How to Pay for Retirement Homes
A look at how Canadians typically cover the costs of seniors' care
There are a wide variety of means Canadians use to pay for seniors' care. This begins with pension money from Old Age Security (OAS) and the Canada Pension Plan (CPP) and extends to personal finances, which can include everything from personal investments to paying out of pocket and getting personal help from kids.
The great problems and dangers inherent in paying for senior care are twofold:
Requiring more care than you planned for. For example, this may be the case when it comes to the need for memory care while you wait for long term care.
Not having planned well enough for retirement, on the other hand. In a worst case scenario, you have very little or no savings and no funds at your disposal other than government pension. Beyond that scenario is everyone else who has not set themselves up so that income exceeds retirement needs and/or care costs.
Both of these situations are discovered everyday by Canadians. This basic guide is intended to help people avoid those unfortunate scenarios. We urge that you get advice from financial experts on all these matters, as this is only a basic overview and informational guide.
Learn more about the following:
- Basic Government Pensions
- Workplace pensions
- Insurance products
- Continuing income and savings
- Tax breaks for seniors
- How will you pay?
- How much is enough?
Basic Government Pensions
There are two fundamental benefits used by seniors across Canada, the Canada Pension Plan (CPP) and Old Age Security (OAS). These are the basic income available to pay for a retirement home or residence for any senior.
Old Age Security (OAS) benefits begin when you turn 65; this will not change until April 2023, when the age of availability is supposed to be changed to 671.
There are three additional supplements to the OAS, so you may not be restricted to just the benefits from this program. Additions and supplements to the OAS include the following:
- The Guaranteed Income Supplement (GIS) provides a monthly non-taxable benefit to Old Age Security (OAS) pension recipients who qualify; this is eligible for those with a low income who are living in Canada.
- The Allowance is an additional benefit, over and above the OAS; this is available to the spouses or common-law partners of Guaranteed Income Supplement recipients
- Allowance for the Survivor is a benefit available to people with a low income, living in Canada, and whose spouse or common-law partner is deceased. You can apply for this if you meet a variety of criteria. You can learn more about this from the Government of Canada website.
Canada Pension Plan Benefits (CPP): You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase. This is a monthly benefit for all who have contributed to this over the course of their working lives. In addition, there is the CPP Post-Retirement Benefit, payable to those who have paid CPP while receiving CPP benefits. Other variant and supplemental benefits include the CPP Disability Pension and the CPP Survivor's Pension. If you qualify for any (or all) of these, as they say, every little bit helps.
A full review of federal government benefits is available at the Financial Consumer of Agency of Canada's (FCAC's) website
Workplace Pension Plans
Workplace pension plans are privately administered by employers who choose to offer them, and many people benefit from these. If you are one of the fortunate people who is the beneficiary of a good company or government pension, paying for excellent senior living is not likely to be an issue. If not, there are still more sources of money.
Read professional advice: "Three steps to understainding your pension options."
Home equity, savings and other funds can be invested, so that payouts can actually be used to cover costs, rather than cutting into your savings monthly. Of course, there are risks involved in investing in funds, the stock market, etc., but as long as the market is good to you, investment is better than slowly dwindling your nest egg. We are not experts in financial planning, and the following overview is intended to be helpful and informational only. Be sure to consult with a reputable financial advisor.
Bonds are safer than some other investments and may appeal to more cautious, older investors. There's much less chance of losing your savings should the market go bust. However, these rely on interest rates, and when interest rates are low, this does not play into the favour of investors.
Guaranteed Investment Certificates (GICs) are (as the name suggests) a protected investment, guaranteed by the Canadian Deposit Insurance Corporation. Thus, as they say, it's impossible to lose money with a GIC, however, these pay bank interest rates which have been low for many years now (as of 2016). That said, these do pay a slightly higher interest rate than you will get from a savings account.
