If you are thinking about downsizing out of your current home and believe that a retirement village could be the right move for you, your next step is to consider the pro’s and con’s of living in a retirement village versus simply downsizing into a smaller residential property.

People make the decision to move into a retirement village for a number of reasons. Listed here are some of the more common explanations that you may be able to identify with:

Neighbourhood. One of the main reasons people want to move out of their home is because of neighbourhood problems: barking dogs, loud music, hotted-up cars, general noise or changing suburban demographics, such as an influx of immigrants from a particular ethnic group. Retirement communities have rules and restrictions that protect residents from stressful situations, and this is very attractive to seniors. It is not unreasonable to want to live somewhere designed to protect your peace of mind, wellbeing and happiness. It could also be argued that seniors need more quiet and relief from everyday stress, and this is especially true for those with health problems.

Home maintenance. Maintaining a large family home can be hard work, particularly for older homes. Mowing big yards, especially in the summer, weeding, pruning, painting and watering can take up most of your spare time and prevent you from enjoying those things you had planned to do in retirement. You may also want to travel, and you should be able to do this without worrying about your home — is it secure, who is clearing the mailbox or mowing the lawn while you are away?

Downsizing. People often find that their existing home is too large for them or presents access problems with stairs, narrow access ways or multiple levels, whereas retirement homes are specifically built for easy access and maintenance.

Security. Elderly people are particularly vulnerable to home invasion and if they do not feel safe in their home or neighbourhood, it can cause a great deal of stress.

Social life. Retirement communities are full of like-minded people who generally want the same things out of life that you do. This can make for a busy social life, if that’s what you want!

All of these reasons are compelling arguments to move into a retirement community! So if you think that a retirement village could be the right move for you, here are some of the pro’s and con’s of retirement villages:

Pro’s:

• You get to live in a community of similarly aged and like-minded residents.
• Retirement village homes are specifically built for low maintenance.
• Many retirement villages feature on-site management and facilities such as a gym, pool, clubhouse or village bus.
• Some villages also offer meals and medical care.
• Resident restrictions such as a minimum age and no pets.
• You will typically find very little cultural or age variation.
• Instant social life, friends and activity programs.
• On site security and support.

Con’s

• Retirement villages are typically a more expensive living option with higher transaction and living costs.
• They feature smaller properties, with little or no backyard (some people may see this as an advantage!).
• Limited choice of locations as well as accommodation products.
• Generally a poor financial outcome for residents upon exit.
• Higher density living — cramped.
• Retirement villages may have a no-pets policy.

Retirement villages are not for everyone and they are an expensive lifestyle option, which is probably why 95% of Australia’s population aged over 65 choose to stay in their existing home. Take your time to choose the best option for your circumstances and do your research thoroughly. My new book Don’t buy your retirement home without ME! is a great aid for anyone going through the downsizing decision and perhaps thinking about buying a home in a retirement village. Buy a copy today!

Many people are confused about the difference between a retirement community and an aged care facility, and I would certainly agree that the lines appear to be blurring between the two.

So what is a retirement village?

A retirement village is basically whatever is defined as a retirement village in your state or territory’s retirement village legislation. Typically, the legislative definition describes it as a property where retired or older people reside, and they purchase a right to occupy (usually via a lease or licence to occupy) and may purchase additional services for a fee. A village needs to be registered under the state retirement villages act in order for it to charge all of those weird and wonderful fees like deferred management or exit fees.

However, you may have heard of other retirement living facilities such as an Over 50′s or Over 55′s village, or a lifestyle resort. These complexes typically sell you the freehold title to the built structure (the house) and then lease you the portion of land it sits on. These developments come under the state or territory’s manufactured homes legislation, usually the same legislation that covers caravan parks and the like.

Other retirement-style facilities include freehold complexes, where you own the freehold title to the unit. These facilities may or may not be registered retirement villages and may or may not charge all of the same fees (such as deferred management or exit fees) that you will find in a village operated under the retirement villages legislation.

There are around five different types of purchase and occupancy arrangements for retirement villages and each one has its own framework of fees, charges and complexity. Generally speaking, the occupant pays an upfront fee similar to the freehold value of the property, then a small regular fee during their occupancy, and a larger deferred fee upon exit.

