The Hidden Costs of Aging: Preparing your Finances for the Full Retirement Journey 

Conventional retirement planning often overlooks the financial needs of later life. Instead, the focus is on planning for the earlier ‘active’ years of retirement, where spending is high due to travel, hobbies, and leisure activities. retirement planning

Thought may then be given to the following ‘passive’ stage of retirement (typically between ages 75 and 84), however the assumption is often that spending will decrease as energy levels wane and there’s an inclination towards increasing time at home.

This assumption certainly has elements of truth. Spending on Support Services and Health Care tends to increase but is more than offset by savings in Transport and Leisure costs. However, this trajectory leads many to assume the later years of retirement take care of themselves and that planning is therefore less important for financial security. This is not the case, and in many circumstances late retirement spending can be higher than even pre-retirement.

Imagine a retiree who has worked hard to pay off their home and is now looking forward to a comfortable lifestyle in retirement. The Australian Superannuation Fund Association (ASFA) guides this retiree will need an annual income of around $50,000 at age 65, reducing to around $45,000 by 85. All sounds good so far. However, these expenses do not factor in a transition to an Aged Care facility.

Upon entering even a modest room in a residential care facility, this retiree will face daily care fees of over $20,000 per annum, and Daily Accommodation Payments (DAP) exceeding $40,000 per annum*. Add to this Means-Tested care fees (most will be expected to contribute something) and suddenly this retiree’s expenses exceed even their pre-retirement needs.

There are options to reduce or avoid the DAP. Entrants can pay a full or partial Refundable Accommodation Deposit (RAD) – essentially a bond for the price of the room. However, the money to cover this bond needs to come from somewhere, and regardless of where funds are accessed from cashflow will be impacted in some way. Selling the home has potential to reduce Age Pension entitlements, as well as increase Means Tested Care fees, a double hit for cashflow. If the home is kept, other assets will need to be sold, reducing dividend or interest help

Balancing the budget can be an even greater challenge for couples with one partner entering care. These couples must meet the same costs of care outlined above, in addition to the basic needs of the non-entrant, and their capital remains tied up in the family home. Bear in mind Accommodation Deposits aren’t cheap, often costing as much, or more, than an apartment. Does your retirement plan factor in purchasing a second home at 85?

The positive to this story is that advances in medicine and healthcare mean more Australians are living longer. 62% of couples can expect one partner to live past 85, and 12% can expect one partner to live past 100! While these statistics may come as a pleasant surprise, they also mean that for a greater number of Australians, retirement will be much longer than expected. It also suggests more demand for an already limited supply of Aged Care services, and having contingencies to self-fund these expenses may be increasing necessary.

A well thought out plan begins with the end in mind. The final years of retirement are therefore a crucial foundation for any financial plan.

An RSM Financial Adviser can help you prepare a holistic plan that caters for all stages of retirement.

*Based on an accommodation deposit of $500,000.


If you would like to learn more about the topics discussed in this article, please contact your local RSM office.

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.         

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