Why Aged Care Cost More Than You Think
& Why Means Testing Won’t Save You

Most Australians assume the government has a formula for aged care that’s designed to make it affordable. Means testing, after all, sounds reassuring. Complex, opaque, and deeply frustrating — yes — but ultimately a safety net that’s fair. After all, if the government has a formula, surely it is designed to make care affordable.

That belief is both understandable and dangerously wrong.
Means testing does not make aged care affordable. It simply determines how the cost is shared between you and the government. And for many people, the gap between what the formula says you need to pay and what you can actually afford is surprisingly wide.
When families first encounter the aged care means test, the complexity often leads to resignation. There are so many thresholds and rates and then there’s the paperwork, it’s overwhelming. So people default to trust: “It is means tested, so it must be manageable.” In that sense, the means test offers false comfort — a sense that costs are fixed, fair and, most importantly, affordable.

The reality is very different
People who are the most financially disadvantaged, with assets below $63,000 and income below $34,034/year have both their accommodation and care fully subsidised by the government. They pay the basic daily fee of $66/day, which is 85% the Age Pension.
So everyone pays the basic daily fee of $66/day.
Once your assets or income exceed those amounts the means test determines what you need to pay towards your accommodation and care. Let’s look at a few examples across the spectrum of aged care cost, from those who pay the least to those who pay the most.

Shirley
Shirley is a full pensioner with $155,000 in assets. She is classified as a low means resident but because her assets are above $63,000 she needs to make a contribution towards her accommodation. The means test will say that she needs to pay $210,458 as a lump sum Refundable Accommodation Contribution or she can pay by daily payment of $44/day or by combination of lump sum and daily payment. Obviously, with $155,000 of assets she can’t pay all of it by lump sum, the means test has calculated a lump sum that is roughly $55,000 more than she has.

Betty
Then there’s the scenario that catches many downsizers off guard. Betty is a full pensioner moving from a retirement village into aged care. Her proceeds from the village, after the exit fee is paid, will be $350,000, outside her home she has $50,000 of investments. Because her assets are above $210,555 she needs to pay the market price for her accommodation. In most capital cities that will likely be around $750,000 but can be as high as $3m. The means test doesn’t look at her actual capacity to pay the market price rather it uses a hurdle of $210,555 and determines that once you have that level of assets you can pay any market price. How can she do that? Let’s assume the price is $750,000, she might pay $350,000 from her village unit and then the other $400,000 she would need to pay by daily payment of $84/day. On top of the basic daily fee of $66/day she will also need to pay a hotelling contribution of $22/day, taking her cost of care to almost $63,000/year. That’s a high price for a full pensioner ($30,646/year) with $50,000 in the bank. The sting in the tail is the exit fee of 2%p.a that will be deducted from $350,000 her lump sum. It’s capped after 5 years, so if she stays that long she could lose almost $35,000 on the way out.

Brian
Last but not least is Brian who is a full pensioner who sells his home for $1 million, pays his $750,000 Refundable Accommodation Deposit (RAD) and puts the remaining $250,000 in the bank. The RAD is excluded from the pension means test, so he keeps his full pension. But the RAD is included in his aged care assets so on top of the $66 basic daily fee, he will pay the $22/day hoteling contribution and $105/day for non-clinical care. That’s just over $70,000/year. The lifetime cap of $135,319 applies to his non-clinical care contribution. If Brian stays in aged care for more than 3.5 years the non clinical care contribution will stop, reducing his cost by just over $38,000/year from that point on. His $750,000 will have a 2%p.a exit fee being deducted. So if he stays for 5 years or more he will lose almost $75,000 when the money is refunded.

The numbers
In all of these scenarios we have only crunched the numbers on the minimum cost of care. Most aged care homes have Higher Everyday Living Fees of anywhere between $10 and $200/ day to cover meal choices, entertainment and lifestyle activities. Of course residents of aged care still have their own personal expenses too, things like medications, haircuts and grandkids birthday presents.
The lesson is clear: don’t assume that means testing equals affordability. Too many Australians treat it as a financial safety net, when in reality it’s a tool for cost allocation.
Before anyone signs an aged care agreement, they need to understand exactly what they are committing to — not just today, but over the years they may spend in care. Aged care contracts are legally binding and many require security through caveats on homes or third party guarantees from children. Yet many families only discover the true cost of care after the paperwork is signed and the money has been moved. This is why getting specialist advice matters, it is a big financial decision with long-term consequences. How you choose to pay for your aged care can directly affect your Age Pension, your cash flow, your tax position, your estate plan and, critically, the cost of your care.
Two people entering the same aged care home can pay vastly different amounts depending on how their aged care is funded. Get it wrong and you can lose pension entitlements unnecessarily, run out of cash faster than expected, or leave far less to your estate than you intended.
The time to ask questions is before you sign on the dotted line. Understanding the numbers — and getting the structure right — can reduce a lot of the emotional and financial stress in the final years of life.