Retirement villages are typically targeted to retirees who can live independently, although many villages now offer some care services as well.

Aged Care on the other hand, comes under the one Commonwealth Aged Care Act 1997, which dictates how the charges and occupancy is arranged. There is still a fair bit of discretion on the operators behalf as to the quantum of charges, and you should be sure to get good advice from a financial planner skilled in the aged care area before you sign anything. As with retirement communities, certain aspects can be negotiated and you should never rely on the company sales agent to give you the right advice.

Under the aged care model a resident may be charged for the care and services provided, as follows:

• Basic daily fee – as a contribution toward accommodation and costs of daily living.
• Income tested fee – as a contribution towards the costs of care.
• Accommodation payment – as a contribution towards capital accommodation costs.
• Extra services charge – applies to residents occupying extra service places (both permanent and respite) for the provision of a significantly higher standard of accommodation services and food.
• Additional service fee – where the resident requests or agrees to additional services (such as newspapers and hairdressing).

Aged Care facilities are targeted to seniors who need an element of nursing support in their day-to-day lives. This can range from a little assistance through to full palliative care. You can find out more on the Australian Government’s aged care website.

I think the confusion arises where you have retirement villages which offer an aged care facility within the same complex as the independent living units. These villages are called “integrated villages” and seek to offer a complete spectrum of care to alleviate the need for its resident’s to ever move again. Well-planned complexes will have the aged care area well separated from the independent living area so that able-bodied residents don’t mix with those who are requiring care.

Integrated facilities typically offer aged care as an incentive to potential purchasers interested in the independent living units, because this is where operators make their money. It is worth noting however that there is usually no guarantee to an existing resident of the village that there will be a place for them in the aged care facility, and they may still have to go onto a waiting list for a place. You may also have to sell your existing unit to fund your aged care place, and the fees associated with a sale of your residence can seriously deplete your capital base.

The aged care facilities within a retirement village may operate under the Aged Care Act 1997 and charge the purchase and occupation fees accordingly, or they may simply charge a weekly/monthly rental, or they may operate under the same deferred management fee schemes as the independent living units within the retirement village.

The whole area of aged care and retirement communities can be a real minefield. I strongly suggest that you find a good financial advisor who can guide you through the process and make sure you get the best deal you can.

If you would like to know more about Aged Care, Noel Whittaker and Rachel Lane recently published a book called “Aged Care – Who Cares?”. To promote the book they are running a series of aged care seminars in Brisbane, Sunshine Coast and the Gold Coast. The seminars are free and I would strongly encourage you to attend if you are interested in learning more about aged care.

The details for the general public seminar are attached here: WM Invitation – Aged Care Public Sessions 2011. Make sure you call to book your seat – previous seminars have booked out.

The details of the seminar aimed at aged care operators and industry is attached here: WM Invitation – Aged Care Industry Conferences 2011.

A sign you don't want on your door in a retirement village!

We have all heard stories about retirement village residents being kicked out of their homes, but is it really such a big issue?

A retirement village resident’s tenure in their unit is determined by the nature of the purchase or occupancy contract they signed when moving into the village. The nature of the purchase or occupancy contract is determined by the legislation under which the retirement village operates.

For example:

The occupancy contract, whether it is a lease or licence, determines the nature of a resident’s tenure and outlines the circumstances in which a resident can legally be ejected from the retirement village. For strata freehold communities these issues are covered under the strata community by-laws.

Typically, the only circumstances that allow for the legal removal of a resident from a retirement village revolve around a breach of the terms of the lease, licence, village rules or community by-laws. The resident is usually provided with a period of time in which to rectify the breach before any further action is taken.

Some contracts contain clauses that allow for the village operator to “move on” a resident in the event that they are deemed to require higher care than what is offered within their current residence or village. These clauses can allow rouge operators to apply this determination maliciously, so you should be careful to have your solicitor cross them out or weaken their application.

