The Federal National Mortgage Association, commonly known as Fannie Mae (FNMA), and The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac (FHLMC), are publicly traded, government-sponsored entities (GSEs) that purchase mortgage loans from banks and mortgage banking companies. GSEs package these loans into mortgage back securities that are sold to investors. This process results in lower interest rates for homebuyers and allows these two entities to set standards for the mortgages they purchase and securitize.
As of January 1, 2022, condominium properties for which banks or mortgage bankers are seeking to sell loans to purchase individual units to GSEs must meet the following requirements:
• Properties with significant deferred maintenance items or that have received a repair directive from a regulatory or inspection agency must provide proof that needed repairs have been completed.
• At least 10% of the community’s annual budget must go to a reserve account to fund capital improvements needed to maintain the property.
• If a special assessment related to safety, soundness, structural integrity, or habitability has been proposed or approved, all related repairs must be fully completed.
Cooperator News New York
Prospective buyers of units in condominium properties with structural deficiencies or deferred maintenance that are unable to quality for FNMA/FHLMC financing are likely to have pay higher interest rates for their mortgage financing and will be able to finance a smaller portion of the purchase price, if they can get financing at all. The value of units in such buildings could significantly decline if they become more expensive and more difficult to finance.
Even if a condominium property has committed to make needed improvements and has a way to finance the work, GSEs will not purchase and securities mortgage to purchase units in a property with structural issues or deferred maintenance until all needed improvements are completed. For condominium properties needing major improvements, this could depress property values or prevent the sale of units for a year or more.
To collect information from condominium projects, FNMA and FHLMC or financial intermediaries wishing to sell mortgages for condominium unit will require condominium associations to complete form FNMA 1076A/FHLMC 476A shown below.
Benefits For Condominium Buyers – The amount of information available to purchasers of condominium units has varied by state and, in some cases, has required prospective purchases to dig through voluminous reserve studies and other documents to determine if any structural or deferred maintenance exist. It has also been difficult in some states for a prospective purchaser to determine if a condominium property has sufficient reserves to fund needed capital projects or may require a special assessment soon after a unit is purchased.
Since the collapse of Champlain Towers South (CTS), many have called for more stringent government requirements on condominiums, such as requiring more frequent independent studies to assess the adequacy of reserves and structural integrity and mandating minimum reserve levels. However, condominium developers and condominium associations generally oppose such mandates and it is not clear whether increased government regulation of condominiums will occur, despite the collapse of CTS. The adoption by FNMA and FHLMC reduces the need for governmental action by establishing a de facto national standard for condominium maintenance, reserves and structural integrity and a clear, straightforward way for a prospective purchaser to evaluate a property before purchase.
I would encourage anyone considering the purchase of a unit in a condominium, whether it be a multi-story property or community of single family homes, to obtain a copy of form FNMA 1076A/FHLMC 476A (shown above) before submitting a bid for a condominium unit, or making any purchase offer contingent upon your review of this form. Prospective buyers should also ask the seller to certify that the building qualifies for FNMA/FHLMC financing.
Making a purchase offer contingent on review of the FNMA/FHLMC form and having the seller certify the property qualifies for FNMA/FHLMC financing:
Assures the buyer that financing will be available at competitive rates.
Provides a quick and easy way to determine if structural deficiencies or deferred maintenance is a problem at the property.
Should alert the buyer to the potential for a special assessment soon after purchase.
I continue to find the Wall Street Journal one of the best sources of financial advice for seniors. In the “Ask Encore” column on Monday, October 31, 1017, Glenn Ruffenach recommends that retirees retain a financial advisor, despite fees that can run to 1% of assets. While some retirees have the skills and time to manage their finances late in life, Mr. Ruffenach recommends an advisor to:
Keep you from doing something stupid, like investing in a business opportunity offered by a relative or selling aggressively in a market pullback.
Establish and maintain a good allocation among asset classes.
Efficiently manage your tax liabilities including required distributions from retirement accounts.
Assist the surviving spouse, who may be less familiar with financial matters, with the support needed to maintain the nest egg you have built together.
If fees are a sticking point for you, Mr. Ruffenach notes major funds families, such as Vanguard Group (and I would add T. Rowe Price and Fidelity) and some financial service companies like Charles Schwab, Betterment and Wealthfront are now competing to be your advisor with fees considerably lower than 1%. I still see an experienced financial advisor offering more personalized advice than that available from the less seasoned staffers or automated advisory services available at some of the firms noted above. But, the key advice for retirees is that there is value in having an outside advisor and you should shop for one that offers a combination of services and fees with which you are comfortable.
As with most articles on my blog, this one started with a conversation with a friend. The friend recently turned 60 and is starting to seriously think about retiring from a professional position. He is thinking about a range of options: fully retiring at age 62, shifting to part-time with his firm and delaying retirement until 65 or 66, or continuing to work full-time until 65 or 66. From a lifestyle perspective, my friend would like to retire sooner, rather than later, but wants to feel confident about having enough financial resources for he and his wife to live comfortably throughout their retirement.
It may seem odd to start a discussion of financial planning for retirement with health insurance but Presidential executive actions to not enforce the requirement for mandatory insurance coverage and leave uncertain the fate of some insurance subsidies under the Affordable Care Act (ACA/ObamaCare) have already disrupted the individual insurance market. Republican proposals to repeal and replace ObamaCare are creating further uncertainty in the insurance market for individuals and, if enacted, are expected to significantly increase the cost of coverage for older, pre-Medicare age, individuals. One CNN report on the Senate bill as of June 27, 2017 shows the cost of ACA Silver Plan coverage increasing from $1,800 to $8,300 because the proposed Republican legislation allows insurers to adjust rates by age and reduces insurance coverage. Until things are settled in Washington, it will be very difficult for any individual contemplating retirement before age 65 (when Medicare kicks in) to determine if individual health care insurance will be available and at what cost.
