One of the biggest mistakes people make when they are looking at downsizing is to focus on the purchase price. They use a simple rule of thumb of “as long as I pay less for my new home than I get for my old home it’s affordable”. The problem with using this simple formula is that it ignores two thirds of the transaction.
When I was a financial planner I came up with a simple but effective exercise that I call the “ingoing, ongoing and outgoing”. You can do it by taking a piece of paper and dividing it into three sections – at in the top box you write “Ingoing”, in the middle box “Ongoing” and in the bottom is “Outgoing”.
Now let’s look at what goes in each box.
The most obvious figure is your purchase price for your home in the village – often your contract is leasehold or licence arrangement and the price you pay may be described as an ingoing contribution, a loan or even a donation.
You should also put in this box any transaction costs. 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 is a strata title village then you may need to factor stamp duty into the ingoing costs (which doesn’t apply in villages where the contract is a leasehold or licence arrangement). In some villages you will be given options around caravan or boat parking, additional car parks or storage cages which may also be added to the purchase price.
Retirement village residents pay a weekly or monthly fee to cover the running of the village, often called a “general service charge”. The General Service Charge often likened to a body corporate fee because a budget of expenses is prepared, residents have input, and the fees are levied on a cost recovery basis. Unlike living in a strata community residents in retirement villages that operate on a leasehold or licence are not normally charged special levies.
In addition to the cost of the village, you will still have your own personal expenses: groceries, clothing, utilities and ad hoc expenses like travel. If you get a home care package, then you should also factor in those costs too – it’s a good idea, as a separate exercise to create a budget.
The is the part that causes the most confusion, because most retirement villages charge an exit fee. The exit fee is normally made up of a number of costs, the biggest being the Deferred Management Fee (often just referred to as the DMF). The DMF is also one of the reasons why you need to look at the whole transaction – the DMF is there so
the village operator can charge a lower price upfront and for running the village on a cost recovery while you live there. So you should look at the DMF you are going to pay and see if it reflects those two things. The DMF is typically a percentage of your purchase price or the future sale price, anything between 25% and 40% is common but anything between 0% and 100% is possible.
Beyond the DMF you may also share in any capital gain or loss with the operator, and just like other property transactions, there can be costs associated with selling your home like renovations, marketing expenses and sales commissions. Unlike other property transactions retirement villages (based on state based legislation) can be required to buyback your home if it hasn’t sold within a set period of time.
Crunching the numbers can be complicated, especially if you are trying to compare different options. That’s where a Village Guru Report can help, by showing you the village costs ingoing, ongoing and outgoing together with an estimate of your Age Pension and Rent Assistance entitlements and Home Care Package fees. It’s great information, 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.