Other contracts may allow for a change in the retirement village ownership (including receivership) to trigger a right to buy back units and eject the residents, particularly if the complex is old or ripe for re-development. It is doubtful that the village operator would change this clause, so if you want better security of tenure, try somewhere else.

Most of the horror stories you do hear about in the media relate to rental retirement communities. In a rental retirement community the resident executes a lease with the individual unit owner, who could be an investor or a company that specialises in rental retirement villages.

The lease itself is governed by a states’ residential tenancies legislation and the only difference with a standard residential lease may be the provision of other services such as meals, laundry or personal care. Consequently, your tenure is determined by the lease term, typically six to twelve months. Once the lease term has expired, the owner of the unit is quite within their legal rights to either increase the rent, or eject the tenant and execute a lease with someone else.

Again, if you are looking for better security of tenure, I suggest that you either execute a very long term lease, or look for another kind of occupancy arrangement.

In conclusion however, it is worth noting that it is actually very rare for residents to be ejected from their units in a retirement village. Even if a village goes broke, the resident’s tenure is still secured by the terms of their lease or licence. It is similar to a large CBD office building – you wouldn’t see the tenants evicted simply because the owner of the building has gone broke, because their tenure is secured by the terms of their lease.

So don’t be too concerned about being kicked out of your retirement village – it is simply not that big of an issue.

I came across this great article recently from the Wall Street Journal talking about business entrepreneurship among the 50+ age group.

Did you know, for example, that rates of entrepreneurship are 50% higher for people between 55 and 64 than people between 20 and 34? Furthermore, rates of entrepreneurship among people ages 55 and 64 have generally been trending up since 2007, whereas rates for that younger group have stayed relatively flat (source: Kauffman Foundation).

It appears there are various reasons for this – many people struggle to find gainful employment if they are aged 50+ in the event that they made redundant from a middle to senior management job. In this event, people may not have a choice as to if they should start a business because there simply may not be any other options for them. At the older end of the spectrum, other retirees simply find that retirement is boring and they have all these great skills sitting there un-utilised.

I think the attitude towards retirement is changing.

People no longer dream of a retirement life of leisure simply sitting in a retirement village  and golfing, fishing or whatever. People can and do want to stay productive as long as possible.

Thankfully in Australia, advances in technology and our low rate of unemployment means that organisations are amenable to their workers tele-commuting or contracting. This type of work solution has really never been available before and allows retirees to become productive once again on their terms! No more 9-5 daily commute on inefficient public transport, the productive retiree of today can work from home, travel from home or set their own hours to be in the office.

And I think this is what retirement will ultimately become – simply just the opportunity to set your own work schedule doing something that you enjoy.

What do you think?

I was recently interviewed on the Sky Business channel, talking about retirement homes.

Here are some of the excerpts from the show…

Lesley Parker wrote this great piece for the Sydney Morning Herald and The Melbourne Age’s “Money” insert today.

Hi there!

In this tutorial I want to help you understand the Exit Fees that are usually associated with buying a retirement home.

The Exit Fee is also known as a Deferred Management Fee or DMF. Most of the homes sold in retirement communities around the country use a deferred management fee arrangement.

DMF schemes have been structured to work within the state retirement village legislation, while seeking to appease our cultural need to “own property”. This is in contrast to the retirement living sectors in the US and Europe where the population is much more comfortable with renting.

You might also hear a DMF contract referred to as a “Loan/Lease” or “Loan/Licence” scheme. In essence, it is an annual fee charged to the resident for each year of occupancy in the village, capped at a set number of years, and calculated as a percentage of either the original sale price or subsequent re-sale value of the home.

The original intention of a DMF scheme, some 30 years ago, was to allow retirees to buy a unit for 20-30% less than the market value of an equivalent freehold unit. The village owner would then make that discount back over the resident’s occupancy through the accrued fee. Unfortunately today, retirement village owners charge residents the full equivalent freehold value of the unit as well as the deferred fee.

Exit fee contracts are structured around a long-term “right to occupy” in the form of a lease or licence, which the resident of an individual unit executes with the village owner. This is a long-term contract between the owner and the resident, and commits the resident to paying a management fee that is deferred until such time as they vacate their unit. The fee is accrued over the duration of the resident’s tenure in the property and is physically received by the operator only upon departure of the resident. The fee is usually retained from the proceeds from the re-sale.

