How to avoid buyer's remorse in retirement
We have all heard a story about someone who moved to a retirement community and then suffered buyers regret. Another kind of ‘buyer regret’ is not making the move sooner.
So, what do you need to know before making such a big decision? Realising this is an issue, two industry insiders, Rachel Lane and Noel Whittaker teamed up to write The Retirement Living Handbook.
Both Noel and Rachel have heard these stories again and again. Rachel says, “The biggest problem with both types of regret is that it is too late to do anything about it. You can’t wind back the clock and move into the village sooner and if you are at the point of leaving the village it is too late to negotiate a different financial arrangement.”
Noel adds, “What they needed was someone to help identify the village or villages that would meet their lifestyle needs and explain the legal and financial aspects to them well before they chose a village.” Of course, that’s easier said than done as many of the legal and financial arrangements are complicated.
How does it work?
Retirement communities can be broadly grouped into Retirement Villages and Over 55 Communities (sometimes called Manufactured Home Parks). Retirement Villages operate under the relevant state or territory legislation, often The Retirement Villages Act, which set age requirements and deal with some but not all financial arrangements, while a small number operate under residential tenancy laws. Over 55’s on the other hand operate under caravan park or residential tenancies arrangements or a combination of the two.
Legal issues
The legal contract for a retirement village unit can take a number of forms, from strata title to more common leasehold and licence arrangements through to company share and unit trust arrangements where the right to occupy a unit is granted in exchange for the purchase of shares in a company or units in a trust. The biggest difference between a retirement village and an over 55’s community is that the contract is over the land rather than a unit - the purchaser buys the unit and has a leasehold or lease over the land.
Of course there is a very big difference between having a 12 month lease and having a 99 year leasehold arrangement. It also creates the very interesting situation of being a homeowner and a tenant at exactly the same time. The form of legal ownership the person has will dictate their rights and responsibilities in relation to their unit and the costs associated with it while they live in the community and after they leave, so it is important to understand.
Be aware of extra costs
The costs associated with retirement communities can be summarised as the ingoing, the ongoing and the outgoing. The ingoing is the amount the person pays for their right to occupy their unit together with other costs such as contract preparation fees or stamp duty.
The ongoing costs of living in a retirement community will relate to the costs associated with the facilities and management of the community, in a retirement village these are often called general service charges or recurrent charges and in over 55 communities they are known as site fees. Of course you still have your own personal expenses too.
In many retirement communities the operator delivers (or engages with external providers to deliver) extra services, such a domestic help, meals and in some cases care. These services are normally offered on a user pays basis and are in addition to the standard charges.
Doing a budget that incorporates all of the costs together with your pension entitlement, rent assistance and other income is a good idea. The cost of leaving a retirement community is the aspect that normally causes the greatest confusion. There are many different exit fee models, most are based on either the purchase price or the sale price and are for a percentage multiplied by the number of years you stay in the village.
A common model historically has been 3 per cent per year for 10 years based on the sale price. In more recent times, exit fee models have tended to be higher - anywhere between 35 per cent and 50 per cent is not uncommon. What many people fail to appreciate is that there is more to the exit fee calculation than just the percentage based cost, often referred to as the Deferred Management Fee or DMF.
There can be sales commissions to the village or to an agent that the resident appoints and refurbishment costs to bring the unit up to the current standard within the village. Understanding all of the fees and charges and putting them into dollar terms is important, although it often involves the imperfect science of predicting how long you will live in the village and what your unit will be worth when it sells.
Expert tips
To help people navigate the maze and avoid some of the traps, Noel and Rachel wrote The Retirement Living Handbook which covers all of the important aspects of moving to a retirement community, from finding the right retirement community to the different forms of legal contract and financial arrangements through to the impacts on pension entitlement and eligibility for rent assistance.
There’s more than a dozen case studies from real Australian retirement communities so you can see how the concepts play out in practice, and at the back of the book is a directory of over 1,000 retirement communities broken down by lifestyle with a lexicon of key features to help readers identify the retirement communities that may best suit you.
What are the biggest concerns you have about retirement? Join the conversation below.
Republished with permission of Wyza.com.au.