Can you afford a retirement village?

CRITICAL to any decision about your retirement lifestyle, your preferred location and the type of retirement accommodation you want, is to work out what you can actually afford.

When thinking about the purchase of a home in a retirement community there are two affordability aspects you will need to consider:

• How much you can afford to spend on your purchase (your purchase capacity)
• Your ability to fund the ongoing costs from your projected retirement income (your spending capacity).

Your ability to fund a purchase of a retirement home will be largely dependent upon the value of your existing home. Basically, if you own your home with little or no residual mortgage, then you should be able to afford to buy a retirement home in the same general location.

This is because the prices of retirement village units will typically mirror that of the surrounding residential area. A two-bedroom villa in a retirement complex should be similar in price to a two-bedroom residential townhouse of similar age and condition in the surrounding suburb. Occasionally you will see a discount of around 10-15% applying to the retirement community due to the lower land component, although this is not always the case.

Valuing the family home

The sale of the family home is an important part of buying a retirement home, so you need to make sure you get the best price for your home at the best time possible.

Most people have a fairly good grasp as to the value of their home, although many of us are emotionally attached to the property and may think it is worth more than it actually is. There are, however, two ways to get a fair indication of the true value of your property to work out what you can afford to spend on your new retirement home:

• Purchase a sworn valuation from a registered independent valuer; or
• Obtain a comparative market analysis, otherwise known as an appraisal of value, from a real estate agent.

The comparative market analysis is an appraisal of value provided by a real estate agent and not a professional, independent valuation. These appraisals can be notoriously variable in accuracy and quality, and are largely dependent upon the skill and honesty of the agent. Unfortunately some real estate agents inflate the estimated sale price of your home in the hope of securing the property as a listing for sale, and then spend the sale period trying to talk you down to the real market price of the property.

CMA’s are provided free by real estate agents and it is a good idea to ask a few agents rather than just one. As there is no charge for a CMA, they can be a good first step to finding out the value of the property.

Spending capacity

The second consideration around affordability is your spending capacity, or your ability to fund the ongoing fees and charges associated with living in a retirement community.

First and foremost is what is known as the general services fee, village fee or weekly fee, which is charged to the residents of most types of retirement villages. The fee is an ongoing charge to the resident and covers the costs associated with running the village, including security, maintenance, management and landscaping. It is similar to the body corporate or owners corporation fee paid by the residents of strata-titled communities such as apartment buildings and is levied on either a weekly, fortnightly or monthly basis.

The ability of a retirement village resident to fund ongoing village fees is limited, because many of them rely on a pension for their daily living costs, or are perhaps self-funded from investments. Either way, there is usually not an excess of cash available to fund the village fee.

Consequently, some village operators charge a lower village fee and offset any losses by applying a higher exit fee. For example, a particular village might have a justifiable levy on a unit of $135 per week, but instead make it $90 per week and add 10% to the exit fee calculation to make up the difference over time. This is a perfectly reasonable way of providing access to potential residents who may have limited incomes, but are perhaps asset-rich from the sale of their home.

To assess your capacity to fund the village fee, you will need to forecast your retirement income and determine what you can afford to pay on an ongoing basis. It is best to use a smart accountant or financial planner to assist you with this work, as you may also be eligible for the rent assistance allowance that can assist to offset part of the village fee.

This article was provided by Richard Andrews, founder of Find My Retirement Home, a company that provides independent advice and buyers agency services to retirees looking to purchase a retirement home. He is also the author of the forthcoming instruction manual, DON’T buy your Retirement Home without ME!