Under the DMF scheme residents also pay a weekly, fortnightly or monthly fee to the owner, to cover the costs of operating the village, such as insurance, rates, utilities and staffing. The owner of the village also contributes to these costs on behalf of the common areas and in new complexes, any units yet to be sold. Legislation prevents operators from making a profit on service costs so weekly fees are set at the level of total costs, including the owner contribution.

Additional services may be offered to residents such as meals, laundry and cleaning. The charge for these services to residents may include a profit component, although this is generally held within a reasonable, commercial range to encourage utilisation of the services by residents. These services may be provided by the owner or outsourced to third parties. Some services may even attract a government subsidy.

It is important to note that under a deferred fee scheme the resident does not actually own the freehold title to their unit – this remains with the owner of the village. Instead, the resident purchases a “Right to Occupy”, in the form of a lease or licence. This Occupation Right is similar to freehold title in that it costs the resident around the same level of cash to acquire it, and they enjoy rights of occupation similar to that of a tenant in a community-titled residential complex, such as a block of flats.

Strengths

Exit Fee scheme do have quite a few good things going for them. For Starters, they are usually larger, better complexes with more facilities.They enjoy better funding and are typically owned and operated by larger, professional organisations.

Some complexes offer to buy your property if it hasn’t sold within an agreed timeframe and the on-site operator will typically manage a refurbishment of your unit for you when you leave and re-sell the unit.

DMF schemes are the most common purchase arrangement around and as such offer a wide variety of accommodation and pricing options.

Weaknesses

The downsides of deferred fee contracts is that they feature a heavy fee structure. Freehold title remains with the Owner, and is not bought by the Resident.

Due to the volatile nature of the cash flows, there is substantial owner/operator sustainability risk.

Re-sales typically the responsibility of the owner/manager, whose interests may not be aligned with yours. Refurbishment obligation is usually on the Resident at the end of occupation.

There is an ongoing liability to the resident from village owner, who may go broke, and upon exit, there is an ongoing liability for resident to continue funding village fees until such time as the unit is re-sold.

Calculating the Exit Fee

As mentioned previously, the DMF is an annual fee charged for each year of occupancy, capped at a set number of years, and calculated as a percentage of either the original purchase price or subsequent re-sale value of the licence. The fee is accrued annually at each anniversary of the resident’s commencement at the village, and paid out to the village owner from the proceeds of the re-sale of the unit. The fee varies between villages, within villages and also between states.

An example of typical DMF model is shown here in this Table.

In this example, we will use a contract known as a 25 over 10, that is, a 25% Deferred Management Fee accrued over ten years.

We assume that the fee is spread equally over the ten-year period, so 2.5% is accrued each year and after ten years, a total fee of 25% has been accumulated. This is just an example however, and total fees can range anywhere from 20% to 40% or more.

Under a DMF scheme a resident is actually free to vacate the unit at any time, but would be liable for the accumulated portion of the fee, if the departure occurs prior to the capped fee year. In this example, if a resident departed in year five they would be liable for the fee accrued to date of 12.5%. If they were to leave in year twelve, their obligation would remain at the capped amount of 25%.

Some village operators, particularly those with a short average length of stay, front-load the fee into the first few years of a resident’s occupancy instead of averaging the fee equally over the accrual period. Under a 25 over 10 structure, a village operator might make the first year 8%, the second 5%, and every year thereafter 1.5%. This ensures that a resident in occupation for only three or so years ends up paying the majority of the deferred management fee.

So let’s look at an actual calculation of this fee, using the same assumptions of a 25 over 10 contract:

The resident purchases a unit for $450,000. After ten years of occupation they exit and sell the unit for $750,000. Under this contract they are obliged to split the capital gains on exit equally with the owner, and we will discuss this in more detail shortly.

At exit, the deferred fee component payable, calculated at 25% of the Entry Price, is $112,500. The capital gain of $300,000 is shared equally between the resident and operator and comes to $150,000 each.

