The impact of the following on the $ value of capital over time both individually and collectively has the capacity to create for many the so named retirement village poverty or financial trap. This can create a no u-turn situation for a sizeable number of retirement village residents.
- Deferred fee
- Loss of earnings on the reducing refundable amount (deferred fee)
- Loss of earnings on the fixed refundable amount (interest free loan to the operator)
- Deferred fee calculated on the exit price rather than the entry price.
Poverty or Financial Trap
This so named retirement village poverty or financial trap is where the $ value of the money you loaned interest free to the landlord is so diminished over time by inflation that it places you at a point where you can no longer afford to leave the village and re-enter the property market or have sufficient money to enter a nursing home of choice as a result of an Aged Care Assessment.
The higher the percentage of total life savings used to pay the entry cost of the village –
1. the higher the likelihood of being in the so named ‘poverty trap’ on departure.
2. the higher the likelihood of requiring family assistance due to a lack of capital.
3. the higher the likelihood of being dependent on a government funded nursing home placement rather than a placement of choice.
The graph below is an example where a person has a capital base of $500,000.00 which is sufficient to meet the cost of either entering a Retirement Village or a Nursing Home at that point in time depending on their personal circumstances. Should they enter a Retirement Village the impact of the ‘Deferred Fee’ together with the inflationary impact of rising nursing home entry prices is such that their in-going capital amount has diminished in purchasing power to create this ‘poverty trap’.
Their ability to leave the retirement village for whatever reason has weakened as each year passed and then they become ‘trapped’ by the ever reducing ‘present day value’ of their original capital base of $500,000.00.
After 5 years they will be $125,000.00 short of the entry cost to a Nursing Home of their choice.
After 10 years they will be $250,000.00 short of the entry cost to the Nursing Home of their choice.
The graphic above indicates how the ‘deferred fee’, inflation, rising property prices and rising nursing home entry costs can devalue your refundable capital $ amount over time.
When the nice salesperson says “Don’t worry about the deferred fee, it is paid on exit and something your children will deal with” do not accept that statement without further research.
The impact of the deferred fee, loss of earnings, inflation etc. is something many will have to deal with. A change in circumstances without further financial resources could leave a person in a financial position they did not envisage at the outset. It is important to anticipate what the financial position might be in say 5, 10, 15 years.
Additional capital resources may be needed to meet the cost of any change in circumstances – ie: choose or need to leave the village, re-enter the property market, meet the cost of a nursing home bond to enable entry into a nursing home of choice.
The following graph shows how quickly a no u-turn situation arises when there is a steadily rising property market, the ability to make a u-turn because of a change of circumstances diminishes as each year passes. Many retirement village residents enter a financial trap they did not see on entry as a result of the ever decreasing value of their in-going capital amount.