The best advice for now for someone considering retirement is to work full or part time until age 65 in order to retain employer-based health insurance coverage or confirm that you can purchase coverage through your employer using COBRA benefits and retire up to 18 months before turning age 65. The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, with the individual paying the full cost of insurance.
When considering how much savings/investments you will need for retirement there are two issues to consider.
Will your savings/investments generate enough income to allow you to live comfortably and
Will the income from your savings/investment last long enough if you have a very long life?
Generating Enough Income
Popular guidelines for retirement income suggest that you should have sufficient income to replace about 70% to 85% of your pre-retirement annual after tax income to live comfortably in retirement but some more recent thinking suggests your income needs will not decrease that much in retirement as travel and entertainment, recreation expenses will offset reduced income use for business clothing, commuting costs, etc. (See Kiplinger Article).
Rather than focusing on your pre-retirement income, I believe most of those contemplating retirement prefer to focus on pre-retirement expenses to determine if they will be able to afford the lifestyle to which they are accustomed when they retire. If you plan a major lifestyle change in conjunction with your retirement, like moving to a different community or buying a vacation home, you will need to adjust your expenses, and potentially your taxes, to account for these major lifestyle changes. Looking at actual spending, perhaps over a couple of years, with adjustments for any major lifestyle changes, should provide a solid basis for estimating your expenses in retirement.
The most widely used tool for determining the income that your savings/investments will generate is the 4% rule. As explained in a CNN Money article (CNN Money Article), “The basic mechanics of the 4% rule are pretty simple. You start with an initial withdrawal of 4% of savings and then increase the dollar amount of that first withdrawal by inflation each year to maintain purchasing power.
So, for example, if you have a nest egg of $500,000 and inflation is running at 2% a year, you would withdraw $20,000 the first year of retirement, $20,400 the second year, $20,800 the third and so on. This regimen results from research done in the early 1990s by now retired financial planner William Bengen. After testing different withdrawal rates using historical rates of return for stocks and bonds, Bengen concluded that 4% was the highest withdrawal rate you could use if you want your savings to last 30 or more years.
Some experts have suggested, however, that a 4% withdrawal rate might be too ambitious given today’s low bond yields and lower projected returns for stocks. For example, Wade Pfau, a professor of retirement income at The American College, says that retirees should probably limit themselves to an initial withdrawal rate of 3% or so if they want a high level of assurance (although not a guarantee) that their savings will support them for at least 30 years. For more on how much lifetime income one can expect to get through inflation-adjusted withdrawals, income annuities and other methods of creating income based on current market conditions, check out Pfau’s Retirement Income Dashboard (Pfau’s Retirement Dashboard).”
Many financial firms also offer retirement planning services, some of which use a range of alternative models to estimate retirement income needs. One I have used personally in the past is from TRowePrice at TRowePrice Retirement Planner.
I continue to find the 4% rule works well provided you maintain a portfolio that includes stocks as well as presently low yielding bonds and have adequate cash reserves to stay invested through market downturns. But one common mistake many pre-retirees make is failing to adjust pre-tax retirement income when comparing it to post-tax retirement expenses. While some retirement income is tax sheltered and some state’s do not tax certain retirement income, be sure to remember that most of your retirement income will be subject to Federal, state and local income tax, even Social Security, and typically taxes are a big enough expense that it will be worth consulting a financial planner or your tax accountant to make sure you get your post-retirement tax calculation right.
Assuring Enough Income For A Long Retirement
A 65-year-old woman has a 68% chance of living to 80 and a 28% chance of living to 90. And a 65-year-old man has a 58% chance of living to 80 and a 17% chance of living to 90.2 (BLS Spending Patterns Of Older Americans). And these are averages for the entire population. A physically fit, more affluent senior who enjoys better medical care and diet than average and is less likely than average to smoke can expect to live longer than the above statistics suggest. As a result, a healthy, affluent baby boomers retiring today should assume 30 – 40 years of life in retirement – living to age 95 or 105 if retiring at age 65.
Assuming you are not spending beyond your means and have sufficient savings under the 4% rule to pay for your post-retirement expenses, there are two primary risk areas that might cause a retiree to outlive their savings:
A large unexpected expense, most likely the cost of institutional care for yourself or your spouse for a prolonged period, or
A significant market downturn from which your savings are unable to recover.
Long-term care insurance can protect you against much of the risk of prolonged institutional care but the ideal time to purchase such a policy was when you were in your 50s. It may be cost prohibitive to purchase such a policy at or near retirement age. My wife and I have policies through Lincoln National Life Insurance Company that we purchased when I was 53 and my wife 52. These used a lump-sum up-front payment to purchase as annuity that pays the premiums for a long-term care insurance policy while also offering a death benefit if the LTC insurance is not used. The mechanics of this are complicated but I like the idea that the payment amount was locked in at the beginning. If you do not have long term care insurance, you may want to build an additional cushion into your retirement savings to “self-insure” against this risk. Setting aside $150,000 to $200,000 when you retire that will grow with inflation, which is enough to cover up to 24 months in an assisted living facility, should provide reasonable protection against you or a spouse requiring institutional care in the future (See The Cost of Care and other posts on this blog for more information on the cost of care, what Medicare, Medicaid and the VA will pay for and the cost of institutional vs. at-home care).
My preferred method for guarding against the adverse impact of a market downturn is to have a larger than recommended cash component to my savings/investments that will allow me to draw cash in lieu of stock principal for more that a year in the case of a significant market downturn and to use Social Security in lieu of a commercial annuity product to assure long-term income. Many financial planning websites will recommend an annuity to assure continuity of income into very old age. While an annuity purchased from a financially sound and reputable company can assure long-term retirement income, the combination of high up-front fees and current low interest rates make commercial annuities less attractive to me, although I am using one in conjunction with my LTC insurance policy.
