, or they may refer you to a third party who can help you work through the numbers at no charge.
Solutions for a 65-year-old in good health may be different from those for an 85-year-old in poor health. That said, four common options for paying for independent living follow.
First, use money currently spent on living expenses that go away with a move to a retirement community. These include items such as rent/mortgage, homeowners' insurance, utilities, house cleaning, building and grounds maintenance, perhaps automobile expenses and insurance, and meals if you have included the cost of meals in the retirement community calculation.
Additionally, remember to include big periodic expenses, such as roof repairs, plumbing and electrical repairs, major kitchen appliance replacements, and so forth. You might also find that you can apply money that you have typically spent on restaurants and entertainment, because you may eat out in the on-site restaurant every day, and can enjoy many activities and entertainments offered at no extra charge.
Second, if you sell a house as part of a move, you might draw on some of those funds (or on the income they generate) each year. For example, if you sold your house for $200,000 and you and your financial planner agree that it is reasonable to spend 4 percent of that money each year, you could apply $8000/year to the costs of the retirement community.
Your financial planner will generally expect that growth in your diversified portfolio will more than cover this withdrawal, leaving you with at least as much money at the end of the year as you had at the beginning of the year.
Third, consider converting a portion of your assets into an immediate fixed annuity. In exchange for purchasing the annuity, you are promised monthly payments for life, starting right away. Some people consider buying an annuity to be akin to creating a pension for yourself.
In this scenario, depending on your age and the interest rates in effect, you may end up with more money to spend each month than you would by simply drawing 4 percent of the value of your investments.
Fourth, consider buying "longevity insurance," that is, a deferred fixed annuity. In this scenario, as an example, you might buy an annuity at the age of 60 that will start making monthly payments to you at the age of 75, coinciding with your planned move into a retirement community. Again, this approach could provide more cash than you would otherwise feel comfortable spending.
It's very important to consult a competent financial adviser before considering the second, third, and/or fourth options, because each of these comes with serious pitfalls that can cause you big problems if you are not extremely familiar with them.
For example, if you turn over a chunk of your assets to an insurance company that goes bankrupt, you could lose virtually all of the money that you put into an annuity. As another example, if it's important to you to have the greatest amount of money possible to give to your heirs, then you might not want to use some of it to buy an annuity.
Further, if you buy an annuity when interest rates are low, it may not provide as much income as you thought it would, and it's possible that you would have ended up with more money to spend by keeping it yourself in a diversified portfolio.
Each solution also has tax implications that it are important to understand before proceeding.
The next column will talk about ways to pay for assisted living and skilled nursing.