A common mistake people make in working out if a retirement community is affordable is to compare the sale price of their current house with the purchase price of their new one.
The conclusion: if they are selling for more than they are buying for it is affordable.
But this back of the envelope calculation ignores most of the financial consequences of downsizing to a retirement community.
A better way to crunch the numbers is to divide the back of the envelope into three, in the top box put “Ingoing”, in the middle “ongoing” and the last box “outgoing”.
Ingoing is the price you pay for your new home and to use of the community facilities.
In a retirement village your contract is often a leasehold or licence arrangement while in a land lease community you normally purchase the home and have a lease over the land.
There can also be legal costs and if it is a strata village then you may need to pay stamp duty.
Some communities also have options around storage cages, car, caravan or boat parking which may be added to the purchase price.
Ongoing is the regular fee you pay to live in the community, in a retirement village it is often called a “general service charge” while in a land lease community it is called “site fees”.
The general service charge in a retirement village is similar to an owner’s corporation, a budget of expenses are prepared and the costs are apportioned across the residents.
In a land lease community the site fees are set based on a market price, that’s to say that they are often more than just costs, they typically include some profit to the operator.
On top of the cost of living in the community, you will have your own personal expenses: groceries, utilities, travel etc. It’s a good idea to have a budget.
Outgoing costs can include your share in capital gain (or loss) any repairs or renovations, marketing fees and sales commissions.
The greatest confusion in the outgoing costs often surrounds exit fees, or what is called the Deferred Management Fee (DMF).
Deferred Management Fees are typically a percentage of either your purchase or sale price, anything between 25%-40% is common but they can range from 0 per cent to 100 per cent.
The DMF enables the operator to charge a lower price upfront, so the amount you pay later should relate to the amount you save now.
Land lease communities are not required to give you a guaranteed buyback, while retirement villages can be required to buyback your property after a period of time, state-based legislation prescribes the conditions of buybacks.
In some cases you may be offered a buyback period shorter than that required by the legislation.
Knowing how much you are going to receive and how soon after you leave can be important if you need to fund a move to aged care.
Your retirement community contract can have wide ranging implications not just on the amount you need to pay an when but also for your pension and other entitlements, cash flow, home package fees and the amount you will receive (and when) after you leave the community.
It is a good idea to seek advice from a Retirement Living and Aged Care Specialist ® to make sure you get it right and there are no nasty surprises down the track.
Retirement Living and Aged Care Specalist®
When you see the Retirement Living and Aged Care Specialist® designation, you can be assured that your adviser has the skills, knowledge and tools to deliver quality advice on all matters relating to retirement living and aged care.