Topic Ten: Retirement Accommodation Options

As part of your retirement planning you may be considering where you want to live - perhaps you are considering a tree or sea change? Maybe addressing health needs or unlocking some of the capital you have invested in a family home are priorities for you? In this episode we talk about retirement accommodation options - why you might move, what financial considerations need to be made, what loans or funding might be available, and a brief look at specialist retirement accommodation.

There is no action plan for this topic but the link below is for more details of the Home Equity Access Scheme that is discussed:

Home Equity Access Scheme - Services Australia

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Hello and welcome to topic 10. Now these last three topics are really things that might not apply to you right now. They may be too early for you to think about in terms of making any decisions, especially if you're pre-retirement. But they are things worth understanding because it might help you understand what sort of capital you might need to have for something like downsizing your home or moving into a specialized retirement option. So today that's exactly what we're going to talk about, and I think it's something that I hear pretty often from retirees, or should I downsize? It's part of this whole shift to simplifying your life, but also just making sure that you've got enough money for retirement. And for many people, their own home, there's a lot of capital tied up in it. Um, now there are lots of reasons to stay in your home, and many of these are when people have a sense of belonging, some history, maybe some family history with the home, and they really don't want to think about downsizing. And if you if that's you, that's fine, that's good. Don't you don't necessarily need to listen to this topic, although I do touch on some of the ways you can get funding from your own home and retirement villages. So keep listening, please, if this is something that would appeal to you. There's going to be a big financial impact from deciding to downsize. So let's get straight into the reasons or the most common reasons people cite for downsizing. So obviously, this one was a big one over COVID, a lifestyle change, moving from a busy city which might have been a great base for you when you were working, raising kids, whatever it may have been to be close to facilities. But that tree change or that sea change becomes really desirable in retirement. Another common reason is people say the house is just too big. You know, we had this family house, four kids, or other family members that no longer live with them, and it's costly or hard to maintain. There's a lot of work to maintain it. Now, more financial reasons for downsizing, and these are the ones I'm going to focus on today. So, one reason might be that household bills are just too high. So, this can include rates, water, electricity, insurance, and of course maintenance going forward. Another reason is unlocking some of the capital that's in your own home and making it available for retirement income or spending. It's a very popular one. Another less popular, but certainly people are thinking about it, is keeping it simple. Do I want this big home? Do I pass it on to my kids now? Let them have the family home to raise their family, and I'll move into something smaller. And then the last one, but an important one, might not be the case now, but maybe something to think about in the future is is the current home not going to be suitable for health reasons? So if there are issues with mobility or access or a health condition that requires bulky medical equipment like a hoist, for example, you know, the current home just may not be suitable for that. Too many stairs, a sloping block, whatever it may be. For many of you, there'll be more than one reason on this list, and that's okay. I want to talk about the things that are pertinent to each of those key financial reasons to downsize. So let's start with reducing household bills. So, firstly, once you turn 60, you might actually become eligible for discounts on things like government rates, electricity, utilities, even car registration. So that doesn't necessarily relate to the home, but it might, if it's important for you, where you're located, getting around. It might also apply to things like insurance policies. And to get these discounts, you might need to enroll in a seniors scheme. They're different in every state, or they may be automatically applied. The important thing is that you do some homework and have a look at what kind of discounts you could get either in your current home or a future one to see if that would address some of your concern about how expensive it is to keep a house. If you move to shared accommodation options like units, which is one of the most popular trends at the moment, you know, retirees are really driving that move into units. This could lower your household bills, there is no doubt. And one of the reasons for this could be a smaller space requiring, say, less electricity or water. You might also get a cheaper rate because you're in a type of a body corporate environment. But what you lose in some of the household bills could be replaced by body corporate fees. So make sure you understand what is included in body corporate and what you'll still have to pay in a sort of a shared accommodation option like units. Maintenance is a great one here because often the appeal of a unit is that the body corporate will cover things like gardening or a shared pool that they clean or painting the outside or whatever it may be, and um and also cover house insurance so and all the hassle of having to deal with insurers. So that is one that could really make a difference. Just make sure that you understand that some costs will be ongoing and what those costs could be if you applied sort of senior discounts to them. Now the next one is unlocking capital for retirement income or purposes. So, like I