How the ‘cheapest’ retirement village could leave you paying more
The biggest financial question for many Australians considering starting a retirement village is not whether they can afford to move here, but what happens when they leave.
Retirement village contracts are built around an exit fee model. You pay dues, you live in the village, and when you leave, an exit fee is charged.
The latest Retirement Living Council/PwC Retirement Village Census found exit fees are still the most common contract, with an average charge of 33 per cent. But last year, upfront management fees represented 8 percent of contracts.
While this may seem like a small number, it is potentially a significant proportion of residents as it is not offered by all villages. While this is common with major operators such as Aveo, Keyton and Levande, many other operators do not offer this option.
The concept is simple: instead of paying when you leave, you pay in advance.
There may be a variety of benefits, and the biggest will probably be a discount. The operator charges less because it receives payment sooner; A 20 percent down payment is common, compared to 30 percent or 35 percent at the end. But the financial implications extend far beyond the management fee.
In the long run, if you move into an aged care home, paying upfront will normally mean your moving out payment will be higher.
Moving to a retirement village may be cheap with an exit fee, but when you realize what this means for your retirement it can make the move unaffordable. This is because once you exceed the asset threshold, your pension reduces by $7800 per year for every $100,000 in assets. Paying the administration fee upfront may allow you to preserve some of your pension.
How you pay for your home in the village may also affect your maintenance costs in the village and beyond. Home Support contributions are closely linked to pension means testing, so paying in a way that protects your pension may reduce your contribution.
Longer term, if you move into an aged care home, paying upfront will normally mean a higher (and sometimes faster) departure payment, leaving you with more money to pay towards the Refundable Accommodation Deposit (RAD). Here is an example.
A resident purchases a two-bedroom retirement village unit. Options include paying $850,000 with a 33 percent exit fee or paying $850,000 plus a 20 percent upfront management fee ($170,000). There is a general service fee of $645 per month.
Under exit fee option:
- Outgoing price: $850,000
- General service fee $7740/year
- Age pension $19,640/year
- Home Support $4790/year
- Exit fee: $280,500
- Exit payment: $569,500
Within the scope of advance fee:
- Entry price: $1,020,000 ($850,000 plus $170,000 upfront management fee)
- General service fee $7740/year
- Age pension $30,149/year
- Home Support $2296/year
- Exit payment $850,000
After 10 years, the difference is around $240,500. Of course, by making a down payment you are giving up the income that $170,000 could have earned. At 5 percent annually for 10 years, that’s $85,000.
Neither model is automatically better, and you won’t always be given a choice. Either way, it’s worth crunching the numbers because the cheapest house in a retirement village may not always be the most affordable.
Written by Rachel Lane. Minification Made SimpleA book and website that aims to shed light on degrowth.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Rachel Lane, bestselling Elder Care, Who Cares? He is the author of the book. and Downsizing Made Simple with financial expert Noel Whittaker.
