I recently read your review of my book on Amazon, and I found your comments to be very enlightening, so I thought I’d reply to them. You highlighted several observations that I think would be good to address.
The charts are impossible to read. I have long struggled with how to get Kindle images to be appear readable. After hearing your comment, I’ve decided to update the book with a note asking readers to email me for full-version images. I will also include a link on my website if readers prefer to access them there. If you’ll email me, I’ll send you a PDF of them as well.
There were some type-o’s. Thanks for catching them! Senior Housing Move is a small shop, and sometimes things slip by. I’ll update the Twitter handle and the South Carolina CCRC resident association listing at the same time that I’m adding my chart notice.
I didn’t compare CCRC living to living at home. This is a really good point. I had assumed that most people doing the analysis would have already chosen to move into a CCRC. That would make the “living at home vs. CCRC” analysis a mute point. However, I can see now why people would be interested in comparing the two. Since that’s a really long topic, I’m going to dedicate a whole new post to it. Stay tuned for that.
I did not consider a 0% discount rate for seniors. Discount rates are basically opportunity costs. A discount rate says: How much of a return would I be giving up if I chose Project B instead of Project A? As such, I’m not sure why a senior would have a discount rate of 0%.
You could argue that the cash rate right now is virtually 0%, and since most seniors have their money in cash or cash equivalents, then 0% is pretty close to a real discount rate. If so, then that’s a fair argument.
However, high net worth clients who are interested in moving into a CCRC generally don’t have just cash investments. They’re liquidating either part of their portfolio or their home in order to pay the entrance fee. Those are investments that have higher expectations regarding returns. (Again, one could make an argument that homes are not investments, and therefore, they shouldn’t have a discount rate applied to them.)
Ultimately, it’s up to individual planners (and savvy investors such as yourself) as to how to treat the discount rate. When you put it in the context of a 10-15 year time horizon, changing the rate a few percentage points might not make that big of a difference. Again, that all depends on the cash flows. If you think your personal rate is 0%, then run the analysis at 0%. There’s no rule against doing it your way. I assumed 8% because it was a reasonable long-term market return, and I assumed that seniors would have a non-zero opportunity cost to their funds.
Acceptable financial ratios should be spelled out. I struggled with this one when I was writing the book. The problem with financial ratios is that they aren’t set in stone. For instance, it seems like a 10% profit margin would be a good thing for a CCRC, right? Well, what if it’s a nonprofit with a large endowment? Shouldn’t it be paying out some of its endowment income to help lower the rates for its residents? Likewise, what if it’s a nonprofit that’s got a negative profit margin but is using its endowment to help lower resident costs?
For profits encounter the same sorts of issues. A negative profit margin is obviously a bad thing. But, what exactly constitutes a “healthy” positive profit margin? Do you really want to move into a community that makes a 40% margin? The implication is that residents might be paying too much for their care or that management is understaffing certain areas of the community (or skipping on regular maintenance, etc). Furthermore, a start-up CCRC will have a negative margin by definition. Should that count against it?
Debt coverage ratios, debt to equity, and others, taken together with profit margin, can give you a better idea of the health of the community. However, like most things, the context in which the ratios are used is probably more important than giving a range of numbers. My hope was that a financial planner would use these as simple guides to eliminate communities that were definitely in financial distress and highlight ones that were in better situations. Perhaps I’ll add more discussion in later editions.
The LifeCare/Fee for Service equation was not spelled out. You ask the question: “Are the CCRC costs worth the life-care benefit? Will I be paying $700,000 over my lifetime to get $250,000 in future life-care benefits? Or, vice versa?“
Again, this might be something that could be answered if you were to see the charts. You are right to suggest that the question has a lot to do with actuarial projections, which are beyond the scope of my book. Without a skilled actuary, the best that you can do is make an honest guess as to what your long-term care costs will be (possibly with the help of your physician) and then run a sensitivity analysis.
As a side note: you might find the long-term care insurance vs. LifeCare chart interesting. In a nutshell, I found that the $30,000 average up-front LifeCare cost (that’s what communities usually charge over and above their regular entrance fee) doesn’t really compare to the benefits that one could get from long-term care insurance. However, given the state of the long-term care insurance industry, the analysis isn’t that simple. For one, long-term care and LifeCare don’t cover exactly the same things. Secondly, you’ve got to look at the financial stability of both the CCRC and the long-term care insurance provider. Third, you have to look at the specifics of each contract.
The leasing vs. fee for service vs. LifeCare decision wasn’t addressed. I think having the charts from the book might help with this issue. I do complete a basic net present value analysis for these options. My conclusion was that there are several factors that are involved in the decision, including a person’s available assets, their estate plans, their anticipated life expectancy, and their health status.
Whether or not you choose LifeCare, long-term care insurance, or a fee for service CCRC, a rental CCRC, or staying at home are analyses that have so many variables as to make it impossible to write a book about them. I can tell you the basic methods for analyzing these questions (which is the reason that I included the chapters on net present value calculations), but the inputs vary so widely that I can’t really nail down a specific formula for you to reproduce the calculation in every situation.
The cash flow analyses need to consider other alternatives. I’m not sure what other alternatives you’d be interested in seeing. Living at home seems to be the biggest one. What other expenses should be taken into account?
CCRC oversights (like murder in a nursing ward) were not mentioned. I agree with you that these sorts of events are tragic, and they happen far too often in senior housing situations. (While I’m not familiar with the event in question, I’d be interested in seeing the link to the news article, if available.)
Unfortunately, that’s where it gets more difficult for both the financial planner and the individual. How exactly does one find out about such events prior to moving into a community? I don’t think there’s a good answer to that question.
In my book for consumers, I dedicate more space to this investigation. I include things like:
- Do an online search for the community, and click past the first page of results. (This would help uncover news articles about the community that don’t appear at the top of the rankings.)
- Visit the nursing home unannounced.
- Ask families and residents about their experiences at the community.
- Check the Nursing Home Compare rating.
These aren’t fool-proof methods, but they’ll yield some information.
Unfortunately, people in assisted living, memory care, and skilled nursing facilities are in fragile states. Even if you’re living at home, you run the risk of caregiver neglect and abuse. I’m not sure that there’s ever an easy answer for things like that. If you find it, please let me know.
Whew! That was the longest post that I’ve ever written for this blog. As always, please email me if you have questions (email@example.com). I’m going to try to have the living at home vs. CCRC post up by the end of the week.
Thanks for your input, Walt from Sun City! I wish you the best of luck in your senior housing decision-making.