For a senior with a sufficient savings / investment portfolio to be able to afford retirement, I believe Social Security offers the most attractive option to create the type of guaranteed income that an annuity offers. Social Security pays an inflation-adjusted retirement benefit for as long as you live. A Social Security benefit for someone who contributed the maximum to the system retiring in 2017 at age 66 (Full Retirement Age) is $2,687 per month but will rise to $3,538 per month if you defer collecting Social Security benefits until age 70. And this higher benefit will continue to grow with inflation over time. If you have sufficient savings to be able to defer collecting Social Security Benefits until age 70, I believe Social Security offers the most cost-effective way to create a guaranteed annuity-like investment stream for your very old age.
A CNN Money asset allocation model suggest a mix of 65% bonds, 20% large cap stocks, 5% small cap stocks and 10% foreign stocks for someone 3 -5 years from retirement with a medium risk tolerance and some flexibility about when income is received CNN Money Asset Allocation Wizard. This is consistent with the financial maxim that the percentage of bonds in your portfolio should equal your age.
However, T Rowe Price’s asset allocation model recommends 50% – 65% stock, 25% – 35% bonds and 5% – 15% short term liquid assets for someone about to retire at age 65. Within the stock portion of the portfolio, TRowe recommends 15% – 19% international/global stocks, 7% – 10% U.S. mid/small cap stocks and 28% to 36% U.S. large cap stocks. Within the bond portfolio, TRowe recommends 5% – 7% international bonds, 2% to 4% high yield bonds and 18% to 24% investment grade bonds TRowePrice Asset Allocation Tool.
I believe thinking about and consciously deciding on an asset allocation for your retirement savings/investment portfolio is one of the most important things an investor should do with their portfolio on an annual basis. Many financial publications and mutual fund companies offer asset allocation models and it may be helpful to consider several and understand what is driving them to help you make a good asset allocation decision for your own portfolio.
My own allocation is a bit closer to the TRowePrice model with 51% equities including a small amount of alternative investments, 32% bonds and 17% short-term cash-equivalent investments. My bond allocation includes a significant amount of tax-exempt municipal bonds and, in my mind, the higher allocation to cash offsets the potential market risk of a larger allocation to equities while allowing me to benefit from dividend yields that are in many cases higher than bond yields and from potential stock price appreciation over time. My stock portfolio includes a healthy dose of individual income producing stocks, exposure to Real Estate Investment Trusts (REITs) through an index fund and some individual stocks and a managed bond portfolio in which I own individual bonds rather than bond funds. I see a real advantage to owning individual bonds over a bond fund because, absent a default, you can hold individual bonds to maturity and protect your principal while the value of a bond fund can fluctuate with market conditions and the actions of other fund investors.
As my bio under “The Blogger” heading above indicates, I worked for 15 years as a stock analyst with Legg Mason and Stifel Nicolaus and was recognized seven times as a Wall Street Journal All-Star analyst. While I have the skills to manage my own investments I work with a full service investment advisor at Stifel, Nicolaus & Company to manage my portfolio and in recent months have shifted from a commission based to fee based compensation structure as Stifel, like many other firms, has implemented the fiduciary rule.
The focus of many investors today is on minimizing investment fees and purchasing low cost index funds or exchange traded funds (ETFs) over using full service advisors and owning actively managed funds or individual stocks. Understanding and minimizing the fees on your investment portfolio is important and there is a lot of investment analysis that passive investments have outperformed most active managers and individual stock pickers. However, I continue to see value in a full service advisor and a degree of active management, particularly if you have a larger amount of investments.
The key advantages I see to a full service advisor/active management include:
Keeping all or almost all your investments in a single place. This makes it much easier to understand and monitor your asset allocation and will be extremely helpful to your spouse and other surviving relatives if you die or are incapacitated. Some low-cost brokers and funds companies offer a broad enough array of investment options and can provide some advisory services over the phone or in person in the event of a death or impairment but not the same personalized attention as an experienced broker or fee advisor in my view.
Index funds may do less well in a more volatile market. We are approaching 10 years of unprecedented low interest rates and market stimulus from central banks throughout the world. In this low-volatility, interest/stimulus driven, broad-based post-downturn stock market rally passive investments have outperformed. But with index funds and the entire market more highly valued and influenced by a relatively small number of mega-market-cap stocks, like Apple and Amazon, will index funds continue to outperform when and if the market and investors are tested by a significant correction and increased volatility? I can’t predict the future, but believe there is a case to be made that the underlying assumptions that have allowed passive investments to outperform may change and again create an opportunity for value-based investing and active management.
You may need an active manager to buy individual bonds. As noted above, because owning individual bonds provides greater principal protection than a bond fund, I prefer to own individual bonds. The only practical way to do this may be to work with an active bond manager because buying bonds as individual, particularly tax-exempt issues, can be difficult. In addition, I want to hold individual bonds through a single account with my other investments for administrative convenience and to keep down overall fees.
A good advisor can save you from yourself. Much has been written in recent years on the psychology of investing. One of the most difficult things for even experienced investors to do is to keep one’s nerve when the market is selling off and potentially even buy on dips. An experienced and trusted advisor can help you keep your nerve in a market downturn and help protect you against following the herd. A good advisor can also protect you against being lazy in a good market by periodically adjusting your asset allocation and culling your portfolio in a tax-efficient manner.
I hope these ideas for evaluating and managing your financial resources for retirement are helpful and will be happy to respond to questions and comments.
I formerly worked at Legg Mason Wood Walker, Inc. and at Stifel Nicolaus & Company, Inc. and previously had some of my investment portfolio with T Rowe Price Investment Services, Inc. I do not currently receive and do not expect to receive in the future remuneration from any of these companies.
Most seniors and their families see the monthly cost of a senior housing facility as much higher than the monthly cost of living at home with family care, or even with part-time or full-time home healthcare. But the math that most seniors and families use to make this comparison assumes no implied cost for occupying a home without a mortgage, much less paid care than is provided in a seniors housing facility and places no value on the companionship and social interaction that a seniors housing community can provide.
