The Social Security administration recently announced a 1.7% annual cost-of-living adjustment, or COLA, for the nearly 64 million Americans who receive federal retirement or disability benefits. For 2015, this results in about a $22-per-month increase for the average retiree. The average monthly Social Security check for a typical retiree increases from approximately $1,306 to $1,328 per month.
The benefit increase is determined by the change in prices for “urban wage earners and clerical workers,” known as the CPI – W. Unfortunately, this COLA criteria does not realistically relate to a senior’s true cost of living, especially those considering or living in retirement communities. There are two dramatic differences: 1) most seniors in either assisted living or independent living communities do not work, and 2) the specific index excludes food and energy costs.
While cost-of-living adjustments may reflect inflation of individual commodities, they do not track the real world of a typical senior’s cost in senior living communities. The senior living industry attempts to hold year-over-year annual operating expense inflation to 3% or less while maintaining annual increases in monthly service fees to approximately 4%. This positive 1.0% “spread” is a typical financial planning objective. The two areas of highest cost for sponsors and owner/operators are dietary, representing approximately 20% of total operating expenses; and direct care, typically representing over 40% of operating expenses. In 2014, the annual increase in employee wages represented approximately 2.5% to 3%. Similar increases are planned for 2015.
Many seniors’ monthly cash flow income is frequently stretched as they try to meet their mandatory and discretionary budget needs. That’s because short-term certificates of deposit and money market accounts have current annual yields of less than 0.5%. Many have to access their savings accounts and net worth, which results in a form of spend-down. In the private pay senior living industry, we focus on the higher “market rate” income group — those seniors with typical household incomes in excess of $55,000 per year. The arithmetic is simple. Determining a senior’s pre-tax qualifying income requirement is a four-step process. Here is an example:
1. Assume an ultimate need to cover at least $3,200 for monthly service fees, or $38,400 per year.
2. Many seniors also have a desired discretionary spending objective of approximately 20%, adding another $9,600 for a total after-tax annual need of approximately $48,000.
3. If the resident has a modest/marginal income tax rate of 12%, that involves approximately $6,545 for income taxes.
4. Therefore, the gross pre-tax qualifying annual income need totals approximately $54,545 or $4,545 per month before any spend-down.
Four very important industry issues must be addressed in 2015 and beyond: 1) What is the real inflation impact being experienced by seniors? 2) How will some seniors access real cash flow to pay their monthly service fees while avoiding serious spend-down? 3) Will resident accounts receivable resulting from unpaid fees increase? and 4) What action do sponsors and owner/operators need to take?
The industry has two major consumer target groups to address regarding affordability: 1) existing senior living residents and 2) new potential prospects for senior living.
Affordability for some seniors will be a continuing issue. It is especially a tough one to address for the private pay, market rate sector. There are at least five practical strategies that should be considered: 1) occupancy enhancement for income-qualified seniors, 2) responsible expense reduction, 3) optimized unit pricing, 4) deploying alternative sources of revenue, such as charitable content as part of a not-for-profit mission, and 5) practical and compassionate implementation of accounts receivable policies.
Enhanced performance within existing senior living communities represents a huge opportunity frequently overlooked by many owner/operators. But in 2015 and beyond, it will become a significant imperative.