Fresh research explains how a lifetime income product, combined with an allocated pension, could mean those on the cusp of retiring will require much smaller superannuation balances than ASFA’s recommended targets.
The not-for-profits flourished when their members were in the accumulation phase. It’s a different story now as increasing numbers want a more personalised service as the decumulation phase beckons. If they can’t get it, SMSFs are a tantalising option.
The cost of aged care: Its bark is worse than its bite
Aged care and death are related and difficult subjects. They are closely related because about one third of us are likely to enter an aged care facility before we die, with the difficulties arising from the inevitable losses and pain.
If it were not difficult enough already, it’s my view that current beliefs about aged care create even more anxiety. So, while we shouldn’t ignore it, obsessing about it is pointless.
Thinking about aged care becomes more of a question when we enter retirement; more than 90 per cent of those entering aged care are over 70. There is, however, so much uncertainty that detailed planning is impossible.
The ideal aged care facility depends on many factors, including the type of care required, the location of family and friends, current availability and government subsidies and means tests.
Even if you buy into a retirement village on the same site as an aged care facility, there is no automatic right of entry.
Although it’s difficult to plan, we can have more confidence that we will be given appropriate support and that some of our concerns about funding aged care are overblown.
This is not true from the perspective of those managing the government budget, but that’s their problem. This is because the cost of care is so large most of us could never afford it.
Currently, it usually runs at more than $120,000 a year and government has to allow for the fact that more than 50 per cent of the people stay for at least two years. It is, however, projected to cost only 1.5 per cent of GDP and, in the wake of the aged care reforms, will slowly decline, so it’s not unaffordable.
It is, however, entirely unreasonable to expect a large proportion of the population to be able to fund this in their late 80s when most will be admitted.
Every system I can envisage must include a significant subsidy for those who cannot afford a basic package. For the third of us who are likely to have to enter formal aged care, we can trust that future governments will continue to subsidise acceptable means-tested care.
Obviously, people who can afford to pay should be required to contribute, and it is highly likely that future systems will involve increased means-tested contributions. It is also highly likely that those who do contribute will have more choice as to location and be given something extra in the level of accommodation – what can be called hotel services.
The actual balance between costs and means testing has changed over time and will continue to do so. Currently, it seems about as complex as it can get, but the regulators ingenuity may not yet be fully tested. I believe it is time that we began to push back against the complexity.
One especially unhelpful source of anxiety in preparing for aged care are the retirement accommodation deposits (RADs). They distort the finances of providers and payers, often subsidising the wealthy. Government will be investigating whether they should be phased out by 2035 – far too long.
My analysis suggests that while having the cash to be able to pay all or part of the RAD is likely to save money, the benefits vary considerably with interest rates. There is little advantage in planning, and when the time comes, there will be plenty of financial advisers ready to help.
There are some preparations we can make. For our personal finances, it should help to have a reasonable probability that our superannuation and investments will last into our 80s and 90s.
Account-based pensions are not likely to do this, and people should consider lifetime annuities at some point in retirement. New products now allow for the same investment choice as account-based products. Lifetime annuities offer increasingly better value as one ages, but current options are not suitable for those in poor health.
So, let’s not worry too much about financing old age care, and let’s try to embrace the active years left to us.
