How it works – the costs of retirement living

A simple guide to the costs of retirement living

For retirees, it is perhaps their number one cause of anxiety.

There is an understandable degree of concern and confusion about the costs associated with moving into a retirement community. The financial arrangements can be complex and the models vary from facility to facility.

Here is a guide that will help you understand some of the key factors that come into play and what costs to factor in.

Advantages of the model

While the payment structures for securing a retirement living home or apartment are sometimes seen as favouring the property developers over residents, the model also delivers benefits for retirees. Chief among them is the ability to defer a large part of the cost of an apartment until after you leave a retirement community, giving you the chance to live an attractive lifestyle right now in the knowledge that final payments will be settled at a later time.

The cost of retirement living is typically broken into three main areas:

  1. Entry price
  2. Ongoing fees
  3. Deferred management fee.

Within these categories, there is usually flexibility for operators and residents as they negotiate a contract to ensure that each party is satisfied with the balance between upfront and exit costs. Let’s consider the three areas of cost in detail.

1. Entry price

This is the single, upfront payment for your apartment or home. In making your decision about where to live, remember that the cost of buying a retirement living place is usually cheaper than purchasing a normal residential property in the same area. So a retirement living community gives residents greater ability to live in their desired area, while also gaining the added advantage of access to on-site features such as social activities, pools, spas, games rooms, gardens and care services.

The entry price is almost certainly going to be the largest payment you will make and secures your spot in the retirement community. Retirement facility contracts differ from those used to purchase a regular residential home, with a lease or licence arrangement – where the resident pays an upfront entry fee, or ‘ingoing contribution’, for occupancy of a unit – being the most common form of contract. It comes with the added security of government legislation designed to protect residents’ rights.

2. Ongoing fees

These fees are usually paid weekly, fortnightly or monthly and cover a portion of the costs of running the retirement community – things such as staff salaries, building insurance and maintenance of recreation facilities, gardens and the like. All residents pay this fee and they will vary depending on the amenities at the complex and the size of your apartment.

Although you may baulk at having to pay weekly fees, you should see them as an important aspect which contributes to the lifestyle that you enjoy at a retirement living destination. For a start, these fees give you a say in the operating budget of the facility and where money is spent. They are the equivalent of the body corporate fees you are required to pay if you buy a unit or apartment.

Indeed, residents should be wary if they find that one retirement community’s weekly fees are much lower than those of another centre – this may mean that the maintenance of the site is poor, and you also have to factor in whether the site offers the peace of mind of features such as 24-hour emergency support and care.

When choosing your retirement community, ask the management team what is and what isn’t included in the ongoing fees.

3. Deferred management fee

This deferred payment is the cost residents pay when they sell their property to a new resident and leave the retirement community. The exit fee helps compensate the retirement community’s owner for the cost of building the centre and ensures that the ingoing fee for residents is more affordable.

It is also designed to give buyers flexibility – some prospective residents may not be able to afford to pay the full market price for a unit when they move in, so instead they pay a larger amount on the way out.

The fee is usually calculated based on a percentage of the entry price of the apartment and should be agreed to by both parties up front. But the final deferred fee you pay will depend on variables such as how long you have lived in the property and whether there are any capital gains or losses on the apartment. Examine your capital gain entitlements carefully. As a rule of thumb, the longer you live in a retirement community, the better the financial outcome will be for a resident. You may also receive an amount from the facility operator when the unit is sold to a new resident. This is known as an exit entitlement and, again, the terms should be clear in the original contract.

And some other points to consider…

Perhaps you can keep your home, after all

Most people are concerned about having to immediately sell their home to move into retirement living. Do the numbers, though. Some retirees with sufficient assets find that renting (and keeping) their home is still an option and the rental income can go towards paying for their retirement living. This allows them to maintain an asset while getting the social and care advantages of retirement living.

Retirement living can be cheaper than living at home

Some retirees automatically think that staying in their home or purchasing an apartment in a normal residential complex will be cheaper than entering a retirement living community. This is not necessarily the case. As mentioned, retirement living fees cover aspects such as property maintenance, insurance and leisure facilities – and this may make it a far better option than having to meet the running costs of a standalone home. In addition, unlike a residential purchase, you often don’t have to pay stamp duty for a leasing arrangement on a retirement living property, potentially saving you tens of thousands of dollars.

Always get professional advice

As with any major financial decision of this type, you should contact your financial adviser, accountant or lawyer before making any decision so as to ensure you fully understand the costs and structure of any agreement into which you enter. Involving your family in the decision also makes sense. The bottom line: don’t sign the contract if you don’t fully understand all aspects of the agreement.