This article was originally published on the Downsizing website here.
It’s the most common question we get asked “how can I crunch the numbers on moving to a Retirement Community”.
It’s important to know that using rules of thumb like if I sell this house for more than I pay for my new home, it’s affordable are dangerous. Likewise comparing villages based on purchase prices or the exit fee percentage can be just as misleading, because you are only looking at one part of the transaction. You need to make sure that you are clear about what you are going to pay upfront, while you live there and when you leave.
My simple methodology that I have used for many years is called the Ingoing, Ongoing and Outgoing. You take a piece of paper and divide it into three sections – in the top box you write “Ingoing”, in the middle “Ongoing” and in the bottom “Outgoing”.
So what goes in each box?
The Ingoing:
Is the price you pay for your home and to use the common facilities – in a Retirement Village your contract is often a leasehold or licence arrangement. In a land lease community your contract has two parts; you buy the home have a lease over the land. If your new home is in a strata title village then the amount you are paying is to own the home and have use of the common facilities (often through an owner’s corporation).
You should also put in this box any transaction costs. For example, there may be legal or administration costs associated with having your contract drawn up or having your leasehold registered on the operator’s title. If it is a strata title village then you may need to factor stamp duty into the ingoing costs (which doesn’t normally apply in Land Lease Communities or Retirement villages that are not strata title).
In some communities you will be given options around caravan or boat parking, additional car parks or storage cages which may also be added in to the purchase price.
The Ongoing:
Retirement villages residents pay a weekly or monthly fee to cover the running of the village, often called a “general service charge”. The General Service Charge is similar to the costs of an owner’s corporation, where a budget of expenses are prepared, residents are able to have input, and the fees are levied on a cost recovery basis.
In a Land Lease Community the ongoing fee is called “Site Fees”, this is the price you pay to lease the land on which your home sits. Unlike in a retirement village, Land Lease Communities are able to charge a market price for the site fees, as such they tend to be higher, but this is often offset by a lower or no Deferred Management Fee (DMF) at the end.
In addition to the cost of the community you live in, you will still have your own personal expenses: groceries, clothing, utilities and ad hoc expenses like travel. If you get a home care package, then you should also factor in those costs too – it’s a good idea, as a separate exercise to create a budget.
As part of your budget you should compare your expenses with your income and make sure you include any Age pension and rent assistance entitlements – this may be quite different to what you currently receive.
The Outgoing:
The greatest confusion of retirement community costs comes from the exit fee, the biggest part of which is normally the Deferred Management Fee (DMF).
The DMF is typically a percentage of either your purchase price or the re-sale price, anything between 25% and 40% is common but anything between 0% and 100% is possible.
As part of calculating your outgoing amount you may also need to factor in your share in any capital gain or loss with the operator, and just like other property transactions, there can be costs associated with selling your home like renovations, marketing expenses and sales commissions.
Unlike most other property transactions, the amount you get back from the Retirement Community may be paid to you before your home sells under what is known as a “Buyback”.
Crunching all of the numbers can be complicated, especially if you are trying to compare different contract options, different homes or different communities.
A Village Guru Report can help crunch the numbers for you – showing you the ingoing, ongoing and outgoing village costs together with an estimate of your Age Pension and Rent Assistance entitlements and Home Care Package costs.
Example of a Village Guru Report
Of course, while a Village Guru Report provides you with great information, it is not financial advice. You should seek advice from a Retirement Living and Aged Care Specialist adviser to ensure you get the best outcome for you.
*The information contained in this article is general in nature and does not take into account any person’s individual objectives, financial situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular financial situation, needs and objectives.