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4 steps to address the missing link in retirement planning

Glenn Freeman  |  20 Jun 2019Text size  Decrease  Increase  |  
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Many Australians are failing to plan for the healthcare costs they will almost certainly face in their later years.

A 2018 study conducted by the Aged Care Financing Authority indicates a huge gap in awareness about Australia's aged care system in general, and the types of aged care services and costs of these in particular.

The study of 1,000 people aged 60 or older, along with a nationally-representative sample of 500 family members, representatives or guardians, found that around one-third of people currently using some form of aged care services had not done any planning beforehand.

It also indicated that among those who do seek professional advice in planning for retirement, they focus almost exclusively on investment maximisation, building wealth and estate planning – entirely avoiding the frailty period.

Even people who can expect to rely on government resources if they develop a long-term care need should think through the financial and other implications of long-term care for their retirement plans.

And people who expect to rely on their own resources to cover long-term care expenses should be methodical about it, thinking through their prospective coverage needs and weighing their options.

The following steps may be a useful framework.

1. Accept you will most likely need aged care services

More than one-third of Australians aged 70 or older will access some form of subsidised aged care, and this number rises to 70 per cent among those over 85 years of age, according to the Aged Care Financing Authority's 2018 annual report.

But unfortunately, it often takes a crisis - maybe a slip in the bathtub, a fall at home or some other event linked to deteriorating health or mobility – before we begin to actively plan for residential aged care.

'Most aged care planning takes place in hospital car parks'

This exact statement, and variations of it, were commonly cited during research interviews conducted by ACFA.

This is particularly troubling, given rising life expectancies in Australia and a population bubble among those aged 70 and older.

Over the next 20 years, Australia will see the population size of the 70 years and over cohort increase by around one million people each decade. The 85 years and over demographic will increase from just under 500,000 people in 2018, more than one million people by 2038.

Given these considerations, it seems reasonable to suggest everyone needs to consider ahead of time the full range of options for covering their care if a need arises later in life.

2. What does healthcare actually cost?

The ACFA study cited above highlights some common misperceptions about the way aged care is funded, the types of care options available, and the potential out-of-pocket expenses.

Though many people assume their costs will be fully funded by the government, or at least heavily subsidised, the costs for individuals can vary widely.

Louise Biti, found and principal of financial planning practice Aged Care Steps, notes that accommodation costs can range from $100,000 to more than $2.5 million.

"The difference depends on your location, the house size, amenities and fittings and many other variables," she says.

Similar price differences occur among various aged care options and facilities.

Costs for home care under the Commonwealth Home Support Program range from around $3,766 per year – fully-supported – for an aged pension recipient, to between $9,159 and $12,037 annually on an income-tested basis for a so-called self-funded retiree.

Costs for a transition care program – which is a combination of at-home and external care – include a basic daily fee of $10.32 per day or $3,766 per year for the at-home component, and a daily fee of $50.16 or $18,308 per year for residential care.

There are several reasons behind a common reluctance to create a financial plan for aged care, including:

  • no money with which to plan
  • delaying considering aged care until later in life
  • no pre-existing health problems for the individual or their spouse
  • a belief you're simply too old to worry about it.

The ACFA study finds a glaring lack of understanding around the payment choices available.

Will I lose my home?

For instance, many individuals or couples are unaware that refundable accommodation deposits (RAD) – the lump sums payable before entering a nursing home or other care facility – are returned to the individual or their estate upon exiting care, minus any agreed costs.

The average RAD in fiscal 2016-2017 was $283,499, but this average has now risen to around $400,000, says Aged Care Steps' Biti.

A lack of awareness about how these costs are levied and ultimately returned often leads to reluctance to move into residential care – because of a perceived loss of capital.

This same misunderstanding may also discourage people from taking up services, or influence them to opt for only the cheapest option available, instead of the one that best fulfils their needs.

Before assuming you need to target a pool of $300,000 or more just to cover your care costs after retirement – or $600,000 for a couple – you need to spend some time customising the figures.

Geography is important, as is the type of care needed and any additional bells-and-whistles you would like.

In-home care is usually a more desirable option, possibly because of the ability to maintain a higher level of independence – and the lower outright cost may also be a supporting factor.

But remember, hiring in-home care means that most other household expenses will also remain, including housing, utilities and water, and food – which would be bundled within the cost of care received in a facility.

