Many seniors feeling strapped for cash

Share this content:
Cost-of-living adjustments are failing to keep pace with actual expenses for many seniors.
Cost-of-living adjustments are failing to keep pace with actual expenses for many seniors.

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.

Coverage Gap

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.

Bottom-line concerns

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. 


Next Article in News

Sign up for newsletters

In Focus

March 14

Hall marks

Newtown, PA

Pennswood Village is encouraging residents to hang their artworks in the community's hallways.