This analysis, using data from a variety of sources, attempts to make a fair apples-to-apples comparison, before and after taxes, of the cost for a senior living at-home without care, living at-home with a modest amount of paid care and living in an independent living, assisted living or memory care facility.
The chart below shows the comparison on a pre-tax basis of living at home with a modest level of care to the cost of various types of seniors housing communities. Bottom Line – The cost of living in a $150,000 home with even a modest level of home healthcare can easily exceed the cost of an independent living community and approaches the cost of assisted living. In addition, a senior living at home with part-time care does not get the companionship and social interaction that a seniors housing community can provide and which many studies show are beneficial for a senior’s mental acuity and well being.
Please read below for details and I welcome your comments and questions.
THE COST OF A SENIOR HOUSING COMMUNITY
The cost of various seniors housing settings is easy for seniors and their families to see because most facilities charge a monthly fee for housing and care. The average monthly cost for this care according to a recent survey by the National Investment Center for the Senior Housing and Care Industry (NIC) is as follows:
Independent Living – $3,076 per month
Assisted Living – $4,722 per month
Memory Care – $6,082 per month
To these costs, we need to add some additional expenses for a senior living in a seniors housing community for social and entertainment activities, transportation and non-housing living expenses. I have estimated these at half the estimated cost of someone living at home based on data from the “A Place for Mom.com” website, at a total of $475 per month. I assume half the cost of a senior living at home for someone living in seniors housing because many of these services are provided in a typical seniors housing facility and are included in the monthly rate. I add another $183 per month for a senior living in a seniors housing community for utilities, cable television, wifi and phone and renters insurance. Adding a combined $658 per month for things like phone, cable TV, some outside meals, transportation and other living expenses to the monthly fee for seniors housing communities brings the total monthly cost for living in senior housing rounded to the nearest $100 to:
Independent Living – $3,700 per month
Assisted Living – $5,400 per month
Memory Care – $6,700 per month
AT HOME LIVING AND HOME OPERATING COSTS
When the total monthly cost for senior housing and care at the above settings are compared to the out-of-pocket costs for a senior living in a $150,000 home without a mortgage they certainly appear formidable. A Place for Mom estimates the monthly out-of-pocket cost for a average senior living at home (in a home we assume is worth about $150,000) without a mortgage to be approximately $2,400, broken down as follows.
Utilities including phone and cable
Three meals per day
Emergency alarm system
Social and entertainment
It is this $2,400 figure (or something lower because the senior in question has curtailed her social, entertainment and transportation expenses) that most seniors and their families compare to the $3,700 to $6,700 monthly cost of facility-based senior housing and care. Therefore,seniors and their families generally see facility-based care as 50% to 275% more expensive than having a senior live at home.
But the above comparison ignores the value of the house in which a senior is living and ignores the cost of caregiving and the socialization benefits that a senior would receive if she were living in a seniors housing facility. Let’s deal with each of these separately.
ESTIMATED HOUSING COSTS FOR $150,000 HOME
To account for the value of the home itself, I estimate implied rent (essentially an estimate of the amount you could earn from renting the house) using a 7% cap rate on the assumed $150,000 value of the home, at $875 per month ($150,000 x .07 / 12), which seems very modest for many U.S. housing markets.
When you combine the above monthly costs for home maintenance, taxes and operation and living expenses of $2,400 per month with the implied rent, we get an estimated monthly housing and living cost for a senior living in a $150,000 home of $3,275 (approximately $2,400 for living and home operational expenses, plus $875 in implied rent).
From the above analysis you can see that the cost of living expenses, home maintenance and operation and implied rent/housing costs for a senior living on one’s own $150,000 home, calculated in what I believe is a conservative fashion, is nearly 90% of the average cost of a senior living in an independent living facility. And in the independent living facility the senior is getting much more interaction with other people, much more socialization and mental stimulation than most seniors get when living at home alone.
ESTIMATED HOUSING COSTS FOR $500,000 CONDOMINIUM
Doing the same math for a senior living in a $500,000 condominium yields estimated monthly living and home operating expenses of $4,449 broken down as follows:
Utilities including phone and cable
Three meals per day
Emergency alarm system
Social and entertainment
The implied rent calculation for a $500,000 condo is $2,917 per month ($500,000 x 7% / 12). Combining monthly living and home operating expenses with the implied rent for a $500,000 condo indicates a total monthly cost of living at home, including implied rent, without care at approximately $7,400.
When the above figure is compared to the cost of seniors housing, you can see that the estimated monthly cost of a senior living in a $500,000 condo is almost twice the cost of independent living and 36% higher than the cost of assisted living. You can argue that comparing the cost of a $500,000 condo with the average cost of seniors housing is an unfair comparison because these facilities would cost more in an expensive real estate market. But I believe the calculation on a $500,000 condo is fair for the Baltimore market, where I Iive, and I believe it is fair to say that when a true apples-to-apples comparison of housing, home operation and living costs for senior is made to the cost of living in a seniors housing facility, the difference is smaller than most seniors and families realize before even taking into account the cost of care.
HOME CARE COSTS
From the above analysis, we see that the cost of a senior remaining at home is less than the cost of any type of seniors housing community, even independent living, for a senior in a modest $150,000 home. However, as soon as any degree of paid home healthcare is provided the cost advantages of living at home disappear.
According to A Place For Mom and other surveys conducted by insurance companies offering long term care insurance, the cost of in-home care ranges from $14 – $24 per hour. Certainly at the lower end of this range we are talking about a companion or an aid, not a trained nursing. If you assume only four hours of care per day and only five days per week with family providing care on weekend, the monthly cost of this much home healthcare would range from $1,120 ($14 x 4 hours x 5 days x 4 weeks) to $1,920 per month ($24 x 4 hours x 5 days x 4 weeks). If we use the average of these two figures, the monthly cost for four hours of home healthcare five days a week is $1,520.