said, your home can be one of your biggest assets, if not your biggest asset, and it can really tie up your money, particularly if you bought well, like many retirees or people planning to retire have. There's been a lot of value increase in in Australian homes, and you want to get the benefit of that now. Just be aware that before you think about how much money is going to be released, that you understand that selling your home has costs. And one of the biggest unplanned for costs is actually spending money on repairs or improvements, getting it ready for sale. Um, because people can be pretty picky about the houses they buy these days, and there could be quite a bit of money that goes into that. You really need to talk to a real estate agent to make sure that you're you're spending in the right places and getting the right value from that exercise. You're also then going to have marketing costs, real estate fees, legal fees, mortgage release fees. Um, and when you buy a new home, you're going to have stamp duty, transfer duty, legal fees, moving costs, connection fees for utilities or a one-off fee for rates, etc. You really need to do your homework on these to make sure that you understand not just I could sell my house for this, that the price, and once again, careful not to put the best price, and I could buy a new one for this. There's going to be a lot more to the transaction than that. And unfortunately, these days, um, buying a smaller but newer home in capital city areas or a unit can be almost as much as the value that you get for the older home. So, in actual fact, you don't unlock much retirement capital at all. Now, there's plenty of reasons why you might make that switch, which we talked about earlier. So, I'm not saying for a second that you you know you need to stay in your home, you just need to understand how much you might release from it, and you might be surprised you know what that that gap may be smaller than you think. Now, if you do sell your existing home and buy a new one and you do and you are lucky enough to have some excess funds, um refer back to topic two for how you can contribute that money to super to add to your retirement income, including the all-important downsizer contribution, or topic three, how to invest it outside of super. The one I want to bring to your attention is topic six, and that was we talked about the treatment of assets and income for the age pension for centering, and it's important to note that your own home is exempt from the assets test. So if you do cash in some of the money in your home, what you do with that money could move it from being non-accessible in your own home into accessible. So if you put it into cash or super, wherever you put it into, it then becomes accessible as an asset, and potentially income for age pension eligibility may change that. Now, most of the time, having more money in some of these other assets has a greater impact, quite frankly, than any reduction in your age pension. You just need to be aware of doing the sums to understand where there could be an impact there. I also want to talk about simplifying your affairs for estate planning purposes. So handing over your family home to a member of your family, children, etc., so they can raise their family in it. Transferring your home, there are some expenses still really relating to whilst you might not have to do that maintenance to get it ready to sell, you might not have to pay a real estate agent or marketing, often you'll have to pay stamp and transfer duty, and it can be a big cost, and you need to understand who's going to pay that, you or the person that's receiving the home. There's very limited circumstances where there's an exemption, and most principal places of residence, so when people own their home and live in them, will have a capital gains exemption. You may not have it in full, so you need to think about that one as well when you sell it. And you really need to check with a solicitor or your state or territory government to understand if something like stamp duty will apply. Another hidden cost can be that you might have to get a property valuation to make sure that the stamp duty you pay is based on a fair value because you're not selling it on the open market. Now, once you have transferred ownership of your home, another couple of things you have to think about, you have removed this asset or the funds from your name and control. So you need to be confident you do have adequate funds for your retirement, or you know, you've got an arrangement with your family that if you were to need them, they're going to be able to help you with that. And this could be problematic if you had unexpected medical costs or care needs, like having to move into an aged care residence where you might need some funding for a room, and we're going to talk about this in the next topic. The other thing to remind you of is gifting some assets, including your own home, may have implications for Centrelink. And I touched on the concept of deprived assets in topic six, and that is where Centrelink consider that those funds should have been available for you to fund all or part of your retirement, and they'll count them back against you for a period of time before you can move into HPension. If you don't have the funds to purchase another home, so this might be stopping you from selling the family home or transferring it over because it's of a low value and you can't afford to buy into you know one of these units. One of the options that has become popular is to carve out and put a granny flat on your property, and whether you carve it out as a separate property or you have a granny flat and you transfer over the main house to family, um, this is a popular idea now with all these tiny homes popping up. Just be careful that you understand how granny flats are assessed by Centrelink because it can have implications once again for age pension. If you do opt to sell your home for any number of reasons and you have decided to rent instead, you