Actuary John De Ravin outlines the financial and non-financial aspects you must consider when deciding whether to move into a retirement village.
Retired actuary and author John De Ravin knows our retirement income system can be complex and, to help, has written a book for pre-retirees and retirees. In this extract from Slow and Steady: 100 wealth building strategies for all ages, he explains what you need to know when considering moving into a retirement village.
Read this strategy if:
- you (and your spouse, if you have one) think you would benefit from the social interaction and activities with other residents that are available in a retirement village
- you accept that the various levels of fees that apply during your stay, and at the time of your departure, mean that moving to a retirement village is likely to be more expensive in the long run than continuing to live independently in your own home.
By the time you reach ‘retirement’, usually there have been some changes in your life. If we have partnered and produced a family, by the time you retire, the children are usually adults who have left home and started their own families, and you may be experiencing the joys of grandparenting.
Also, physically you may not be quite as agile as you used to be, so that the task of maintaining a large family home may be more of a drain than it once was. Your social networks have changed, or are about to change; you don’t have daily contact with your work colleagues, and you may not have the same frequent contact with your children’s families and friends as you used to.
Finally, although most people at retirement will still be physically fit and active, as you enter retirement you need to plan a new life for yourself. You have to keep in mind that over the next few decades there is likely to come a time where you will need to seek support with some activities that you were previously able to do independently.
In summary, there are two key reasons why you might consider moving to a retirement village:
1. To promote social engagement and activities with others whose company you enjoy.
2. To secure access to a range of support services that will make your life easier as you age, while enabling you to live independently for as long as possible.
Of course, there are crucial non-financial aspects of this decision. What will life be like in a retirement village? What aspects might you not like or enjoy? Will you enjoy the company of the other residents? What activities are available and do you enjoy those activities? How close is the village to family and friends, and how easy will it be to maintain those relationships?
While the non-financial aspects of a decision to move to a retirement village are critical, there are also financial aspects. When you choose to move into a retirement village, you will be asked to sign a contract. These contracts are complex and have important financial consequences. Also, many of the terms and conditions in the contracts are negotiable: you shouldn’t assume that just because you have been asked to sign a very long, very technical legal document, the document cannot be varied by agreement between you and the relevant village proprietor.
The NSW Department of Fair Trading publication, ‘Retirement Village Living’ contains an excellent tip for prospective new village residents:
“Moving into a retirement village is an important decision. Shop around, don't be rushed, talk to village residents, family and friends; compare the costs, read the contract and obtain independent advice from a solicitor before you sign a village contract.”
In particular, the terms and conditions in relation to departure from the retirement village should be carefully examined. In many cases, the contract will provide that when a property is vacated, the departing resident has to pay:
- a deferred management fee to the proprietor of the village
- cleaning fees
- costs of restoring the property to the same condition as when the resident moved in
- costs of reselling or re-leasing the property
- a share of the capital gain arising from the resale of the property.
Often the deferred management fee will be a certain percentage of the purchase price of the property per year of residence, such as three per cent, with a cap so that the maximum percentage cannot exceed some specified total percentage of the purchase price.
Not infrequently, when a resident departs from a retirement village, there is a level of shock about the total amount of charges that may be levied under the resident’s contract with the village proprietor. It is also important to bear in mind that if a resident needs to leave, often they will want access to their funds to assist them with their move into their next residential arrangements (whether that be a home, another retirement village or a place in an aged care facility).
However, there will be an inevitable delay before the property can be resold or re-leased to a new resident. Therefore, it may well be that the proceeds of the sale of the property may not be available for two years (or in some cases even longer), which may impose some financial difficulty on the departing resident and his or her family.
In Victoria, however, there are special rules that may require the village operator to provide you with funds within six months of a former village resident moving into an aged care facility and need to pay a Refundable Accommodation Deposit (RAD), but this entitlement does not apply in all cases, so it is necessary to check the terms of the contract between the village operator and residents.
How to do it
There are many non-financial aspects of choice of a retirement village including:
location relative to family and friends
- nature and quality of services that are offered
- suitability of the premises
- activities that the village organises for its residents
- availability of an aged care facility on site or nearby if the resident’s health deteriorates.
There are also important financial aspects. These will be spelt out in detail in the contract that you will be handed by the proprietors of any villages where you make inquiries, if you show serious signs of interest in moving into their village. The financial aspects include:
- the amount of the entry fee
- the amount of ongoing contributions to the village, and what these ongoing fees cover
- the amount of the exit fee (often called a deferred management fee) payable on departing from the village
- the share of the capital gain on reselling the property that accrues to the resident and the share that goes to the village proprietor
- the costs of resale of the unit and the fees and charges and other terms and conditions relating to departure (such as how long it may be after your departure from the retirement village before the village operator refunds the agreed part of the resale value net of exit fees and charges).