When you add the cost of four hours of home care during the week to the cost of housing noted above, the monthly cost of housing plus a modest level of home health would be approximately:
No cost is assumed for family care on weekends.
As the chart at the beginning of this post indicates, as soon as a modest level of home care, in this case four hours per day five days a week, is added to the cost of a home, home operation and living expenses, the cost of living at home with home care, even for a modestly priced home, easily exceeds the cost of independent living and is nearly 90% of the cost of an assisted living facility.
In general terms, healthcare costs exceeding 7.5% of income of a senior’s income are deductible. This includes long term care costs if the senior is chronically ill and is is being cared for pursuant to a plan of care prescribed by a licensed health care practitioner.
If a family member younger than age 65 is paying for care, healthcare costs exceeding 10% of the income of the family member paying for care are deductible. This can apply to home care prescribed by a licensed health care practitioner but not a senior’s housing costs while living at home.
In a seniors housing facility the cost of healthcare provided in assisted living or a memory care facility that exceeds 7.5% of income may be deductible if required by a senior’s medical condition and it is possible that the full cost of facility-based care including housing component may be deductible if living in such a facility is considered essential for medical reasons. See IRS Publication 502 https://www.irs.gov/publications/p502/ar02.html for more information and consult with an accounting professional for more complete information.
AVAILABILITY OF GOVERNMENT ASSISTANCE
While many people believe it does, Medicare does not pay for long-term custodial care at home or in a seniors housing facility. It may pay for short-term home health, therapy or nursing care at-home or in a facility if is prescribed by a physician in response to a particular medical need.
Medicaid will pay for long-term custodial care in skilled nursing facility but only after all other resources are exhausted. Some states have waiver programs that allow Medicaid to be used for assisted living and memory care or at-home community-based care, but as is the case with nursing home care, Medicaid will pay only after all other resources are exhausted. In addition, the last proposed Republican repeal and replace of the Affordable Care Act included significant cuts to Medicaid that could potentially reduce the availability of Medicaid funds for long term care for seniors.
Veteran’s benefits include increased Veteran’s Aids and Attendance Pensions payment for care in a seniors housing or long term care facility under certain circumstances and seniors who qualify for Veteran’s benefits should investigate this option.
The chart below shows the average monthly cost of care for skilled nursing (nursing home), memory care (dementia), assisted living and independent living facilities in the Baltimore/Washington region for 2015. It also shows the cost for 24 hour / 7 day a week home health aide care and 24/7 home health aide care supplemented by 7 hours each week of registered nursing (RN) and licensed practical nursing (LPN) care in an attempt to replicate the level of care an individual might receive in an assisted living or skilled nursing facility.
The monthly cost in 2015 of facility-based care in the Baltimore/Washington region ranges from $2,912 in an independent living facility to $5,659 in a one bedroom unit in an assisted living facility to $6,234 in a memory care facility, and $9,990 to $11,270 for care in a skilled nursing facility (nursing home) in either a semi-private or private room. For a resident needing assistance with three or more activities of daily living (bathing, transferring, etc.), or with any significant degree of dementia, an independently living facility would probably not provide adequate care without supplemental home healthcare, so the effective range for the monthly cost of care for a senior needing a moderate to significant level of assistance in a specialized seniors housing and care facility in the Baltimore/Washington region in 2015 was $5,659 to $11,270.
To see description of the various types of senior housing and care facilities see my page Senior Housing Options http://wp.me/P64zBK-w.
Home health aides cost $21.73 per hour in 2015, and would cost $14,603 monthly if provided on a 24/7 basis assuming no differential for night shifts. A licensed practical nurse was $53.94 per hour and a registered nursing was $77.88 per hour. In the above example, I assumed an hour a day of both LPN and RN care in addition to 24/7 home health aide care to estimate the monthly cost of care equivalent to that delivered in a skilled nursing facility to be approximately $18,294 per month. Many families care for seniors with a combination of care by family members supplemented with limited time by home health aides or other paid caregivers. While this type of arrangement can result in lower cost than facility-based care, it is clear that the cost to provide 24/7 aid and nursing care at home far exceeds the cost of obtaining such care in an assisted living, memory care or skilled nursing facility. Even when less than 24/7 paid care is provided the cost of facility-based vs. home care is often closer than families expect once the cost of utilies, home upkeep and forgone rent or sales proceeds are considered.
The other big advantage to facility-based care over 24/7 home care, even if you can afford it, that I believe many families overlook, is socialization. Seniors being treated at home, even by the most dedicated family caregivers and aides, spend a lot of time isolated from human interaction. At well-run senior housing and care facilities, interaction among the residents and between residents a diverse group of staff provide more interpersonal and intellectual interaction and stimulation than can be achieved at home, which can be very important for a seniors’ mental health and emotional well being.
Planning For The Future Cost of Care
If the raw cost of care and learning that the government will not help you pay for it (See prior post “The Government Will Not Pay For You Long Term Care”) are not sobering enough, seniors and families trying to plan for long term care need to understand the probability of needing such care, the likely duration of such care, and its future cost. I hope to explore these issues more fully in a future post on long term care insurance and other financing options. But to illustrate the future cost of care for planning purposes here, I have assumed an average length of stay (LOS) for skilled nursing and assisted living care of 24 month, 36 months in memory care and 39 months in independent living. I have then assumed 2.5% inflation for 35 years because the average entry age in to an assisted living or skilled nursing facility is about 85 and the time many people start seriously considering long term care insurance is age 50.
