The Cost of Aged Care in Retirement
Planning your retirement may be exciting. It is likely to be less fun to think about the potential for physical and cognitive decline in the latter part of retirement – our aged care years - but this is just as important to plan for.
The reality is that we are all likely to experience some cognitive decline or lose some of our physical ability as we age. This is a natural process but does not mean we will all develop dementia or lose the ability to live independently.
It does mean, however, that at some point we may need to ask for help with doing our normal activities of daily living. This might be help we get at home, or it might be help in a residential care service.
What do I need to plan for?
Based on figures from the Australian Institute of Health and Welfare you should plan for approximately 17-25% of your retirement years to be “care years”. For example, if you expect a potential of 30 years in retirement, this might include 5 to 7.5 care years.
If asked, most of us would prefer to stay in our own homes as we age. Staying at home may be possible if we have lower care needs or we can rely on the support of a capable spouse/family or if we have sufficient financial resources to pay for help at home.
But if our care needs are too high for the people around us to cope, or we don’t have good support networks, residential care might be a better option.
In any case, planning the financial aspects of your retirement should also include an assessment of how much you will need to pay for care. This is difficult to calculate because of the unknown factors around health, opportunities and finances.
Historically, the approach to retirement planning has been to decide what income you need and then calculate how much you need to save to generate this income. Most people assume a flat (or declining) level of income which grows in line with inflation. However, if you consider the cost of care, the pattern is more likely to follow an upward curve as shown in the graph below.
In your early retirement years, you may spend more on leisure activities. This spending may decline as you age but is likely to be replaced with the costs of care or to pay someone to do the activities you previously did yourself.
“You should plan for approximately 17-25% of your retirement years to be 'care years'."
What does care cost?
The costs of aged care have been increasing and opportunities expanding. The government is increasingly focused on helping to expand and improve the home care opportunities.
Australia has a good system of care compared to many other countries, with safety nets to ensure people with lower financial capabilities can still access care. But the ability to choose and the options available may be more limited if relying on the low-means concessions.
How much you will need to pay can be difficult to predict. Currently, it can roughly vary from $100 a week to $6,000 a week depending on the options chosen. This covers a wide range of opportunities from basic home care packages to full-time nursing care at home.
Access to government subsidies and rules for calculating the fees based on your finances helps to make care affordable, but having adequate savings opens up your choices and your ability to control the level and type of care you receive.
These figures are current to 19 March 2019 and only cover the cost of care. Regardless of which option you choose you also have the costs of accommodation and other personal expenses.
If you can afford them, top-up or extra services in addition to these costs can make the difference for a comfortable ageing process.
What you should start thinking about
While we don’t know what our future holds, with some planning ahead we can help to make our retirement a comfortable one and live it the way we choose.
Some of the things we can start to do include:
- Ensure we have a safe and secure income in place for life – this might be pension income, lifetime income streams or drawdown strategies from other investments.
- Include your home as a financial resource available to provide a safe place to live – this might be a physical building but it might also be access to equity to pay for our care needs by drawing regular income under an equity release arrangement, renting to generate extra income if we move into residential care or selling to access the sale proceeds for other purposes.
- Consider the impact we would have on family and friends if relying on them to provide care and how we can help with financial support.
Planning to make sure we have resources available is important. Equally important is to ensure we have an Enduring Power of Attorney in place in case we need to give someone else the responsibility of making the decisions and paying the bills on our behalf.
These are all major decisions and can be too hard to make on our own, so advice from a financial planner who is an Accredited Aged Care Professional can help to remove some of the stress.
Louise Biti, Aged Care Steps