The concept of retirement living in Australia is poorly understood. This is partly because the legislation surrounding property developments in this industry is so complex. And it is also because of the confusion arising from the ever-changing rules in relation to superannuation and the age pension.
It’s important to talk about what the retirement living options look like so that those precious thousands of dollars that you’ve earnt over a life time can be spent in a way that gives you best value.
There are five broad options attached to retirement living.
The first is known as ‘ageing in place’. This means staying in your long-time family home with the support of home care services. It’s the option which is being strongly pushed by the federal government because it wants to avoid spiraling costs in the aged care sector, and it can be a reasonable outcome until you mobility reduces to the point where you are effectively housebound.
The second major option is to move into a retirement village. Retirement villages account for somewhere between 6-8% of people over 65 years of age. The terms and conditions which apply to these villages can prove too difficult or too expensive for potential residents.
The main deterrent is the deferred management fee or DMF, which is in effect, an exit charge. When your dwelling is sold, a percentage of the sale price, typically 20-30% must be refunded to the retirement village owner. The DMF model is actually known as ‘lease for life’. You do not own the freehold.
The initial reason for allowing this fee was to provide an incentive for developers to build these villages at an affordable price. However, not enough developers moved into the business, and so those in the market are able to charge a similar sticker price to a conventional villa unit and they still get the 20-30% icing as well.
There can be other fees which apply, such as maintenance and upgrade fees, and these can also be quite extensive depending on the contract.
The third option would be living out your retirement in a manufactured housing estate. In this scenario, you purchase a portable home outright and pay rent for the site on which your dwelling is ‘parked’. This sort of accommodation encompasses everything from caravans to state-of-the-art pre-fabricated homes. The key thing is that the dwelling can be relocated at short notice.
The fourth option would be to sell your current home and rent. If you are relying on the capital from your home sale to fund your future rent and lifestyle, that can be a gamble. You may live for a very long time and exhaust your savings.
The fifth option is to downsize. This means downsizing the value of the dwelling, rather than the floor area, because in many cases less and have more. The difference you can pocket can be invested or be used to pay off your existing mortgage.
Choosing between your retirement living alternatives depends on two main considerations: your wealth and how long you plan to work.
At Macroplan, we are finding labour force participation rates for people 65 years and over has doubled in the past 10 years and we think it will double again. We have a strong expectation that by 2025, people will easily be working into their early 70s. This may mean that, rather than one major residential move after retirement, there could be two moves. We call this the transitional market.
Depending on how wealthy you are, you might need to downsize the value of your home to create cash for your retirement or to boost your superannuation. Or you might look to your next dwelling as a new investment for the future. A property purchase can be an effective method of investment when bond rates and cash at bank rates get to 2% and can barely match inflation. In such a case, it might be a wise five year investment to upsize, rather than downsize, depending on how you are planning your retirement.
One thing is for sure, there’s more to planning for your retirement than just getting old.
About the author:
Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years experience as an advisor to governments and major corporate clients throughout Australia and New Zealand. For more information or to discuss your property research requirements, please contact Amy Williams on 02 9221 5211 or email@example.com.