Retirement Village

The things you should know before entering a Retirement Village.

Living in a retirement village is popular and the market is growing, it has the capacity to be a good lifestyle decision but also the capacity to be a poor financial decision.

It is easy to identify the benefits as they are laid out in the glossy promotional material but the costs, the 'real' costs can be a little more difficult. This site has a focus on five main areas at this time, they are highlighted because they are generally not discussed in the operator promotional material or the consumer advice material.
  • What is the real cost of the Deferred Management Fee? (the operator keeps this part)
  • What is the real cost of the Refundable Amount? (aka the interest free loan to the operator - this part is due for refund on departure)
  • What is the real cost where the 'deferred management fee' is calculated on the exit price rather than the entry price.
  • What is the real cost where there is no 'capital gain' provision in the contract.
  • What is the real cost of living in the village expressed as if it was paid on a weekly basis. (enables a comparative analysis)
  • What is the real cost of living in a Retirement village as opposed to a standard Residential Tenancy.
There are many variations to the arrangements to enter a Retirement Village, the principles discussed here may not match all of them.

                     
 The following are some of the least understood areas of entering a retirement village:-
1. The Deferred Management Fee really is paid to the operator within the entry cost on entry to the village.

2. The added negative impact of the Deferred Management Fee where the contract uses the unit exit price rather than the unit entry price.


3. Earnings forgone on the Deferred Management Fee.

4. Earnings forgone on the Refundable Amount on departure (aka the interest free loan to the operator).

5. In the initial years of occupancy the 'deferred fee' has a refundable component which reduces each year until $0 over the deferred fee period.


6. The impact on the refundable amount of inflation, rising property prices and rising nursing home entry costs etc.


7. Capital gain provision in a contract.


When looking at entering a retirement village there are visible costs and some not so visible costs, visible costs are generally the in-going $ amount and the weekly management fee.  The not so visible costs can be the cost of the deferred fee expressed in a $ amount rather than a percentage of the entry or exit payment, the forgone earnings on the capital contribution (aka the deferred fee), the forgone earnings on the refundable capital contribution (aka the interest free loan to the operator) and the lack of a 'capital gain' provision in the contract.

What is wrong with the 'deferred fee', the first component of the total entry price. The problem is that it is not 'deferred', it is paid upfront to the operator before moving in.

What is wrong with the 'interest free loan' to the operator, the second component of the total entry price. The problem is the $ value of the interest free loan to the operator paid on entry is ravaged by inflation, rising property prices, rising nursing home entry costs, loss of earnings until it is due for eventual refund on exit from the village. The 'present day $ value' of the 'interest free loan' component can be greatly diminished over time to a much lower 'present day $ value' amount due for refund on exit from the village. There is the potential to be caught in a 'poverty trap' as a result of this devaluation of capital value over time.

An understanding of the following two components (where applicable) of the entry fee should have a high priority:-
Part 1. The 'non-refundable amount or deferred fee' - generally a deferred fee has a reducing refundable amount until $0 at the end of the deferred fee period.
Part 2. The fixed 'refundable amount' - due for repayment on exit.


The graphic above indicates how the 'deferred fee', inflation, rising property prices and rising nursing home entry costs can devalue your refundable $ amount. 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 – eg: choose or need to leave the village, re-enter the property market, meet the cost of a nursing home bond.

A deferred fee may also be described as,
  • Capital Contribution
  • Fee Payable on Exit
  • Departure or Outgoing Fee
  • Deferred Management Fee
  • Reducing Refundable Amount
  • DMF
  • Scheduled Annual Rental
A refundable amount due on exit may also be described as,
  • Refundable Capital Contribution
  • Fixed Refundable Contribution
  • Interest Free Loan to the Operator
  • Refundable Lease Premium
  • Bond Remainder
The entry fee may also be described as,
  • Purchase Price - whether ownership or not
  • In-going Amount
  • Entry Price
  • Lease Premium
  • Capital Bond

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