Retirement Village Living
Things you should know before entering or the things you wish you had before you did.
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Living in a retirement village has the capacity to be a good lifestyle decision but also the capacity to be a poor financial one.
This site seeks to provide an explanation of the financial costs of retirement village life which are not always easy to identify nor always fully explained by the industry.
It is easy to read the benefits of living in retirement villages as they are laid out in the glossy village promotional material. However the costs, the ‘real’ costs can be a little more difficult and many people focus just on the initial village entry price rather than on the total cost over time.
If you are unsure or want to check your understanding of the financial implications of leasing a residential property within a retirement village, then take the link to the quiz and answer Question 1 and then Question 2. Click this link to – Take the Quiz
There are many variations to the arrangements to enter Retirement Villages within Australia and principles discussed here may not match all of them, take this link for an explanation of what is a – Village .
The retirement village industry is best summed up in the following statement:-
Retirement Village living but at what total cost, it is important to look beyond the entry price and examine what is the actual total cost. Many Australian retirees and their children are realising that while the transaction may seem attractive, the total cost of this conditional residential accommodation is simply too high and becomes merely a mechanism for the transfer of capital wealth away from the retiree and subsequently their children to a retirement village owner/operator.
The following table examines the potential impact on capital value over a 7 year occupancy period for four retirees.
The four scenarios and outcomes in the examples above are as follows:-
Scenario 1 –One retiree elects to stay in the family home. (value $850,000.00) Outcome – Capital Value of $850,000.00 moves up to $1,113,820.00 after 7 further years of occupancy in the family home . A Capital Value Gain of $263,820.00. Assumption – Capital Gain @ 6%pa compounded, Monthly costs, Refurbishment cost in year 7.
Scenario 2 – One retiree invests their $850,000.00 capital and simply rents a property of commensurate standard within the general community. Outcome – Capital Value of $850,000.00 on entry moves down to $772,506.00.00 after 7 years of renting a commensurate property within the general community. A Capital Value Loss of $77,494.00. Assumption – Return to property owner of 5%pa + 5% annual rental increase. Investment return to renter @ 4% pa compounded on their $850,000.00 capital which they have retained.
Scenario 3 – One retiree enters a retirement village where the contract has a deferred management fee rate of 35% calculated on the out-going value of the unit ($1,113,820.00) and the out-going resident obtaining 100% of any capital gain amount. Outcome – Capital Value of $850,000.00 on entry moves down to $367,394.00 on exit after just 7 years of occupancy. A Capital Value Loss of $482,606.00. Assumption – Deferred Fee rate 35% on the unit exit value of $1,113,820 = $389137.00, Monthly Fees, Refurbishment cost, Loss of value on the base Refundable Amount ($850,000 – $297500=$552500) @ 3% compounded – The refundable amount is retained by the operator and used for their own use, repay borrowings, invest, etc. until resident leaves the village – Capital Gain ($263,820) @ 4%pa compounded.
Scenario 4 – One retiree enters a retirement village where the contract has a deferred management fee rate of 35% over the first three years calculated on the in-going payment of $850,000.00 but 100% of any capital gain amount going to the village operator. Outcome – Capital Value of $850,000.00 on entry moves down to $192,843.00 on exit after just 7 years of occupancy. A Capital Value Loss of $657,157.00. Assumption – Deferred Fee rate 35% on entry value ($297500), Monthly Fees, Refurbishment cost, Loss of value on Refundable Amount (850,000 – $297500=$552500) @ 3% compounded – The refundable amount is retained by the operator and used for their own use, repay borrowings, invest, etc. until resident leaves the village.
The following table examines the cost of the residential accommodation component of the total weekly cost plus the cost of the intangible component such as a pool, communal hall, bowling green, village bus, secure and social living environment.
The table shows that in this example the residential accommodation component is only 53% of the $1805.00 total weekly cost with the intangible component being a whopping 47%. Not all residents make use of the village facilities thus making their weekly cost almost double the accommodation value.
The following table examines the transfer of capital wealth from the retiree to the village operator over a 7 year period of occupancy.
The table shows that in this example the capital wealth of the retiree is reduced from the original $850,000.00 down to $242,773.00 whilst the capital wealth of the village operator has risen from $850,000.00 up to $1,990,697.00. A $607,227.00 capital value reduction for the retiree, not because the stock market crashed, not because the housing market crashed, because the retiree chose residential accommodation in a retirement village.
Below are some of the least understood areas of entering a retirement village:-
A. Deferred Management Fee – the deferred fee (aka the capital contribution) is effectively paid at entry to the operator as one of the two major components of the entry price to the village, 1. The deferred Management Fee & 2. The refundable amount on exit. Take this link to page 3 for further details on the Village Deferred Management Fee .
B. Deferred Fee on Exit Price – the increased impact of the deferred fee (aka the capital contribution) where the contract uses the unit exit price rather than the unit entry price. Take this link to page 3 for further details on the Village Deferred Fee .
C. Lost Earnings – earnings forgone on the capital contribution (aka the deferred fee). Take this link to page 2 for further details with the help of the RV Calculator .
D. RV Calculator – earnings forgone on the refundable capital contribution (aka the interest free loan to the operator). Take this link to page 2 for further details with the help of the RV Calculator .
E. Deferred Fees – In the initial years of occupancy the ‘deferred management fee’ can have a refundable component which reduces each year until $0 over the deferred fee period. Take this link to page 3 for further details on the Village Deferred Management Fee .
F. Financial Trap – the impact of inflation, rising property prices and rising nursing home entry costs on the refundable capital contribution (aka the interest free loan) due for repayment on departure. Take this link to page 6 for further details on the Village Poverty Trap .
G. Capital Gain – is there a capital gain provision in the contract. Take this link to page 4 for further details on Capital Gain .
H. Reinstatement / Refurbishment – what is the difference between reinstatement and refurbishment. Take this link to page 5 for further details on Refurbishment .
A RV Calculator is offered on page 2 to help indicate the financial impact of a move into a retirement village but of course can only be regarded as an indicator, not an absolute statement of financial outcomes. Any decision as important as entering a retirement village requires sound, independent, professional advice and preferably from retirement industry specialists in law and finance.
Two further calculators for Retirement Villages are available at,
Macquarie University – http://www.rvcalculator.org/#/
NSW Government – http://rvcalculator.fairtrading.nsw.gov.au/