Do seniors spend more for IL? The true costs of retirement communities.

For years the senior living industry has been dealing with the perception that, while independent living monthly service fees were affordable to 30 to 40 percent of seniors age 75-plus, these residents paid a premium to enjoy the benefits of an independent living community.

Making the perception worse, income-qualified seniors frequently underestimated the true cost of living, at least initially. When some of these seniors did additional homework, however, many revised their estimates upwards. The results were a more favorable comparison between an income-qualified senior's current cost of living and today's prevailing IL monthly service fees.

While prevailing wisdom offered hints that this perceived cost gap might not be that significant, there was no significant quantitative evidence regarding these comparative costs of living. The American Senior Housing Association (ASHA)recently hired Moore Diversified Services to investigate this important issue.

The study found that the actual spending patterns for seniors age 75-plus with average annual incomes between $35,000 and $50,000 are strikingly similar to the typical average monthly fees currently being charged for service-enriched IL. The results could help operators more effectively address some of the industry's most serious sales objections.

David Schless, president of ASHA, said he was not aware of any similar study previously conducted. "I think it provided objective data that would suggest that the cost of living in independent living communities is roughly equivalent to the cost for seniors living in the community," he said. "One of the frequent objections is that they underestimate their monthly living costs and list that as a barrier."

The study, based on statistics from the Bureau of Labor, analyzed how average household expenditures of age 75-plus seniors with pre-tax incomes in the range of $35,000 to $50,000 compared with typical IL monthly service fees for the same cost of living categories. For seniors currently living at home, spending patterns involve two major categories:

* Routine consumer expenditures similar to those goods and services typically provided within a senior community's monthly service fee;

* Discretionary expenditures involving other typical senior spending patterns regardless of a senior's particular living arrangement (travel, entertainment, clothing, medical, etc.)

Expenditures for people age 75-plus by detailed expense category are published by the Bureau of Labor Statistic's "Survey of Consumer Expenditures." This survey is conducted every two years. In the most recent report, with information for 2002, expenditures for consumers age 75-plus can be inflation-adjusted to reflect 2005 dollars. (See Figure 1.) Note that a typical age 75-plus senior's cost of living has been segmented into the two expenditure categories mentioned above. There is also a third cost of living category: the opportunity cost of a senior's home.

Is pent-up home equity an asset or an opportunity cost? Actually, it is both. When comparing relative costs of living, the existing pent-up home equity of a senior's home is actually a cost burden. More accurately stated, it is an opportunity cost.

This opportunity cost is defined as the lost income-producing potential that would otherwise be realized if the home were sold and the cash proceeds invested, earning a cash return. For example, the ASHA study found that a typical senior selling a home with a $130,000 average value and incurring a 10 percent selling cost would net approximately $113,000.

At an average annual investment return/savings rate of 6.5 percent, the senior would increase his pre-tax income by more than $7,000 per year or almost $600 per month. This cash resource might also be used to fund CCRC entrance fees. Remember, a senior's opportunity cost typically escalates when one considers the possibility of substantial home repairs and maintenance.

Figure 1 provides a summary of a typical example of a non-resident versus independent living resident cost comparison--assuming a household with a senior of age 75-plus with an after-tax annual income of at least $35,000. The three major categories of senior consumer expenses are:

There are two important cost of living comparisons that must be made between a senior living at home and one considering a move to a retirement community

Monthly Expenditures--In Figure 1, the independent living cost component and the pent-up home equity opportunity cost result in an average non-resident monthly outlay of $1,935.

Figure 2 shows that this compares favorably with the actual range of independent living community pricing (monthly service fees) contained in the ASHA report, The 2003 State of Senior's Housing Report. Those monthly service fees ranged from $1,750 to $2,480 with a median of $2,050 per month.

Mix of Monthly Expenditures--Figure 1 also shows that typical nonresidents are paying approximately 66 percent of their after-tax income for independent living-type expenses and 34 percent for other/discretionary outlays. That expenditure mix is similar to frequently relied upon independent living consumer guidelines, which are 65 and 35 percent, respectively. In assisted living, the cash needs for the monthly service fee increases, but, due to a more limited lifestyle, the senior's need for discretionary income decreases.

The ASHA study results clearly show--quantitatively--that the current cost of living for age--and income-qualified seniors living at home is similar to those costs required by quality IL communities.

This cost of living trade-off comparison must become an integral part of the future sales and marketing process. Professional sales and marketing teams must get this important message into the marketplace--objectively and effectively.

Figure 1 FOR AGE 75+ HOUSEHOLDS WITH AFTER-TAX INCOME OF
APPROXIMATELY $35,000

                                                      Expenditures
                                  2005 Dollars          as % of
                                                       after-tax
                                                       tax income
Annual Expenditures                Annual   Monthly       (4)

Senior Living Community           $16,080   $1,340       45.4%
  Type expenses (1)
Opportunity Cost of                $7,140    $595        20.2%
  Senior's Home (2)
                         Subtotal $23,220   $1,935       65.6%
Discretionary                     $12,180   $1,015       34.4%
  Expenses (3)           Total    $35,400   $2,950        100%

(1) Expenses that are typically part of senior living monthly service
fees.

(2) Includes the equivalent cost of home ownership.

(3) Other mandatory and discretionary expenditures.

(4) The acceptable senior living monthly service fee expense ratio
is 65/35.

Figure 2 INDEPENDENT LIVING BENCHMARK COMPARISONS AND GUIDELINES

                          Typical        Typical senior
                        expenses of      living resident
                       non-residents        benchmark

Monthly senior living    $1,935       $1,750 Range of Pricing
                                      $2,050 Service Fees
                                        from ASHA's
                                      $2,480 State of Senior's
                                        Housing--2003)
Percent of after-tax      65.6%       65%
  income
Discretionary/other       34.4%       35%
  expenses

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based national senior housing and health care consulting firm. He is author of Assisted Living Strategies For Changing Markets.