may receive a more generous assets assessment by Centrelink. We talked about the different rates for homeowners and non-homeowners. You might also qualify for rental assistance as part of your age pension eligibility. The problem with it is that rents are so high now, even in some regional parts of Australia, that it may not replace the loss of benefit of owning your own home. So, once again, you really need to do the numbers there if you're thinking of switching out of home ownership into rental. Now, moving for health and medical reasons is a really valid one. If, like I said, if you've got stairs, sloping blocks, lack of access to the street, narrow doorways, so that you couldn't move a wheelchair through them, small room sizes, um, nowhere that you could bathe, like you don't have an open shower or something like that, you really have to think about the home modification costs to change an existing house, but even a new house to put that kind of equipment in. So some things to think about, like for example, if you had to install a lift, NDIS, if if if these modifications are required because of a disability, um, an injury or illness, NDIS funding is not available after the age of 65. And there is really limited support given by private health insurers or the federal government's support at home package. It may not be adequate to fund the kind of modifications you need to do here or the care that you might need to receive because you might have to fund both. And the government really is angling for people in this position to look at the aged care facilities where it is more cost-effective to put in place the care and the equipment needed on a basis where more people can share it rather than having it in individual households. I'm going to talk about aged care in the next topic, and it's just something that people can spend a lot of money on home modifications and move, only to find that the care forces them into an aged care sort of situation, anyway. So just you know, things to think about. Now, if you are in your own home or even buying a new home, um, what are some of the ways that you might be able to access funding to assist with this? Because generally banks are reluctant to lend to retirees because there's no reliable source of income that may be adequate to fund a mortgage. So here's a couple of other schemes that you could think about. The first one is the home equity access scheme. Now, this is run by the federal government, it is only available to people who are age 67 and are eligible to receive a centrelink pension payment. So refer back to topic six as to whether this is you. What it does is it provides a loan based on your interest in a property and at a you know quite a low interest rate. It can be provided as a lump sum or as an income stream just to help you top up either staying in your own home or purchasing a new one. It is equivalent to 150% of the full age pension. It is only the amount above what you receive of the age pension. So if you're on the full age pension, you would only get 50% more of it. Now, when you think about that, for a year, a couple gets around $28,000. Um, and a sorry, a single gets around $28,000 and a couple $42,000. So 150% of that, um, if you were eligible for the pension and not receiving it, would mean that a single person might be able to get something like $42,000 in that year from this scheme, whereas a couple might be able to get something like $64,000. That would reduce by any age pension payments you're receiving. It's not much, it's a little bit extra though for people that might need it from a federal government scheme. The other option is available on the private market and it is called a reverse mortgage. Sometimes it's called a home equity access loan. These can be more flexible as firstly they're open to people who are age 60 or over, so you don't need to be 67 that age, pension age, and the amount of equity you can receive or loan you can receive is ranges generally from 15 to 20% of your home's value. So if we talk about in the last example of retirement calculator, a home being worth 600,000, then you could see that you could receive 90 to 120,000 on say a $600,000 property. It actually can go up to about 45% the older you are, so almost half of your home's value. Um, like the home equity access scheme from the government, reverse mortgages allow the homeowners to use the equity in their home as a way to draw funds to fund retirement expenses. And once again, it could be a lump sum, it can be regular repayments, or it could be that you just apply for it and you have it there as a line of credit as a bit of a backstop if you needed it. Unlike a regular mortgage, you're not required to make regular repayments. So whilst this is you know fantastic in taking away that obligation on you, it's just important to note that what happens here is the interest, which will be a lot higher on the private market than that government scheme, is being added to the loan balance on a continual basis. It can make the cost of the loan expensive because it's compounding and it's never paid down. Well, it's not paid down during the period or the life of the loan. It works on the premise that the loan will be repaid when you sell the home. And often that doesn't occur until it may not occur until you're passing, unless you have to move into aged care. Um, you can make repayments along the way for some of these um products, and you need to understand that. Um, you also need to you know understand the difference in the interest rates because they get, you know, they get it is on a private market. Um, what you need to also be aware is that if the loan is attached to your primary home, remembering that for centrelink age pension, your own home is an exempt asset, but the money you release from this loan could then become accessible as an asset. So if you put it in the bank or you know, if it's not needed for spending straight away, it could become visible to centrelink, reducing your age pension entitlements. Um, also