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CCRC-Optimized Portfolio

The Need for a CCRC-Optimized Portfolio

If you or a family member are considering a Continuing Care Retirement Community (CCRC) for housing and future health care in retirement, it’s vitally important to consider your current financial resources against your potential new expenses.

I’ve talked to hundreds of prospective CCRC residents and share with them the methods I use to help them determine if they can reasonably afford a CCRC lifestyle, given their financial resources. That said, I also can tell you that the coordinated manner in which an individual or couple manages their resources also can significantly determine their financial plans for the remainder of their lives.

Covering Your Biggest New Expense

Prior to moving to a CCRC, you may have spent the most money on expenses related to your home, such as property taxes, insurance, maintenance or outstanding mortgage. Eliminating some of these expenses in later years may be one of your motivations to move into a CCRC in the first place.

Monthly CCRC expenses, however, cover housing plus a host of other services, such as a dining plan, fitness center and social activities, security services and health care. Monthly fees may range from $3,000 to $5,000, depending on the community, the contract type, the size of the unit and whether you’re single or part of a couple. These new fees could easily end up representing half or more of your net retirement income from Social Security, pensions and net portfolio withdrawals. It’s also important to note that these monthly CCRC fees aren’t just discretionary spending. They’re now major expenses that may increase over time.

Managing Money for the Near Term and Long Term

Most wealth advisors recommend that investors maintain a fairly set asset allocation over the long term. That is sound advice. However, that suggestion doesn’t take into account CCRC residents’ special near-term needs for cash flow from their portfolios.

Unless a retiree’s retirement income sources, such as pensions and Social Security, can completely cover their new expenses on an inflation-adjusted basis, a portion of the retiree’s portfolio will need to provide ready, reliable cash flow. Additionally, the retiree’s remaining portfolio may need to be invested for growth. This is to hedge against longevity risks and also provide an estate for heirs, if that is a goal.

How Do You Design a CCRC-Optimized Portfolio?

If you’re a retired investor, you typically will have a mix of both stocks and bonds in your portfolio. Within those broad asset classes, you may diversify your risk by including investments in both large and small company stocks, and in companies both within the United States and abroad. You also may include alternative asset classes to further spread out your risk and maximize return. Within your fixed-income portfolio, for example, you may have a mix of corporate and municipal bonds to provide income, as well other bond asset classes that perform differently when interest rates or inflation changes. These are basic characteristics of a well-designed portfolio.

A CCRC-optimized portfolio differs from a typical retiree’s portfolio in the way the investments work to achieve both short-term cash flow needs and long-term goals. A retiree and/or wealth advisor who designs a CCRC-optimized portfolio starts by determining the excess cash flow the retiree needs above and beyond other retirement income resources.

The Ideal CCRC-Optimized Portfolio

The ideal CCRC-optimized portfolio includes investments that generate near-term income. This includes short-term corporate or municipal bonds with maturities between one and five years. The portfolio also may include other conservative investments, like certificates of deposit (CDs) with similar maturity schedules. In my opinion, the goal of the fixed-income allocation within the CCRC-optimized portfolio should be to provide consistent cash flow to meet CCRC monthly fees over the first five-year period.

What about the remainder of the portfolio? Its long-term growth side should be designed to take on a bit more market risk. Why? To start creating cash flow for CCRC fees in year 6 and beyond. An additional purpose could be to continue growing the portfolio for legacy planning. I find that leaving an estate is a relatively common goal among CCRC residents who may not have refundable contracts and already have sold their primary home to help fund their CCRC entry fees. In some cases, the only funds these retirees can leave to their heirs are their portfolio’s long-term earnings.

How Do I Do This?

A “do-it-yourselfer” probably could construct and manage a decent CCRC-optimized portfolio. However, it does require ongoing monitoring, rebalancing and investment selection to ensure that it meets both short-term cash flow and long-term growth goals. This specialized portfolio also requires strict discipline  —   and that can sometimes be hard to maintain during periods of market volatility. As a result, you may want to consider delegating your portfolio’s investment management to an advisor who has specific experience working with CCRC residents and their unique financial needs.

What’s the Risk of Sticking With the Status Quo?

I review the financial portfolios of prospective CCRC residents. I often find some common mistakes that could derail their future plans. For instance, they may have significant concentrated risk in a single stock, sector or asset class. This can come from not having a “sell discipline” when they manage their investments. It may also be that they hesitated to sell an investment because they worried about the related taxable gain.

Another typical mistake is taking too much risk in their bond holdings. This usually happens when a retiree feels they need to generate income. As a result, they load up their portfolios with long-term bonds, real estate, energy investments and high-yield (junk) bonds. However, these investments can create too much interest rate and credit risk.

Finally, seniors often become targets for salespeople who talk them into annuities and other high-cost, non-liquid investments. The fees on these investments can be in excess of 2-3%. This is an amount that can certainly cut into the retiree’s returns.

However, running out of money is the most significant consequence of not having a CCRC-optimized portfolio. Many CCRCs do offer guarantees that they’ll care for you for life, no matter what. However, it’s usually not ideal to plan on receiving benevolent care from your community if your assets run out.

Benevolent-care residents often are subject to financial audits to prove their lack of funds. They then end up having to adhere to strict “allowances.”

My thinking is this: The goal of moving to a CCRC is to maintain your independence. If so, that independence should include financial self-sufficiency, too.

Financial Planning for Your Next Steps

If you are considering moving to a CCRC, you probably already have done a good job of accumulating assets and income resources to afford it. However, what got you to where you are today, financially speaking, may not necessarily work as easily after you’ve made your big transition.

For peace of mind, you may want to delegate your CCRC expense-planning and investment management to an objective, experienced advisor. Your advisor can actively manage your finances so you can just relax and enjoy your new home.

Please contact me to learn how a CCRC-optimized portfolio might work for you. CCRC planning is my specialty. I’ll give you an honest, no-obligation assessment.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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