Retirement villages: look beyond the brochure

Retirement Villages are marketed as being the optimum lifestyle choice for recent retirees. Often in ideal locations with all the facilities for a stress-free lifestyle. But with complex fee structures and inconsistent regulation, retirement village living should be approached with caution.

Before becoming emotionally attached to the idea of living next to a golf course or an ocean. Or the prospect of no more home maintenance. Consider how long you are going to be able to enjoy all the lifestyle options and whether you can afford it. Affordability is impacted by the cost of living in a village, due to recurrent charges, and the cost when it comes time to sell. The retirement village sector is complicated further by each State and Territory having its own legislation.

For these reasons reading and understanding any retirement village contract is a must. As these may be as long as 100 pages or more, so is professional advice.

Understanding the contract

There are three main contract and finance models used by the country’s estimated 2000 retirement villages.

  • Outright ownership which gives the unit owner a title over the unit;
  • the loan licence model, where the bulk of the ingoing contribution is set up as a loan to a village operator in return for a licence to occupy the unit, and
  • a traditional lease.i

In each case there is an ingoing contribution, often similar to the cost of buying the unit (if this was possible). A departure or exit fee will be based on the length of time someone lives in the unit. Operators also charge weekly, fortnightly or monthly fees, called recurrent charges. These cover the day-to-day operating costs of the village and may or may not include rates, maintenance and staffing costs.

Depending on the legal structure, residents may share in any capital gain in the value of the unit. A resident can also be asked to contribute towards the refurbishment of their unit before it’s sold.

Calculating departure fees

Departure or exit fees are unique to the retirement village sector and require particular scrutiny by a professional. The calculation is commonly a percentage paid per year of residency. This is usually capped somewhere between 30 and 38 per cent. The cap is generally reached after 10 years. The fee may be calculated on the ingoing cost that was paid, or the amount the unit is sold for.  The calculation method can vary between providers and within a village.

The Retirement Living Council says the departure fee helps to compensate the village owner for the cost of building the village. This allows the resident to part-pay for this at the end of their residency rather than the start. It can also be designed to give prospective residents a choice of whether they pay a full market price for the unit when they move in or defer some of the payment until they leave.

Make sure you

  • Understand the contract and have it reviewed by a professional
  • Research about the operator and their experience
  • Be aware of how village budgets are presented
  • Know how the operator reacts to residents who query how money is being spent
  • Are happy with how the residents’ committee works

Looking for lifestyle benefits

Financial considerations aside, there is real value to be had from retirement village living. Many residents enjoy the benefits of being part of a community. Living independently but with some additional support, activities and social interaction. The financial benefits are dependent on the finance model and the market.

The primary reason for entering a retirement village is often lifestyle choice. It’s important to understand where the value lies in making that choice. If you would like to discuss your retirement planning, give us a call.

i http://www.retirementliving.org.au/wp-content/uploads/2017/03/Contract-Finance-Model.pdf

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