So the Total Return to the resident is: $487,500, and the Total Return to the Village Operator is $262,500.

Note that the resident has only just broken even after ten years of capital growth, although this doesn’t include outgoings such as sales commissions or village fees.

Retirement village sales agents will usually dismiss this away by saying that this purchase is a lifestyle decision and not an investment. In a way, they are right – you are no longer at the asset accumulation stage of your life and now is the right to be spending the fruits of your labors from the past fifty or sixty years. However, we see no reason not to apply the same level of financial analysis and due diligence to this purchase as if a person was 30 years younger.

DMF Summary

The Deferred Management Fee scheme is the subject of much angst and bad feeling from retirement community residents. I think this is not so much from the unfairness of the contract, but rather from the lack of understanding of how the contract works, which results in unpleasant surprises for the resident when they consider moving.

However there is no denying that Deferred Fee schemes weigh heavily in favour of the village owner. Village owners and developers have invested many thousands of dollars with accountants and lawyers to design contracts that work within the appropriate state and federal laws, yet maximise the profit and tax outcomes for owner.

But is this necessarily a bad thing?

It is wrong to assume that village owners who use deferred fee contracts are profit-minded vultures that don’t care about their residents. Many not-for-profit operators such as church groups or benevolent organisations also use deferred fee contracts.

You know, at the end of the day, successful villages are those with well-funded, interested owners. If an owner is making money from the enterprise, they will be more inclined to spend money on the upkeep of the community facilities to keep the complex looking fresh and attractive. No-one benefits when a retirement village owner goes broke.

Retirement communities - are they really "la dolce vita"?

I came across this comment recently from Barbara Morris, a US commentator on ageing issues:

Stay in the “real world” as you age, connected to productive people who support your mindset and lifestyle. Do not buy into a senior community, join senior organizations, or participate exclusively in senior activities. Becoming part of the traditional senior culture is the number one reason healthy [seniors] age prematurely.

Barbara has a website you can see HERE called “Put Old on Hold”.

Whilst I love Barbara’s philosophy on living life, I do disagree with her recommendation to avoid seniors’ communities, or as we call them here in Australia, retirement communities.

I think with Barbara’s statement here she misses some of the important reasons as to why people actually choose to move into a retirement community:

NEIGHBOURHOOD

One of the main reasons people want to move out of their home is because of neighbourhood problems: barking dogs, loud music, hotted-up cars, noise or changing suburb demographics such as an influx of immigrants from a particular ethnic group. Retirement communities have rules and restrictions that protect residents from stressful situations and this is very attractive. It is not unusual to want to live somewhere dedicated to your peace of mind, well-being and happiness.

HOME MAINTENANCE

Maintaining a large family home can be hard work, particularly for older homes. Mowing big yards, particularly in the summer, weeding, pruning, painting and watering can take up most of a retiree’s spare time and prevent them from enjoying their retirement. It is also quite likely that you will want to travel and you should be able to do this without worrying about your home – is it secure, who is clearing the mail box or mowing the lawn while you’re away?

DOWNSIZING

Often people find that their existing residence is too large for them or presents access problems with stairs, narrow access ways or multiple levels. Whereas retirement homes are specially built for easy access and maintenance.

SOCIAL LIFE

Retirement communities are full of like-minded people who generally want the same things out of life. This can make for a busy social life, if that’s what you want! Loneliness and isolation are big issues for retirees, particularly those who are restricted in their mobility or independence. a retirement community literally provides an instant social network.

In our experience, we can summarise the major benefits of living in a retirement community as follows:

• The companionship of like-minded people – if you want it;
• Security; and
• Smaller homes that are specially built for access and low maintenance.

What do you think? Does living in a retirement community make you age or keep you young?

This is dinner ... resident Faye Webb with what she was offered for dinner at Lifetsyle Estates at Redbank Plains Picture: Annette Dew Source: The Courier-Mail

I am often asked by worried clients whether they can be kicked out of their retirement home, mainly because of sensationalised media stories like the one featured in Brisbane’s Courier Mail today.

