We all reach a stage of life where our loved ones start slowing down and we need to consider a retirement home, lifestyle village or nursing home. Their ability to cope on their own becomes diminished, which can be a concern from a safety and mental health perspective.
It can be difficult to determine what to do next: do you get them to move in with you, do you get someone to visit them at home, or do you look at moving them into a lifestyle or retirement village? How do these options differ from a nursing home? Will your parent/s need to sell their house? What’s going to make the most sense financially, that won’t put a strain on your financial goals or budget? Following is some advice on how retirement homes and lifestyle villages are structured financially, so you can make an educated decision.
What’s the Difference Between A Retirement Home and A Lifestyle Village?
Not so long ago, the only option for aged care was a nursing home. This was limiting in that it only catered for elderly patients who didn’t need to be in a hospital, but couldn’t care for themselves at home. It didn’t cater for those with minimal care requirements. It was also very expensive.
The introduction of retirement homes and lifestyle villages has changed that. Retirees are choosing to relocate into these social communes for many reasons: ease of living, low maintenance lifestyles, increased security, great facilities, and a sense of community. Consequently, it’s become a fast-growing industry that has transformed retirement for many Australians.
The primary difference between the two is the Retirement Villages Act, which only applies to retirement homes. The act ensures residents at a retirement village are covered by a more structured process that clearly outlines fees, contracts, exit conditions, and obligations by both parties. A lifestyle village is generally governed by the same legislation as caravan parks – a much less formal process.
How Is A Retirement Home Financially Structured?
Navigating the financials around these options can be a source of frustration. Owning or living in a retirement village is different to other forms of property lease of ownership. The costs of retirement village life can differ depending on the village concerned but will generally be divided into three areas:
Entry fee. The village owner may offer title or ownership to the property or a leasing arrangement with a reduced upfront cost. Ownership will obviously involve a higher payment. This may depend on the resident’s property type and location within the village, with a range of living options from independent units to onsite apartments and medical facilities provided.
Maintenance and Ongoing. Living in a village includes day to day costs which covers shared expenses such as security, rates, village and facility maintenance, and building insurance. In addition, there will be personal living costs such as electricity, telephone, and contents insurance which the resident will be responsible for.
There will generally be the opportunity to take advantage of extra services offered by the village such as meals, outings or laundry services that may be also incur ongoing fees. These vary greatly across different facilities depending on age and the extent of services offered, however it’s wise to budget for between $300 – $700 per week, depending on whether the resident owns or rents the property.
Exit fee. This can often be a larger cost than the entrance fee and is designed to help compensate the developer for the initial costs of the village. These fees are often charged as a percentage based on the number of years a resident has lived there, capped at a maximum level. It may be calculated as a percentage of the entry fee, or in relation to the value that the unit is sold for.
Here’s A Good Example
Joan and Mike purchase their unit for $400,000. Under the terms of their agreement they will pay an exit fee based on the selling price for the unit when they leave, which will be 6% per annum for each year they lived there, capped at a maximum of 5 years (30%). After ten years the unit has increased in value to $650,000 which, after paying the 30% fee of $195,000, leaves them with $455,000 from the sale.
Sharon and Dave elect to pay their fee based on their entry cost. Their scenario is the same as Joan and Mike’s, but upon leaving the unit their exit fee is only $120,000 based on their purchase price of $400,000. They must split the selling profit with the village operator meaning they only net half of the gain in value during the ten-year period. This means their overall net after deducting the fee and 50% of the increase is $405,000.
Joan & Mike Sharon & Dave
Entry Fee $400,000 $400,000
Length of Stay 10 years 10 years
Percentage fee 6% 6%
Capped after 5 years 5 years
Annual Increase 5% 5%
Sale Price $650,000 $650,000
Exit fee Payable $195,000 $120,000
Capital Gains (50/50) $0 $125,000
Return to Residents $455,000 $405,000
In closing, it’s important that you do your homework and read the fine print. You should be basing your decision not only on requirements now, but those ten years from now. Does the facility cover what’s required? What would a case study like above look like? What are the risks associated with committing to one plan or another? How are you going to budget for the ongoing management fees? Will you use all the facilities the home or village offers?
It pays to shop around, ask lots of questions of the village owners, and talk to the residents. It’s important to note that a move is more about money – you also need to choose a location that will ultimately make your loved ones happy.
If you’re trying to develop an aged care plan for your loved one or yourself, you don’t need to do it alone. A financial adviser (or planner) spends their days identifying and presenting opportunities to their clients. Our simple, quick, free service will connect you to the best independent financial advisers, based on your needs. Click here to get started.
The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.