The process of relocating to a retirement village may be outlined as follows.
1. Consider the possible benefits and disadvantages of relocating and discuss the issue with family and friends. You can also talk to any family or friends who may already have moved into nearby retirement living options and ask them about their experience.
2. Learn some of the basic facts of retirement village living. There are helpful sources of information on the NSW Department of Fair Trading website, the Retirement Villages Residents’ Association (RVRA) website and a CHOICE article about retirement villages.
3. Identify the villages that operate in the area where you would like to live. To form a short list, you can search on the agedcare101 website and key in the postcode for the area in which you might like to live. The search will return options not only in the postcode you input but also in surrounding suburbs. You might also want to search some other retirement village sites.
4. Create a short list of villages in which you might be interested. The agedcare101 website contains a ‘short list’ button, which enables you to store a short list of possible locations while you continue to browse through the search results.
5. Prepare a checklist of questions you would like to ask the various village operators. There are high level checklists available on the Retirement Living website, as well as in the Fair Trading and CHOICE articles mentioned in item 2 above, but experience suggests that sometimes it’s matters of fine detail that can affect whether the village you have chosen may be perfect for you or not. The following websites offer much more detailed checklists: Office of the Ageing, Retirement Village Info and Village Lifestyle Park.
6. Visit the villages on your short list and ask the village organisers the questions on your checklist. Inspect the property in which you would live and the communal facilities in the village. Ask whatever questions come to mind as you consider whether that location might be the right place for you to move to. Try to imagine yourself living there and think about how your daily activities might change if you were living in the village. What would mealtimes be like, for example, especially if you intend to take advantage of the communal eating facilities?
7. Consider a second and third visit to the one or two villages in which you are most interested. Talk to the residents about their experience of the village – what’s good about it and what’s not so good.
8. Once you have definitely decided to move into a retirement village, you will need to consider how to finance the entry payment. Typically, you would finance the entry payment by selling your existing home. You will, therefore, have to make arrangements to sell your home. The first steps are to contact some local real estate agents and ask for an assessment of the value your home is likely to bring, and to appoint a real estate agent to conduct the sale process for you. If you sell before you can go into the retirement village, it would be good to be sure that you will be able to move out of your home by the time you have to settle the sale contract for your existing home. On the other hand, if you enter into a retirement village contract before you sell your home you may need to find bridging finance until you are able to sell it. Discuss with the manager of your intended retirement village when they need to receive the entry fee payment.
9. Obtain a copy of the contract for the village you are seriously considering, and the rules of that village. Unfortunately the documentation that will be handed over to you will be lengthy and some of it will be couched in legal language that may be difficult to understand, but it is important to understand the terms of the contract because once you sign, you have entered into a legal contract and it will not be easy to get out of that contract (after any statutory cooling-off period) without potentially severe financial disadvantage and personal inconvenience.
10. Seriously consider asking a lawyer and/or financial adviser with experience in retirement village contracts to review the contract you have been offered.
11. If necessary, you may need to negotiate some aspects of the contract after receiving legal or financial advice.
12. If all is well, sign the contract and start making arrangements to move into your new property in the retirement village!
What does it mean for you financially?
Usually, the decision to move into a retirement village is driven by lifestyle reasons rather than financial reasons. By the time you pay the entry fee, recurring charges, the deferred management fee and sacrifice a percentage of the capital gain from your retirement village property to the village operator, it is very likely that from a purely financial perspective, you might have been better off living in similar accommodation outside the village.
However, your primary consideration may be lifestyle. You may want to:
- call on the manager for maintenance
- go on holiday and know your property is relatively safe
- not concern yourself with garden maintenance
- enjoy the activities and companionship of others in the village.
In that case, moving to a retirement village may still be the right choice for you, notwithstanding the financial disadvantage.
Once you have decided to move into a retirement village, the better the financial arrangements are, the more choice you will have when you eventually move out of the village, whether into another village, into another home, or into an aged care facility. So, it will pay to try to ensure that the financial terms of your retirement village contract are not unreasonably penal and are not out of line with the financial terms that other reasonable alternative retirement villages offer.
Factors to take into account before you decide
The checklists mentioned above provide a good list of issues to discuss with the retirement villages you are considering. Remember, sometimes it’s the small stuff that makes a difference to your best options. Try to imagine every aspect of how you would live in the village compared to how you live currently, and ask about anything that is important to you before you make the big move.
Slow and Steady is available from John De Ravin’s website for $39.95.
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