Funding aged care in retirement can be a minefield. With both the cost of living and life expectancy on the rise many people are poised to enter into their retirement years without adequate savings. Selling the family home has seemingly become the only option to access quality aged care – though the majority of seniors would prefer to remain at the family home. While of course the decision to move into aged care is a very personal one that is dependent on a number of individual circumstances, as retirees consider all the implications of selling, many may question whether they can afford to let go of their biggest and most valuable asset.
Insufficient funds in retirement
Saving enough for retirement is a challenge and being able to plan for how much you will need may be even greater. According to The World Economic Forum “…people should expect to live longer than the pot of money they have saved for retirement, by between eight to almost 20 years on average…”[1]
There are currently a number of different strategies and financial products available to meet the increasing challenges of funding life in retirement:
- Downsizing;
- Reverse mortgaging the home;
- Using or converting assets by relying on an allocated pension; or
- Lifetime annuity, to name a few.
The inherent risks, namely the risk of faster than anticipated capital depletion, must be addressed as retirees transition to a more precarious, fixed income lifestyle with uncertain longevity.
The decision to downsize (usually to a home unit or independent community living) must mean retirees incur not only significant upfront selling and moving costs, but more importantly, must be able to fund ongoing strata levy payments for an undefined period of time.
Similarly, if a portion of the capital from the sale of the family home is used for investment, retirees who dependent on these funds for future living expenses must be able to comfortably withstand unforeseen market fluctuations or ‘black swan’ events such as a market crash.
In the scenario where retirees may need to transition into a level of residential aged care support, the question of finding sufficient funds for this comes into question with the average accommodation bond $675,000 nationally and between $1 million to $1.5 million (or more) for capital cities.
This becomes even more complicated for couples who do not need to make the transition at the same time, or who may later require different levels of aged care support. In this case retired couples may struggle to find adequate funds to pay for two separate aged care accommodation bonds.
Desire to leave an inheritance
Building family wealth is no small task. After years of work to achieve the ultimate ‘dream’ of property ownership, one of the greatest gifts that retirees can pass on to their children and grandchildren, is the financial security and freedom that comes from the equity (and potential future earnings) of the family home. For retirees hoping to leave such an inheritance, the decision to sell in order to cover the costs of aged care, quickly becomes a ‘solution’ that is fraught with lost potential, most significantly the ability to establish life-changing, generational wealth for one’s family.
On a broader social scale, if retirees are able to retain and pass down the family home, then significant progress can be made in breaking the growing cycle of intergenerational unfairness, as the barriers for younger generations to enter the housing market become ever greater.
Depleting equity via traditional ’reverse‘ mortgages
As an alternative to selling, reverse mortgages were created to help give retirees the ability to access capital for their next phase of life by instead tapping into the existing equity of the family home. While this may be a suitable option for some, for others there are real disadvantages to a reverse mortgage that must be cautiously considered. Foremost is that retirees must be comfortable with depletion of their home wealth. Because interest rates and fees attached to a reverse mortgage are high and because these mortgages use compounding, rather than simple interest, the reverse loan balance each month, the balance rapidly increases— as the balance goes up, the home equity goes down. In general, retirees might expect to see their ‘debt’ double every 9-10 years leading to negative equity around year 20+.
We have found it is a common failure of financial advisers who recommend reverse mortgages, to highlight the risk of being left with insufficient equity to fund a residential aged care accommodation bond some twenty years on. This can leave retirees exposed at the most vulnerable stage of their lives and simply gambling on their longevity and their continuing good health.
Retaining social connections
For some, the non-financial motives for remaining in the family home far outweigh the financial ones. Retirees who need to downsize to fund aged care may struggle with the competitive and time-consuming task of finding the right place to live. Being unable to secure a home in the right area may mean having to move to a new geographical location. This loss of proximity to family, lifelong friends and an established social network (doctors, shops, church etc.), has the potential to create a host of emotional and psychological issues.
Is there a solution?
For too long there has been no alternative and little innovation made towards solving the challenges retirees face in accessing quality aged care, besides selling the family home or taking out a reverse mortgage.
At Futureproof, however, we believe there is a better way.
As a FinTech company committed to addressing the current product shortcomings for an aging population, our mission is to give the power back to retirees. Working in collaboration with one of the foremost, global thought leaders in the technology and innovation space, we are poised to launch a next generation smart mortgage that can be used for both retirement income and aged care funding.
Our Equity Preservation Mortgage™ is designed to overcome the barriers preventing retirees from keeping their homes by providing annuity income, to pay for home care packages whilst ageing-in-the-home or to fund aged care daily fees, whilst at the same time preserving their home equity – all tax free. It will be the only mortgage capable of monetizing home equity in a fiscally responsible, low-risk manner with no depletion of home wealth.
Our recent submission to the Royal Commission regarding Capital Financing & Funding of Aged Care also directly addresses the unintended consequences that traditional solutions have caused, such as the loss of generational wealth, as well as identifying how the Equity Preservation Mortgage™ is able to effectively address them.
Most importantly, however, the soon-to-be-launched Equity Preservation Mortgage™ will be able to, finally, provide a viable option for retirees when they need it most. Delivering far better financial outcomes and financial security without carrying risk in their golden years.
[1] https://www.weforum.org/agenda/2019/06/retirees-will-outlive-their-savings-by-a-decade/
