I persuaded her to take me to visit the village. It soon became clear the contract and the fee structures were not only complex, but I formed the view it was cunningly designed to look cheap - when in fact, it wasn’t. We decided to shop around and look at other retirement villages. What we found was huge variability in contracts – but it was almost impossible to compare them. The entry fees varied widely, as did the maintenance fees and exit fees. The exit fee structures also varied considerably, and the fees were usually substantial. This complexity doesn’t benefit consumers or aid comparison shopping.
At university I studied pure mathematics and a few years on I retrained as an actuary. Analysing complex financial products and contracts was a key part of my work. I could never have imagined then that trying to understand retirement village contracts several decades later would stretch my professional expertise. As an academic at Macquarie University for 22 years I’m equipped with skills in statistics, financial and actuarial mathematics, yet it was still challenging for me to unravel the complexity embedded in retirement village contracts. The situation with my mother led me to do research on how to compare different fee structures and analyse them from a consumer perspective. In turn this led to the development of the Retirement Village Calculator.
Consumers may feel that they own their retirement village apartment, but they don’t. It is in fact usually a very complex insurance-type deal involving provision of long-term accommodation in return for payment of a large entry fee and ongoing maintenance fees. After leaving the village the consumer receives an exit payment, which is a refund of the entry fee, possibly adjusted for capital gain or loss, after an exit fee is deducted. The exit fee typically depends on the length of stay in the village and is often called a deferred management fee. What looks cheap may not be in reality. How long you stay in a village is critical for determining how good a deal it is. Generally, a younger and healthier person gets much better value for money than someone who is older and less healthy when they move in.
At Macquarie University we developed a method to easily compare different contracts, and set up a free online financial calculator for consumers and financial advisory practitioners: https://rvcalculator.mq.edu.au/#/
It takes into account the fee structure, the age and gender of the consumer, and economic conditions such as interest rates and inflation. It estimates the average length of stay in the village and a comparison rent per month payable over that period. This comparison rent is financially equivalent to the fees paid under the contract. This metric is easy for consumers and financial advisory practitioners to understand.
I have been researching retirement villages for several years now and more than ever I’m convinced there is a strong need for improved financial literacy for both seniors and financial advisory practitioners.
Some of the biggest risks often materialise when the consumer is most vulnerable; when they face ill health and need to move to aged care or after they die, and their families grapple with the financial reality of alarming fees – and delays - they weren’t expecting.
Most consumers are encouraged to get legal advice about retirement village contracts, but they need both legal and financial advice. Not all professionals providing advice fully understand the nature of retirement village contracts.
Consumers need legal advice about:
- the features of the contract
- the fee structures
- the rules and regulations they must comply with, and issues that may lead to disputes with the village operator
- dispute remedies available
Consumers may need financial advice about:
- Eligibility for the aged pension if selling their home to downsize to a retirement village
- Their financial position after relocating to a retirement village
- The potential financial position in the future
- Their health adjusted life expectancy
- The cost of entry to a suitable aged care facility and the financing options
- Whether the amount left after the retirement village exit fee is paid will adequate
- Delays in getting the money from the village to finance the move to aged care
- Planning in advance
More information about retirement villages and financial literacy can be found at https://iase-web.org/icots/10/proceedings/pdfs/ICOTS10_7E2.pdf and https://theconversation.com/why-retirement-village-contracts-need-to-be-regulated-like-insurance-80059.
If you have any questions about the Retirement Village calculator and related research, Tim can be contacted at [email protected].