Dividend stocks are a risky investment, of course. Dividends for stocks found on the stock market are paid out quarterly or annually. These are unreliable depending on the general confidence in the stock market and the individual performance of any company in which you invest. That said, there are some reliable stocks on the market. A high quality company will pay around four or five percent in yield per year, and this can give your investment portfolio a good boost.
An annuity is an insurance product that can offer seniors periodic payments (usually monthly), based on their original investment, current interest rates and the terms of the contract. Non-registered annuities can be taxed at favourable rates. A straight life annuity will provide income for the duration of a lifetime. A joint life annuity will provide income for life for both spouses.
Essentially, this is an insurance policy against "living too long." Like life insurance, this sometimes works to the benefit of the insured – if they live a lot longer than expected. Talk to your insurance company to see if they offer annuities.
There are several types of annuities, and not all are ideal for retirees. Immediate annuities should be "approached with caution." Other types of annuities include single-premium, flexible, deferred, fixed and variable2.
Long-term care insurance will provide tax-free benefits if you develop a critical and chronic illness and are unable to care for yourself. It may cover health and personal care services if you are living at home, in a retirement residence or a long-term care facility. Different policies will reimburse for eligible expenses, a set amount for expenses on a given day or provide flexible income without the need of proving expenses. In the past, Stephen Gadsden has provided a cautionary tale demonstrating the value of long term care insurance.
Segregated funds are insurance protected investments with guaranteed capital of either 75 or 100 per cent at maturity or death. These funds allow you to designate a beneficiary in your policy, bypassing probate fees. These have come in and out of vogue over the last 20 years, and may be most ideal if you own your own business. These have the advantage of guaranteeing the principal, but they also have higher fees for management costs3.
Selling a life insurance policy is a practice also known as life settlement, recommended as a possible option by some experts but considered dubious by others and questionably legal in Ontario and other provinces. This will negatively affect the financial future of heirs and is considered a desperation move by most experts, perhaps after you have
Continuing income and personal savings
Many people continue to work during their retirement, some out of need, others out of choice. Many studies show that it is very healthy to work – at least part time – in your retirement, in order to keep active, to keep on felling valuable to society and others around you, and to keep making money. Why not, if you can find work you like? For example, retired teachers find value in staying available for supply work. Others may find a job doing something simple, even working in retail or work of that nature.
Personal savings can include equity on your home (especially helpful if you have downsized), Registered Retirement Savings Plans (RRSPs), savings accounts, investments.
Renting your primary home is a way to generate monthly income to pay for accommodations in a retirement residence. However, being a landlord also carries the demands and pressures of seeking and maintaining good tenants, while bearing the responsibility for upkeep and major repairs of the property.
Scrutinize your personal taxes to ensure you are taking advantage of all the tax exemptions and credits for which you qualify. Consider these points when consulting a tax expert:
- Residents of retirement communities or long-term care facilities can claim the cost of attendant care.
- Individuals with long-term disabilities that affect their ability to perform the functions of everyday life may qualify for a disability tax credit. This tax credit may also be transferred to a spouse.
Other help seen often in seniors' care includes the help of family. Older adult children often pitch in to help pay for mom's or dad's retirement home. This may be difficult for some senior parents to live with, but it should be considered understandable. Churches and other charitable organizations can also help families pay for seniors' care. This is not ideal, especially for people who have valued self-reliance all their lives.
Tax Breaks for Seniors
In addition to the above, Canadian senior citizens are also eligible for a number of tax credits.
Here's a look at what you can claim:
The Age Amount
For anyone with a net income less than $82,353, the federal government allows you to claim the Age Amount on line 301 of your tax return. If your income was $35,466 or less you can claim the max amount $7,033. For amounts in between those two figures there is a Federal Worksheet to help you calculate the tax credit you will receive.4 Essentially, it comes to $6,845 minus 15% of the amount by which your income exceeds $35,466.