Essentially, the story is about residents who are living in a retirement village in Ipswich (west of Brisbane), who have been asked to move out because the village has been sold. Understandably the residents do not want to move and the newspaper has taking the sensationalist route by painting the new buyers as “greedy developers” and the residents as poor victims of the system. What is even more concerning is the comments to the article – most of them abusing the “greedy developer” and questioning why the state government doesn’t “do something”.

In case you were interested, here are the facts of the case that should have been reported by the Courier Mail, but clearly weren’t because the journalist Robyn Ironside was either a) lazy, b) stupid, or c) decided not to report the facts in case they got in the way of a good “angle” on the story.

1. This is a rental retirement village. Residents occupy their unit under a standard residential tenancy agreement and is covered by the state Residential Tenancies Legislation. If your lease agreement has expired you have no legal right to occupy and can be asked to leave. If you want security of tenure, then sign a longer lease!

2. The rental retirement village model is broken and does not work, as evidenced by the fact that most of the operators of these types of villages are struggling financially. The residents would be far worse off if the previous operator had gone broke, as there would have been no-one around to prepare the meals or run the village. Avoid rental retirement villages wherever possible – they don’t work.

3. The Seasons organisation is a good, ethical operator of aged care facilities. They are not a “greedy developer” but provide a quality alternative to aged care accommodation available through the state and not-for-profit organisations. They are doing everything they can to assist with an orderly transition for the residents, but you will never please everyone all of the time. To abuse Seasons for simply carrying out their business (albeit in the kindest and most ethical way) shows the typical ill-informed, un-educated, half-baked, spoon-fed opinions held by the consumers of popular tabloid media. Heaven save us if that hot-air haggis Alan Jones get a hold of it!

What really riles me is the comments after the article, half of which carry that familiar hand-wringing refrain – “the government should do something!”

Why? Why should the government “do something”?

Where are the comments abusing the families of these seniors for not providing them with housing, assistance or support? Oh, that’s right – their families are too busy paying off mortgages on their over-sized McMansions, or the credit they used to stuff said McMansion with Plasma Screen TV’s and Jet Skis, or filling their fat progeny with food-court fast-food.

These nanny-state nut-jobs are the first group of people to complain when the government raise taxes or sell off “their” assets to pay down debt or fund other services. So on one hand they want the government to take more responsibility, then scream like stuck pigs when they get charged for it.

If you people continue to respond in such an emotional way to poorly-researched, tabloid articles you do yourselves an injustice and guess what – you will continue to get more poorly-researched, tabloid articles from the ambulance chasers at the Courier Mail. Please try and understand that there is usually more to the story than what is published in a Courier Mail article.

By the way, don’t bother leaving any comments here.

NOTE: For the record, I am not affiliated with Seasons in any way and have never done business with them. I do however, like and support their business model.

We are continually bombarded with media articles and research about the impact of our ageing population and how it is going to result in higher taxes, over-loaded hospitals and caravan-clogged road networks. So I think it is high time that we closed the door on our dooms-day soothsayers and thought about some of the more positive aspects of an older population (not all of them serious!)…

1. The hidden economics – Figures from the Welsh Assembly Government’s Strategy for Older People show the value and cost savings that many older people are making to the Welsh economy. If those older people who take on caring responsibilities were paid it would cost at least £1 billion a year. Similarly, the value of childcare provided by grandparents is estimated at £259 million a year.
2. Volunteers – Older people are the most likely group to offer their time to volunteer – the value of which has been estimated at £469 million a year. Similarly, Carers UK have argued that if carers across the UK (the majority of whom are older people) downed tools, it would cost the economy a staggering £87 billion annually.
3. Less graffiti – Most graffiti is done at night and older Australians generally prefer ABC’s re-runs of “The Bill” to spraying tags on local fences and walls.
4. Less traffic – Many seniors don’t drive, which has to result in less traffic.
5. Cheaper suburban homes – Many empty-nesters seek to sell and downsize out of their suburban family home where they have raised their families and move to smaller digs elsewhere (retirement communities, apartments, etc). With less demand coming through for larger properties prices have to come down.
6. More re-runs of “The Bill” on the ABC!

Can you add any more suggestions as to the positive aspects of an ageing population?