You should also bear in mind that if you're part of a married couple, it's quite common for one spouse to need long-term care while the other remains healthy.

In these circumstances, as in the above scenario, the couple's financial resources will need to simultaneously cover ongoing household costs for the healthy spouse and the cost of long-term residential care.

3. Identify the resources available to you

Once you've arrived at a reasonable estimate of how much long-term care might cost, you can then look at your total post-retirement investment portfolio.

Ask yourself the following questions:

  1. Will my assets cover my ongoing living expenses, based on a reasonable withdrawal rate?
  2. Does this also stretch to cover additional long-term care costs?

If the answer is "yes, comfortably" then you probably have enough to self-fund long-term care – in which case you can proceed to the next step.

But if your plan is tight, you may need to consider either combining private care with government-subsidised options.

If your post-retirement budget is so tight that setting aside a long-term care fund isn't an option, you may need to opt entirely for publicly-funded options.

Australia has three broad types of aged care services:

  • Government-funded
  • Non-government funded
  • Informal care and services.

The first of these, as the name suggests, are largely subsidised by the Australian Government, which spent $17.1 billion on aged care in 2016-17, versus the $4.8 billion spent by consumers.

Non-government funded – or private – services may either be used to supplement government funded aged care or offer an alternative source of care.

Retirement villages and land lease communities – often known as 'over-50s parks' – are two of the most common private accommodation options for senior Australians.

In land lease communities, individuals or couples own the dwelling and only rent or lease the land on which the building sits. These arrangements are regulated by each state or territory under the various Mobile Home or Caravan Park Acts.

The fee structure can vary across different providers, but there are a few attributes common to most:

  • The consumer will pay an initial cost of a relocatable home offered by the provider
  • Ongoing land lease fees are payable, with individuals eligible for Centrelink or Veterans' Affairs income support often able to receive Commonwealth Rent Assistance
  • Typically, there are no exit fees, but these costs may be levied in some states and territories.

Other private care options include group homes and private in-home services, such as 24-hour nursing care, in-home care, live-in care or overnight care.

A November 2018 ACFA report, Understanding how consumers plan and finance aged care, outlines the average fees for the different types of care options available to senior Australians.

Resources and information about the types of care options and costs involved are also available on the Australian Government website, www.myagedcare.gov.au

4. If government-funded care is your only option, be aware of what this means

If you've determined that you don't have the resources to cover the costs of long-term care from your own savings, government resources will be the only option.

Just be sure that you fully understand the rules in place to qualify for it. This is especially important if you're part of a married couple and there's a realistic possibility that one of you will need care while the other remains at home.

If you do find yourself needing to access residential aged care, there are four fees, and the amount you pay depends on how much money you have.

These are:

  1. Basic daily fee
  2. Means-tested care fee
  3. Means-tested accommodation fees
  4. Fees for extra or additional optional services.

All aged care recipients pay the basic daily fee, which is 85 per cent of the basic single Centrelink pension.

If your income exceeds $25,792, you may also have to pay additional means-tested aged care residential fees.

You'll need to complete some forms so the government can then calculate how much of your accommodation and care costs will be subsidised, and how much you will be required to pay.

What assets are assessable?

Currently, superannuation accounts aren't assessable if you're under the age cut-off to receive the aged pension – which is generally between 65 and 67 years of age.

Your home is not assessable for two years after you enter residential aged care if it’s lived in by a person who is dependent on you, either financially or otherwise, or someone who has provided you with care.

There are also separate rules that apply if you rent out your home to pay your residential aged care fees, with further information about these available from the Department of Social Security.

Seek professional advice

Because there are a number of caps on the amount you pay per year and over your lifetime, and various ways you can pay your accommodation fees, it is a good idea to speak with a financial planner specialising in this area.

Once you've settled how much you will pay for your accommodation and your terms of payment, these details are written up in an Accommodation Agreement.

You then have 28 days to sign this, from the day you enter residential aged care facility as a permanent resident.

If you haven't already received financial advice, many people use this time to make contact with a financial adviser to work out the best way to pay their means-tested accommodation costs.

There are separate implications for people who are part of a couple, which are also worth exploring with a financial adviser well ahead of when either you or your spouse need to entire residential aged care.

is senior editor for Morningstar Australia

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