Also note that you can transfer all or part of this Age Amount to a spouse or common-law partner, or conversely you can claim all or part of your spouse's or partner's Age Amount. The CRA offers more about amounts transferred from your spouse or common-law partner.
Pension Income Amount
If you collect from a public pension plan such as the Canadian Pension Plan (or any private company pension plan: see above), you can claim an amount up to $2000 in credit for this Pension Income Amount, if you have any eligible sources of pension income. Other eligible sources of income are various. These include
- annuity income you receive as payments for a pension
- annuities received as part of a superannuation plan
- payments you received from an RRSP
You can shift money between partners or spouses in order to maximize the credit you receive. You can transfer income from one spouse to another, based on who earns a higher amount. Transfer the amount to the spouse with the lowest income (and thus the lower tax rate) to decrease the overall tax you will pay. The CRA allows you to switch up to 50% of your pension income from one spouse to another in order to optimize the tax credit you receive.
If your medical expenses exceed 3% of your total income, and they are not reimbursed in anyway, you can claim medical expenses as a tax credit. You can claim a wide variety of medical expenses, in fact, some of them less obvious than others. As a number of sources note, the list is actually extensive. It includes oddities like:
- Costs related to the purchase of non-gluten foods
- Costs of blood coagulation monitors
- Expenses related to service animals for those with diabetes
- Air filters or air purifiers
The full list of claimable medical expenses will surprise many. Check out the CRA's sortable list for many more eligible medical expenses: cra-arc.gc.ca/medical/. When claiming any of those, you need to be sure that you can verify those with receipts, so be sure to keep records of all expenses.
Disability tax credit
Seniors who are qualified as disabled may receive the disability tax credit. Some eligible disabilities may surprise some. Included in the list are some impairments related to activities of daily living (ADLs), typically associated with seniors in assisted living facilities; these ADL-related disabilities include feeding, dressing, and incontinence, as well as impairment of mental functions (including those requiring memory care) .
Learn more about the disability tax credit.
More federal credits
There are even more federal credits available, depending on your individual situation. Other tax credits include but are not limited to the following tax credits:
Those with a disability, for example, can receive a substantial tax credit, up to $7,899. Search the CRA website for the disability tax credit.
For seniors who are renovating a home, whether it's their family home or an active lifestyle home they have purchased, there is a Home Accessibility Tax Credit (HATC). This is available for anyone who is 65 or older and has made changes that improve their home's accessibility.
You can claim expenses for the following common accessibility improvements, and more:
- wheelchair ramps inside and outside of the home
- the addition of walk-in tubs
- widening of doors
- non-slip bathroom flooring
- motion-sensor lights
- much more
Provincial home renovation credits and/or property tax grants are also available to seniors in BC, Ontario and New Brunswick (as of 2016).5
How you will pay for the cost of a retirement home
Facts about most people’s retirement savings
According to the Ontario Association of Non-profit Homes and Services for Seniors, a woman retiring today at 65 can expect to live another 19.9 years on average, while a 65-year-old man has an average of 16.1 years ahead of him. As we move into our 80s, the likelihood increases that we will need the services offered by a retirement residence or a long-term care facility.
RBC Insurance says people 65 and older account for 50 per cent of hospital days and almost 100 per cent of long-term care days. Manulife Financial points out that one in five Canadians who live in a nursing home stay for longer than five years.
A retirement home can be expensive but there's no doubt we can enhance the quality of our retirement by preparing. But in point of fact, many people find out that they can afford senior care or housing comfortably.
Even higher quality retirement homes with "luxurious" amenities like hair salons and other modern conveniences are within the means of many Canadians. Costs here can exceed $5,000 per month, up to over $7,000, especially if you need care. Even in these cases, though, people are surprised at what they can afford when they look at their finances and actually consider what they are currently paying in terms of all their household costs, including groceries, gas, utilities, property taxes, etc.
