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Why care costs are key in retirement planning

Glenn Freeman  |  22 Nov 2019Text size  Decrease  Increase  |  
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Josh Frydenberg this week reignited the debate over Australia's demographic divide, suggesting older Australians will have to work longer to ease the potential burden on younger people.

As polarising as that debate is, there are other more pressing questions - and more uncomfortable questions for people approaching their twilight years.

Did you know that the average cost of aged care accommodation is more than $400,000? Do you know the daily cost of aged care? Or the cost of accommodation?

Ahead of the intergenerational report due to land in early 2020, we examine these and other associated costs of aged care that are crucial to know.

The other side of rising life expectancy

"As our ageing population puts pressure on our health, aged care and pension systems, we need to develop policies that respond effectively to this challenge," Frydenberg said.

"It is a great development that people are living longer but we must be prepared for the implications."

He also referred to the ongoing Retirement Income Review, which is expected to produce a consultation paper before year-end.

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A broad theme is the emphasis on self-funding of retirement in order to reduce reliance on the Aged Pension – as the superannuation system matures and future retirees have higher balances to support them in retirement.

Dementia is now the leading cause of death in Australia. Our ageing population means that as people are living longer, they have a longer retirement. This also means more people are living in a state of frailty for longer. And one in two people going into aged care have a mental incapacity.

Three in 10 people over the age of 85, and almost one in 10 of those aged 65-plus, will suffer dementia, according to Dementia Australia.

Almost half a million Australians are living with dementia in 2019. Without a medical breakthrough, this number is expected to increase to 589,000 by 2028 and surpass 1 million by 2058.

A cruel Christmas irony

As families gather and pause for a break, we're now heading into the time of year when people often notice for the first time the onset of frailty and associated health concerns in their parents or other loved ones.

For other sufferers, who have no children, family, or who are perhaps estranged from their family, Christmas can be an even grimmer time, not to mention a financial burden: the average cost of aged care accommodation alone is about $400,000.

This is a common problem, according to Louise Biti, director of Sydney legal and financial consultant, Aged Care Steps. She says family estrangement often occurs because of a widespread misunderstanding of dementia.

"Many people think of it as just loss of memory, forgetting who people are, what they look like,” Biti says.

"But what it will also do is change behaviours. People can become aggressive in actions and words [because there is] a lot of frustration, and they lose the ability to problem solve, to sort through things rationally.”

Australians increasingly likely to reach the frailty years


Source: Aged Care Steps

Thinking ahead: Power of Attorney

Because of these complications, and the lack of a pre-defined plan, decisions are often made "by family members, in hospital car parks," she says.

A first step in planning, and one which will reduce stress, says Biti, is to establish an enduring power of attorney and legal guardian. In other, deciding who will be authorised to make financial and other decisions on your behalf when you are no longer capable.

"If there's a plan in place, it takes a bit of the stress out of the decision. Set a plan in place about who will do what and when; what's going to be important in making the necessarily decisions; and involve the family in that planning process," Biti says.

Considering care

Things you and family members should consider include:

  • Can you be cared for at home, or do you need 24-hour care
  • What type of facility would you prefer and whether it’s suitable e.g. Residential care, group home, retirement village
  • What can you afford
  • Whether you qualify for government support, and if so, how much.

'It's not lost money'

The Australian government subsidises residential aged care services, which are provided on the basis of two fee types:

  1. daily care fees
  2. accommodation fees

Daily care fees include a basic fee and a means tested fee, and both are set by the Australian government. As the name suggests, the means-tested fee – which has cost of care as well as annual and lifetime caps – is based on an individual’s means and income.

Uniting Care is one provider of aged care homes catering to a broad range of people, including those suffering mental incapacity. 

Uniting's least expensive accommodation option starts at $199,000, paid as a lump sum – which currently equals a daily amount of $27.16.

The most expensive is a $950,000 lump sum, equalling a daily amount of $129.62. These figures are as at 21 November 2019.

The variance in these costs is based on different locations, quality and range of amenities, room category and size and type of building. They vary in the same way as general household rent and housing prices.

A Uniting spokesperson says residents have 28 days from the date of entry in which to elect their preferred payment method.

"If they elect lump sum, as an option, they have six months in which to pay, and in the interim period, will pay the daily amount," the spokesperson says.

"If the accommodation is paid as a lump sum, it acts like an interest free loan, so the balance is returned at the time of leaving the aged care home."

Uniting's aged care homes have many residents who are government-supported, which means the government covers accommodation contributions – either in part or fully.

"Those residents receive exactly the same care and consideration levels as anyone coming to live with us, irrespective of their ability to pay.”


Aged Care Steps' Louise Biti also emphasises that even if paying a lump sum, it isn't simply "lost money" – something many people overlook initially.

For example, she says the average cost for aged care accommodation is about $400,000.

"And when you leave, or pass away, that $400,000 comes back to your estate. It's not like retirement villages where it's paid, and you only get back some portion of it," Biti says.

She also highlights the importance of professional advice, preferably from an accredited financial planner with expertise in aged care.

"Because the aged care facilities aren’t there to give you advice, they're there to get residents in the door. They don't know how the strategies work, or have their own ideas on how to encourage people into various options.

"The only person who's going to be objective is the financial planner you pay for the advice."

is senior editor for Morningstar Australia

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