In the table above, the average monthly costs for 2015 in the Baltimore/Washington Region are mutiplied by an assumed LOS in months to get the cost for an expected episode of care. The future value of this expected episode of care is then calculated for 2050 assuming you are thinking about this today at age 50 and planning for costs when you are 85 and are more likely to enter an assisted living or skilled nursing facility. The LOS assumed above are averages and at two years probably a bit high for long-stay custodial skilled nursing care. The average LOS are about right for assisted living and independent living based on actual turnover rates in buildings today. I did not find good data on memory care facility LOS but it is widely recognized to be higher than assisted living because some residents enter at younger ages with early onset Alzheimers and are in better physical condition. When planning for an individual’s need to finance long term care it may be appropriate to plan for longer or shorter lengths of stays and look at the probabities of these but I believe these averages are useful to illustrate the order of magnitude of possible future long term care costs.
I assume 2.5% inflation to estimate the future cost of long term care. The 2.5% inflation factor is about where costs have been increasing in recent years but with increasing wage pressure and inflation expectations higher now that Donald Trump is President-elect, other higher inflation assumptions may be appropriate.
The bottom line is that a 50 year old today might reasonably plan for between $300,000 and $600,000 of long term care costs (an average of $516,483 for AL through private room skilled nursing) and expected to spend this amount over a two – three year period beginning around 2050.
New York Life, which is a long term care insurance provider affiliated with AARP, has an online cost of care calculator that is updated annually. New York Life’s 2015 Cost of Care Survey was designed and implemented by Long-Term Care Group (LTCG), the nation’s leader in long-term care administration services. Each year LTCG surveys thousands of Skilled Nursing Home, Home Health Care and Assisted Living Facility providers to collect cost of care data. The cost of care averages are calculated from over 30,000 different providers at the national, state and metropolitan statistical area level. Other cost of care calculators, including one from Genworth Financial, are also available online.
The figures above are for the Washington / Baltimore Region and are somewhat higher than the national average. I supplemented and verified the LTCG survey data with information from the National Investment Center for the Seniors Housing and Care Industry’s NIC-MAP database, which surveys seniors housing and nursing care properties on a quarterly basis (see http://www.nic.org). I used NIC-MAP data for the Baltimore region, which shows the cost for skilled nursing facility care and care in an assisted living facility 7% – 8% lower than the LTCG survey but similar enough to confirm the LTCG survey data. NIC-MAP is also able to provide pricing data for independent living and memory care / dementia facilities, which I incorporated in my analysis.
The Fall conference of the National Investment Center for the Seniors Housing and Care Industry (NIC – www.nic.org) was held in Washington, DC from September 14 to September 16, 2016. This is the largest industry conference for seniors housing and care.
I moderated a panel entitled “Somewhere Over The Rainbow: Where Winning Post Acute Strategies Attract Investors. “ Panelists included: Benjamin Breier, President & CEO, Kindred Healthcare, Inc.; Larry Cohen, CEO, Capital Senior Living Corporation; George V. Hager, Jr., CEO, Genesis HealthCare, LLC and Andy Smith, President & CEO, Brookdale Senior Living.
When I served as an equity analyst I would spend almost my entire time at NIC conferences in private meetings with companies and investors. As a retired analyst, blogger on seniors housing and care and session moderator, I had many informal conversations with operators, industry organization staff, lenders and investors, a few scheduled meetings and attended more of the actual conference sessions.
My ten takeaways from the 2016 Fall NIC Conference are:
Record Attendance – Guarded Optimism – NIC’s Fall Conference at the Marriott Marquis Hotel next to the Washington Convention Center had a record reported attendance of 2,700. Senior housing operators are guardedly optimistic, with asset prices still high, reasonably positive operating metrics and only spotty reports of rising labor costs. There is some caution about overbuilding but that threat may be receding (see below). Skilled nursing and post-acute care operators are struggling with top-line revenue pressure and big transition to value-based purchasing.
Capital Plentiful But Diversifying – Capital for seniors housing property acquisitions and renovation remains readily available as does investment capital for experienced senior housing operators to grow their businesses. HUD financing is still very attractive for skilled nursing but, with the underperformance of some skilled nursing and post-acute care operators, REITs are diversifying to limit their exposure to these subsectors. Ventas led this charge with its CCP spinoff and new investments in hospitals and university-tied biotech. HCP has announced its intension to spin off its skilled nursing holdings into QCP and Welltower has also announced a desire to reduce its exposure to Genesis.
Construction Lending Standards Tightening – NIC’s in-house economist Beth Mace and NIC’s bluebook featuring key industry trends note a tightening of lending standards for new seniors housing construction as reported by surveys of loan officers. If true, this may help limit widespread overbuilding of assisted living properties, about which I have expressed concern. Other conversations I had during the Conference seemed to support NIC’s view that underwriting standards for new seniors housing projects are tightening. Some finance types I spoke believe the cutback in senior housing construction lending is driven by a broader cutback in lending for multi-family construction projects rather than lenders making a specific determination that seniors housing is becoming overbuilt.
Good and Some Less Good Development Continues – Despite the cutback in lending, many seasoned senior housing operator/builders are continuing to develop projects in markets in which is it is difficult to develop and for which the approval process may have been 3-5 years. There appear to be a smaller number of projects still being developed by inexperienced players with money from community banks and smaller equity investors and hopefully tightening lender standards will further weed out more of these types of projects in the future.
NIC Continues to Built Its Value For Skilled Nursing & Post-Acute Care – Since adding skilled nursing data to its NIC-MAP data service a number of years ago and adding a Spring conference with more skilled nursing focus, NIC continues to build its data and content for skilled nursing and post-acute care providers and is at the forefront of educating senior housing operators about the convergence of seniors housing and post-acute care. As post-acute care transitions from a fee-for-service to value-based purchasing, NIC appears well positioned to help educate investors and attract investment capital for this portion of the industry, as it has previously done for seniors housing.