one of the issues to think about is that it could mean that less funds are about available for aged care needs. So if you draw down the maximum you can now, and we're going to talk about aged care in the next topic. After two years, your own home gets assessed as an asset, and it will get assessed at the full value. Um, you know, potentially not taking into account that there's a loan here on it, meaning that the full value is not available to you. So if you do want to look at one of these options to release some funds from your home for the purpose of buying a new home or helping you to stay in your existing home, it would be really worthwhile to get some financial advice on these products before you use them so that you understand the implications and particularly some that you may not be able to reverse in the future. So I want to talk briefly about retirement villages because this is a popular option. Generally, retirement villages are open for people over the age of 55, and they can be quite a bit cheaper than buying a unit on the private market. And there's a reason for this, which we'll talk about in a moment. Now it can take quite a few forms. There could be an upfront purchase of a villa, it could be a rental or a kind of lease arrangement to be part of the village, it could just be a lease of a plot of land where you can place a mobile home. So you own the home and then you lease the land in that retirement village. So you need to understand the form it takes when you look at the different options because it there can be different implications in terms of what money you might receive back. In a worst case scenario, that one where you lease and you own the home, worst case scenario, the operator could close up the home, you get to take the home, but without land to put it on, and you know, all the problems with moving a home. Um so these are the sort of things that you have to understand. There's a lot of positives to retirement villages, though, all the shared facilities, including pools, cinemas, restaurants, tennis courts, there could be transport like minibuses to help you get around, mean you don't need a car, recreation programs to keep you busy. There could also be access to medical and other personal health or grooming services that are provided to residents, as well as security. So a lot of these are you know behind closed gates, which is something that retirees, particularly if they're living on their own, Might you know find to be really important and potentially if you're away for periods of time as well, so travel or with family, being able to lock up and not worry about your place. There will be an ongoing facility fee to pay for living in one of these retirement villages. This will be similar to a body corporate, so obviously you'll have to factor this into your retirement income needs. But many retirement villages also have a management fee, and this is an in this is in addition to the ongoing facility fee. So there's two types of fees, and there may be options in how you pay this. So some retirement villagers will say you can pay it up front. So you purchase your property or you enter into a lease for the property, and then you can pay any management fee that could be applicable up front. The management fee can represent up to 30% of the purchase price of the unit or the villa that you buy or agree to lease. So say it's offered at $500,000, it could represent something like $150,000. Now it is deferred, it's it's called a deferred fee because it's based on the idea that you only have to pay this when you vacate that property. So you vacate it or you sell it or you pass away, whichever option it might be. And this is a structure that was agreed to with the government to encourage property developers to build these sort of villages so that they were very specific to retirees, lower entry fee, and you know the downside to that being that there was a higher exit fee. The sale of the unit could be structured in a number of ways. So some retirement villages will allow any capital gain that's made on the unit, and these village units have been going up. Either you get the full capital gain, you might share in the capital gain. Some of them may not allow any capital gain. So it's literally the purchase price is what you would receive back, less the exit fee. There may also be fees to do something like renovate the unit to restore it to a good condition because they have to sell it or lease it to the next person. And so obviously, you've got to think about well, it was great on the way in because I had a lower cost. You may get many years of enjoyment from living there as well. But what it could mean is that when it comes time to exit, you've reduced the capital that you put into it, and that means it might not be available for another accommodation option and all your beneficiaries when you exit. It can be a bit of a problem sometimes for a couple if one partner requires heightened medical care and has to live separately, and you can't release any capital to help fund that because the other person needs to stay there. The other person may also need to fund the ongoing facility fee out of a single income now. So just thinking about that, the dynamics, how it could change if it if you were a couple moving in versus if there was just one of you left in it. That's a very high-level look at retirement villages, just some things for you to do your homework on. I don't have an action plan for this topic. It really was designed as a bit of an overview, and that will be the case in the next topic as well. Just some considerations and pros and cons about retirement accommodation options. Once again, I'd strongly encourage you to get financial advice before making any decisions, and that may also extend to legal advice because a lot of particularly the retirement village situations are tied up in a contract and have somebody explain that to you. Thanks for listening. I look forward to seeing you in the next topic, which will be talking about aged care.