In retirement, many Australians need to determine the most appropriate housing option from both an emotional and financial perspective. And the housing options of retirees cannot be ignored by the financial services industry as it works towards delivering sufficient retirement income.
While the vast majority of Australians choose to ‘age in place’ by remaining in their own home, retirement villages’ popularity is increasing faster than any other age-specific housing option (Productivity Commission Research Paper). Prima facie, retirement villages provide a good solution, but currently the offer is complex and requires specialist advice.
Three reasons to move to a retirement village
Retirement villages house around 5% of Australians over 65 years old (approximately 184,000 people) and this housing segment has a number of advantages.
Firstly, transitioning to a retirement village can provide an opportunity to downsize and unlock home equity, and unlocking home equity can be key to sufficient retirement income. Yet according to the Producivity Commission, unlocking home equity is rarely the main driver of moving to a village and the majority of older Australians believe that their current home will not help fund their retirement.
Secondly, retirement villages meet retirees’ needs to feel safe, offer a range of activities and provide the necessary building features, such as non-slip surfaces and handrails.
Thirdly, retirement villages can serve as a gateway to further care such as an aged care facility.
However, there are a number of emotional barriers to moving into age-specific accommodation. A study by the National Seniors Productive Ageing Centre in 2013 cites a 'loss of independence' and 'lack of privacy' as the two most likely factors to discourage relocation to a retirement village. Atul Gawande’s book, Being Mortal, openly details the 'controlled and supervised institutional existence' that can result by moving the elderly into assisted living and aged care facilities in particular.
Financial arrangements are complex
From a financial perspective, the fee structures of retirement villages are complex and vary substantially across villages, making comparisons difficult. Further, the cost of getting it wrong can be high due to significant exit costs in some structures. A Macquarie University economist, Tim Kyng, developed the Retirement Village Cost Calculator after trying to select a retirement village for his mother. The calculator simplifies the various fees down to a single monthly cost, to help compare different options. However, when working through the calculator and the various fee structures, what appears to be a housing decision for retirement looks a lot like purchasing a complex end of life insurance product.
Despite this, legislation remains state based, standardised and comparable fee disclosure principles (think RG97) do not yet exist, and retirement villages are not ‘in-scope’ at the current Royal Commission into Aged Care Quality and Safety. On top of the complex contract, individuals also should consider how a transition (and possible downsizing) can affect pension entitlements and their future income stream.
In the absence of better regulation in this area, seeking professional advice is necessary. As advisers consider their value proposition, this is one area that could make a significant difference to the retirement outcomes of their clients. Examples of providers of specialist education and ongoing training are Aged Care Steps and Aged Care Gurus.
Superannuation funds should also consider the role they play as they grapple with designing appropriate post-retirement products, such as Comprehensive Income Products for Retirement (CIPRs). One concept floated was super funds owning residential aged care accommodation options, providing quality social infrastructure, while generating a return for their members. It would be age-specific accommodation provided for the member and owned by the member. The concept might prove an important pillar in unlocking home equity and underpin Australians’ income streams in retirement.
The Australian Bureau of Statistics projects that by 2050, there will be over eight million Australians over 70 years old. The challenges associated with age-specific housing options, the complexity of the contracts, and unlocking home equity are not going away. As we work towards providing Australians with an income stream in retirement and embark on the upcoming independent review into retirement income, we cannot ignore this housing segment.
Annika Bradley, CIMA® is an independent member of a number of investment committees and she provides advice to other financial businesses. This article is general information and does not consider the circumstances of any person.