Post-Acute & Senior Housing Providers Have Opportunity to be “Strategic Aggregators” – Former HHS Secretary Michael Leavitt opened the NIC Conference by providing an overview of the broad changes occurring in the U.S. healthcare system with a focus on the shift to value-based purchasing. Mr. Leavitt believes the shift to value-based purchasing increases the risk that senior housing and post-acute care providers become commoditized fee-for-service price-takers. But Leavitt also believes that senior housing and post acute care companies that serve significant numbers of patients in their facilities and programs have the opportunity to aggregate patient lives and serve as general contractors making value-based purchases themselves rather than just being price-takers in a value-based payment world. While the shift to value-based payment is slow and fragmented, Mr. Leavitt quoted Bill Gates as saying, “Don’t overestimate what will happen in the next two years or underestimate what will happen in the next 10.” He foresees continued consolidation through both mergers and acquisitions and additional joint ventures among operators.
Major Post-Acute Operators Generally Agree With Leavitt – The four publicly traded senior housing and post-acute care operators who participated in my panel are clearly frustrated as they function in a fee-for-service world (Only 1-2% of their revenue is now truly value-based) while pivoting their organizations to profit from value-based payments. These large operators are pursuing a wide range of strategies to provide post-acute care and adapt to value-based payments (from senior housing operators contracting out all post-acute services, to focusing on being the preferred provider for a few segments of post-acute care, to being a comprehensive provider of all services – LTACHs, IRFs, SNFs, home health, rehab therapy and even hospice – in select markets). Two common themes appear, however. Major post acute care providers are positioning themselves to be strategic aggregators and value-based purchasers and major senior housing operators believe offering post-acute services within their buildings themselves or through third parties will be key in continuing to attract and retain senior housing residents. Most operators are also looking to increase their concentration in select markets.
Managed Medicare Rate Pressure Slowing – NIC reports that the downward pressure on Medicare managed care (Medicare MA) rates to skilled nursing operators slowed in 2Q16 and it will be interesting to see if relentless downward pressure on SNF rates and length of stay from Medicare managed care providers is really beginning to subside. This would be very good news for skilled nursing operators.
Importance of Data/Information Systems Growing – Both post-acute care operators and senior housing operators providing, or contracting with others to provide, post-acute care within their facilities are seeing an increased need for data to measure outcomes in order to make the case to ACOs and other bundlers of post-acute patients and in order to take a more active role themselves in managing patient lives. Data to predict future performance of facilities in a value-based purchasing world is also key to underwriting future investments for sophisticated investors, like Formation Capital, since past performance alone of a skilled nursing or post-acute care facility may be a poor predictor of how it will perform in a broader value-based purchasing environment.
NIC-Map Making Some Important Strides – NIC-MAP has expanded to an additional forty metro markets for its traditional data reporting and is adding two important products – actual monthly rent, occupancy and turnover information for a national sample of 250,000 senior housing properties and actual monthly rates by payer source and occupancy for a smaller but growing sample of skilled nursing properties. These are national surveys electronically reported from operator’s actual month end data and NIC hopes to grow these samples. This will allow NIC to be much more accurate and timing on rent and other key financial metrics on a national basis and provide benchmarking data to participating operators and other industry participants.
On Tuesday, May 17, 2015 I was featured in a question and answer session over breakfast with subscribers of Senior Care Investor, moderated by its editor Steve Monroe. We covered a wide range of topics. I summarize below key takeaways from my Senior Care Investor interview and provide a link to the nearly one hour webcast.
The public markets are much less important for seniors housing and post-acute care than they were twenty years ago when there were as many as 30 public companies including operators and health care REITs. If you review the investment history of seniors housing and post-acute care there have been a number of “pivot points” where stocks in these sectors experienced significant sell offs and then rebounded strongly. These pivot point were driven by overbuilding and reimbursement and operating problems that in some cases led to operator bankruptcies. If you got the timing right, these pivot points provided very attractive investment opportunities in the stocks of private pay senior housing operators, post-acute care operators and health care REITs, with the stocks within each of these industry groups moving on somewhat different events and at somewhat different times.
I see current industry conditions again creating pivot points for investments in senior housing, post-acute care and health care real estate and believe it is the right time for investors to be studying these sectors and deciding when it makes sense to invest.
Private-Pay Seniors Housing – Overbuilding, few publicly traded investment options and operating issues at the largest publicly traded operator, Brookdale Senior Living, Inc. (BKD), have caused most public market institutional investors to flee the private-pay seniors housing space. I don’t see a quick pivot in private-pay seniors housing because capital remains plentiful for new construction, underlying demand from older seniors (80+) is slower than it was before 2010 (see Slow 80+ Pop Growth, Elevated Construction Spark Concern For Seniors Housing on this blog), and issues at Brookdale will take some time to resolve. I also believe private equity investors will await a more receptive market before bringing other quality operators public.
Post-Acute Care – Post-acute care currently has more publicly traded operators with scale than private-pay seniors housing, but deteriorating operating fundamentals and high leverage have also driven public market institutional investors away from publicly-traded post-acute care operators. Major REITs, such as Ventas (VTR) and HCP (HCP) spinning off skilled nursing assets has underlined the risks investors see in this space. Increased use of Medicare and Medicaid managed care and ever expanding use of bundled payments are reducing lengths of stay (LOS), pressuring post-acute care rates and volumes and eroding operator revenue and EBITDA. However, because baby boomers are now beginning to turn 70, the pool of post-acute care patients should grow dramatically over the next 5 – 10 years while the supply of post-acute care facilities and beds is flat or declining and quality operators should be able to attract higher volumes of patients from hospitals if they care demonstrate quality outcomes. A mild flu season and high operator leverage exacerbated poor 1Q16 financial performance. I anticipate pressures on rates and LOS stabilizing and volume growth providing upside for post-acute care operators over a 1 – 2 year period while operators are rationalizing their delivery systems and paying down debt. I believe these factors put post-acute care closer to a performance pivot point than private pay seniors housing.