One typical scenario is that an individual or a couple will receive about $2,000 from OAS and CPP. A company pension might add up to $850 per month. You may also have an RRSP or other investments that might bring in an extra $500 per month. The above figures would give you about $3300 per month in relatively reliable income.
If you choose to sell your home, you will have the equity available from the home. In 2016, the Canadian national average price for home sales was $480,000. If we take a conservative approach and say $400,000, selling your home, taking off commissions and other costs, you will end up with $380,000. Invest that money to get a conservative return of 3% per year and you will end up with an extra $950 per month. Add all those income figures above (and note: money invested notwithstanding), and this comes to $4,250 per month.
The cost of staying at home for a typical elderly couple (adjusting figures for inflation, from our 2012 report) will be about $2450. Average rent for a suite in a retirement home (with at least one meal per day) in 2015 was $2,815, plus an additional $800 companion fee, in Ontario; this totals a monthly one-cost-to-catch-them-all of $3,615.
On another hand, if you know that you are not going to be staying in a retirement home long (there are a variety of reasons this might be), the costs of monthly rent are less of a challenge. When seniors are suddenly desperate for care, the sudden cost of moving into a retirement home may be unfortunate.
Worst case. In one of the worst case scenarios, you (or your family) may have to pay for memory care, at a cost of $5500 per month. If you fit into the average, here's how it all stacks up:
Professional pension $850
Additional investment' $900
The average wait time for a long term care home is about 6 months to a year, in which case family may be well-advised to dip into the savings or home equity to cover the costs of memory care. After a year that takes about 12,000 out of the savings or equity from the home.
After this time, you go into long term care, where the government covers care costs, and all that family is required to pay for is room and board.
Paying for a retirement home when money runs out
There are a variety of ways you can pay for a retirement home when your money runs out. Some later or even last ditch measures are as follows:
Help from family members, churches or other charities. Many people taught the value of self-reliance from a young age will resist the idea of getting help paying for care when they are in their senior years. However, older adult children will often be able to pitch in and be happy to help "mom and dad" and "pay them back for everything they've given us." In still other cases, churches and other charitable organizations are there to help and often have funds readily available to help you pay for care that you absolutely need.
Selling a life insurance policy is a practice also known as life settlement, recommended as a possible option by some experts but considered dubious by others and questionably legal in Ontario and other provinces. This will negatively affect the financial future of heirs.
Of course, you want to avoid desperation, so be sure you understand how much is enough for retirement.
How much is enough for retirement?
In the past, financial advisers used 70% of pre-retirement income as their rule of thumb for how much money we need to live in retirement, to live as well as we did when we were working. But these days, financial advisers and planners are taking a more sophisticated view of retirement.
The best advice suggests that people look at retirement as a three-stage process; each stage has different financial requirements. The first stage of retirement covers 65 to 75 years of age; at this stage, people are generally active and healthy and get to live some of their dreams. In the second stage people stay closer to home; at this stage, one spouse or both may experience declining health and require some home health care. In the final stage, one or both partners may require the help of 24-hour nursing care provided by long-term care facilities.
One final important consideration is "life planning." No one can really decide how much money they will need in retirement until they are sure what kind of retirement they really want. If you plan to sell your big house in the city and find a quiet country home where you can indulge your passion for art or gardening, your retirement needs are going to be very different from those of someone who can spend four months skiing in British Columbia and the rest of the year enjoying life somewhere in the south.
1As of 2016, this change may also be reverted by the Trudeau government, as part of their Middle Class Plan.
2Read more at fso.cpasitesolutions.com/../fg-Annuities.html
3Read more at theglobeandmail.com/../segregated-funds-may-be-on-the-rise-again/article24706328/ and getsmarteraboutmoney.ca/../Segregated-funds-explained
4These amounts (as of 2016) are, see cra-arc.gc.ca/../lns300-350/301/menu-eng.html. For the Federal Worksheet: cra-arc.gc.ca/../t1gnrl/menu-eng.html