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Just how much will it cost to move into a retirement village? Our resident finance expert crunches the numbers for you.

The most common question I get asked is, “How can I crunch the numbers on
moving to a retirement community?”

The simple answer is to get a Village Guru report from the community you’re looking at moving into – that way the numbers are crunched for you. But if your chosen village won’t give you one, then you’re going to need to crunch the numbers for yourself or get someone who knows how (like a specialist adviser) to do it for you.

It’s important to know that using rules of thumb such as, “If I sell this house for more than I pay for my new home, it’s affordable” are dangerous. Likewise, comparing villages based on purchase prices or the exit fee percentage can be just as misleading, because you’re only looking at one part of
the transaction. You need to make sure you’re clear about what you’re going to pay
to the village upfront, while you live there and when you leave.

Downsizing to a retirement community can have much wider financial implications than what you pay to live there. You also need to make sure you understand the implications on your pension (if you receive one); whether or not you will be eligible for rent assistance; how much money you’ll have left over to spend or invest; your cash flow; how it will affect your home care package fees; and your longer-term financial position if you need to move into aged care or when you pass away (how much you are going to get back and how soon after you leave). My simple methodology for crunching the numbers is called “Ingoing, Ongoing and Outgoing”. Take a piece of paper and divide it into three sections called “Ingoing”, “Ongoing” and “Outgoing”. Breaking down the transaction like this makes it much easier to see what you’re going to pay and when. If you’re comparing one payment option with another or perhaps two different villages, then you can draw a line down the middle of the page and look at them side by side.

So what goes in each box?

The Ingoing

This is the price you pay for your home and to use the common facilities – in a retirement village, your contract is often a leasehold or licence arrangement. In a land-lease community, your contract has two parts – you buy the home and have a lease over the land.

If your new home is in a strata-title village, then the amount you are paying is to own the
home and have use of the common facilities (often through an owner’s corporation).

All transaction costs should go into this column. For example, there may be legal or administration costs associated with having your contract drawn up or having your leasehold registered on the operator’s title. If it’s a strata-title village, then you may need to factor stamp duty into the ingoing costs (which doesn’t normally apply in land-lease communities or retirement villages that are not strata title).

In some communities, you’ll be given options for caravan or boat parking, additional car parks or storage cages. These should be added to the purchase price.

The Ongoing

Retirement village residents pay a weekly or monthly fee to cover the running of the village, often called a “general service charge”. This charge is similar to the costs of an owner’s corporation, where a budget of expenses is prepared, residents are able to have input, and the fees are levied on a cost recovery basis.

In a land-lease community, the ongoing fee is called a “site fee”, which is the price you pay to lease the land on which your home sits. Unlike in a retirement village, land-lease communities charge market prices, so they tend to be higher, but this is often offset by a lower or no deferred management fee (DMF) at the end.

In addition to the cost of the community you live in, you will still have your own personal expenses: groceries, clothing, utilities and ad hoc expenses like travel. If you get a homecare package, then you need to factor in those costs, too.

It’s a good idea, as a separate exercise, to create a budget. In your budget, include your personal expenses as well as the village costs together with your income. Make sure you adjust your investment income for any change to your investments (most people free up equity from their home when they
downsize) and make sure you include any age pension and rent assistance entitlements based on your new financial position and how your contract is treated by Centrelink – these may be quite different to what you currently receive.

The Outgoing

The greatest confusion of retirement community costs is around the exit fee, the biggest part of which is normally called the “deferred management fee” or DMF.

The DMF is typically a percentage of either your purchase price or the next sale price: anything between 25 per cent and 40 per cent is common but anything between 0 per cent and 100 per cent is possible.

To calculate your exit fee, you may also need to factor in your share of any capital gain or capital loss with the operator and, like other property transactions, there can be costs associated with selling your home, such as renovations and marketing expenses as well as sales commissions.

Unlike most other property transactions, the amount you get back may be paid to you before your home sells under what is known as a “buyback”. This can be as short a period as three months or as long as 18 months. (Of course is there’s no buyback, you’ll receive your money when your home sells.)

Making it simpler

Working out these figures can be complicated, especially if you are trying to compare different contract options, different homes or different communities. At Aged Care Gurus, we have created a software program to help take the financial confusion out of crunching all the numbers: it’s called Village Guru. It enables the village to provide you with a report showing the ingoing, ongoing and outgoing village costs, together with an estimate of your Age Pension and Rent Assistance entitlements and Home Care Package costs. It’s great information to have and can save you a lot of time and worry, but it is not financial advice. You should seek advice from a retirement living and aged care specialist adviser to ensure you get the best outcome for you.