Health Care REITs – Health care REIT share prices have been buffeted by some of the same issues affecting private pay seniors housing and post-acute care operators but health care REIT share price performance has been much more mixed than that of the operators. Many health care REITs are well diversified, have strong lease coverage and are less exposed to overbuilding and revenue pressures than the operators themselves. Health care REIT stock performance is also significantly influenced by investor’s views on interest rates and overall economic growth. Some healthcare REITs, with more significant exposure to seniors housing or post-acute care issues, such as HCP, presumably its future SpinCo, and CCP, have been more directly impacted by the industry and operator issues noted above. These REITs, and some others, offer larger cap, more liquid investment vehicles than seniors housing or post-acute care operators but likely also have potential for upside from the industry pivot points described above.
Having retired as an equity analyst who followed seniors housing, post-acute care and health care REITs for 15 years, I no longer make Buy, Sell, Hold recommendations. I do recognize that there are significant risks for private pay senior housing operators and particularly for highly leveraged post-acute care operators. However, experience in the 1999 – 2002 crash of private-pay seniors housing and post-acute care and other sell-offs driven by operating underperformance, reimbursement cuts and regulatory issues show that these sell-offs have often proven to be great investment opportunities and have absolutely been a time to look harder at these sectors and develop an investment strategy and timetable rather than to flee the space.
For a more in depth discussion of these issues, listen to the Senior Care Investor webcast by clicking on the link below. Comments, including those with opposing viewpoints, welcome.
There is an excellent article in today’s Wall Street Journal, Monday, March 28, 2016 on the difficulties of sorting out your parents’ financial affairs after they become incapacitated. It includes a number of recommendations on steps you should take with your family while your parents are still healthy to share financial information and avoid the difficulties the author experienced.
As a former stock analyst, I often get questions about what stocks to buy or how to manage an investment portfolio. I am not going to recommend specific stocks in this blog because I believe there is already an overwhelming amount of financial advice on the web and because I no longer follow individual companies closely enough to make recommendations with conviction. But I do have some suggestions on how to manage your investment portfolio.
Know what you own – Older adults with upper middle incomes or higher have typically amassed a portfolio pre or post retirement that includes cash, stocks and bonds. But the portfolio is often spread across a variety of bank and brokerage accounts, certificated of deposit (CDs), investment retirement accounts (IRAs), 401k’s and other investment vehicles. In my experience it is not unusual for individuals or couples to view each of these investments as discrete investments, perhaps focusing on the one or two largest account, rather than taking a complete inventory of their total investment portfolio at least once or twice a year.
Limit the number of accounts in which you hold assets – While shopping on line for the best CD rates and using an online brokerage account to trade stocks, while maintaining other accounts for IRAs and 401ks, may save you fees, I have found the complexity multiple accounts adds to managing a portfolio often leads to less well informed decisions on your overall portfolio and often represents false economy. If you insist on using multiple accounts, and particularly if you have six or more, it is essential that you keep a financial inventory where all accounts and passwords are kept, regularly update it and share it with others. It is also essential that you brief your spouse and heirs on where this information is located and be sure they can readily access it in the event of your death or disability.
Decide on an asset allocation that works for you – Even though I made my living for many years recommending stocks to institutional investors, I was generally prevented from owning any of the stocks that I followed as an analyst. The primary way I managed my own portfolio was to focus on an overall asset allocation – the percentage of stocks, bonds and cash I wanted to hold. Then within the stock portion of the portfolio I considered the percentage of large, small and mid cap and international stocks I wanted to hold and whether I wanted to own individual stocks, managed funds, or exchange traded or index funds. In the bond portion of the portfolio I considered the maturities I wish to hold and again how I wished to gain exposure to bonds. There are many suggested asset allocations by age online, as well as asset allocation tools that allow you to enter your age and other information before recommending an allocation for you. One traditional rule of thumb is that the amount of bonds in your portfolio should equal your age but with increased longevity and current low interest rates many advisors consider “Percentage of Bond = Age” be too conservative. The conservative end of the T. Rowe Price asset allocation model, to use one example, suggests 60% stocks/30% bonds and 10% short-term investments (cash or cash equivalents) for an investor in his or her 50s, 50% stock, 35% bonds and 15% short-term investments for an investor in his or her 60s and 20% stock, 50% bonds and 30% cash for an investor in his or her 70s. But even within the T. Rowe Price model the mix of bonds and stocks can vary a good deal dependent on your risk tolerance and your life expectancy and I am more aggressive in my personal allocation to stocks than the conservative end of the T. Rowe model suggests. Asset allocations can also address the mix of large cap, small/mid cap and international stocks in a portfolio but an in depth discussion of stock allocations is too long for this blog post. The best way to get a sense of the asset allocation that is right for you is to review a number of different allocation models and think about how your own personal circumstances and risk tolerance fit with one or more of these. Discussing asset allocation with a broker or financial advisor in which you have confidence can also be very helpful.
Use asset allocation to reallocate your portfolio at least once a year –I highly recommend using asset allocation as a tool to rebalance your portfolio on a regular basis. This forces you to avoid the pitfall of most investors, which is an unwillingness to buy when valuations are low and sell when valuations are high. There are three steps in using asset allocation to rebalance your portfolio. The first is to determine the mix of stocks, bonds and cash or cash equivalents in your existing portfolio. This is not as easy as you may think because many mutual funds may combine both stocks and bonds within an single account and may also hold a portion of cash at any given time. Getting the details on each account can sometimes get difficult, particularly if you want to do a more refined asset allocation, separating out large cap from small, mid-cap and international funds and perhaps separating out real estate investment like REITs from other types of stocks. This is one of the reasons I prefer fewer accounts and it is something a full-service broker can do for you. The second step is to compare your actual asset allocation to the allocation that you believe works for you and the third step is buying or selling stock or bonds to move your allocation back toward the model allocation you selected. Shifting the allocation does not have to be done all at once but you should have the discipline to implement it over a relatively short period of time if you want to use asset allocation to manage your portfolio.