By the age of 65, the best of your working days are behind you, you are poised to enter into retirement and all that it entails – travel, time with the grandkids, leisurely days, and aging (hopefully) gracefully in the comfort of your own home.
However, as the average life expectancy increases – according to The World Economic Forum people should expect to live between 8 to 20 years longer on average[1] – the likelihood of developing age-related health issues increases considerably. The severity of these issues could necessitate home care assistance (e.g. weekly housekeeping, grocery shopping, etc.) all the way to intensive, around-the-clock support in a nursing home facility.
For this reason, planning beyond the highlights of the ’Golden Years‘ is crucial for overall life satisfaction. Things come up, the unexpected can happen – it is essential to be prepared for what may lie ahead[2].
So, how much will I need for Aged Care?
Figuring out how much residential aged care will cost can be overwhelming. However, in the simplest form aged care fees can be broken down into 3 main categories:
- Accommodation Cost
- Basic daily fee
- Means-tested care fee
The final amounts will differ from person to person based upon individual financial situations, what and how many services will be received, where those services will be received, and any additional fees that the chosen aged care provider charges.
Accommodation Fee
The most important cost to consider in aged care is the RAD (Refundable Accommodation Deposit). This is a lump-sum payment charged by the facility. The exact amount for the RAD will be dependent on which facility you choose and the type of room you select, amongst other considerations.
Those who cannot afford the lump sum RAD can instead elect to pay the same amount in daily installments, otherwise known as DAP (Daily Accommodation Payment). The DAP is calculated as the RAD multiplied by the maximum permissible interest rate (MPIR), divided by 365 days.[3]
Retirees can choose to pay the RAD in full, the DAP in full, or a combination of the two. If you pay a combination of both, then the DAP will be reduced. Another key consideration between the two is that while the full RAD is fully refundable to the estate once the resident passes (minus any amounts that have been taken out to pay for any additional services), the DAP, however, is not.
Basic daily fee
Covers the cost of day-to-day services at the aged care home, including meals, electricity, cleaning, laundry, etc. The maximum basic daily fee for new residents entering aged care (including respite) is currently $47.86. The rate increases on March 20th and September 20th every year to coincide with changes to the Age Pension.[4]
Income-tested care fee
A contribution that some people pay toward the cost of their care. This is determined by an income-tested assessment. There are annual and lifetime limits on how much and for how long you pay this fee – it is capped at around $25,000 yearly or $60,000 over a person’s lifetime.[5]
So, what can I do to prepare for the potential Aged Care stage of my retirement?
The Association of Superannuation Funds of Australia (ASFA)
recommends retirees ‘assume up to 67% (or two-thirds) of annual pre-retirement income’ will be needed in order to maintain a comfortable lifestyle in retirement. It must be stressed that the ASFA income estimates do not consider the amount retirees may need for daily costs in aged care, as well as the Retirees Aged Care Accommodation Bond (RAD).
The ASFA calculations also rely on the assumption that a retiree owns their own home and are in good health. If retirees need additional support in later life, the only way to pay for aged care whether 1 x RAD (or potentially 2 x RADs if a retired couple enters aged care at different times or requires differing levels of care) is by selling off their largest, most valuable, and in some cases, their sole remaining asset – the family home.[6]
The reality is that a retirement funding gap will emerge where a retiree has either sold their home or depleted most of the home’s equity through the use of traditional equity release products such as reverse mortgages, shared appreciation mortgages, shared equity mortgages, retirement interest-only mortgages. Tapping into the equity of the family home is not an easy decision, but rather, born from the necessity to find a way to continue paying for basic living costs once savings or superannuation funds run out.
How can Futureproof help?
It is Futureproof’s view that the traditional financial instruments ‘intended’ to help with retirement income and aged care funding are simply not fit-for-purpose – the worst of them being reverse mortgages, which are unsustainable and fiscally irresponsible for the majority of retirees.
Governments too, based on the current trajectory, face a major fiscal time bomb – a steadily ageing population with insufficient superannuation savings and a lack of viable retirement and aged care funding options, will inevitably result in more retirees relying on pension support and aged care living subsidies.
In response, Futureproof has developed the Equity Preservation Mortgage™ (planned for release in Australia and United Kingdom and written only through our regulated financial institution partners).
The Equity Preservation Mortgage™ is a new nextgen smart mortgage which allows retirees to unlock the capital of the family home, tax-free to be used in any of the following ways:
- Preserving all home equity to later fund lump sum RAD paymenst;
- Providing tax-free income to pay the weekly DAP with no depletion of home equity;
- Provide tax-free income to pay daily care fees with no depletion of home equity;
- Retain ownership of their property as it continues to appreciate and upon death, pass all home wealth onto the next generation.
As it currently stands, it is not wise to merely hope or assume you will be able to remain in your home with enough savings to live a comfortable, assistance-free life – Futureproof ensures you won’t have to.
[1] https://www.weforum.org/agenda/2019/06/retirees-will-outlive-their-savings-by-a-decade/
[2] https://payingforlongtermcare.com/golden-years/
[3] https://thirdagematters.com.au/the-cost-of-aged-care/#
[4] https://agedcareonline.com.au/2015/10/Residential-Aged-Care-Costs-Explained
[5] https://www.myagedcare.gov.au/help-at-home/home-care-packages
[6] https://www.superannuation.asn.au/resources/retirement-standard
