The elderly often require care, which is costly in whatever form it’s delivered. Here’s how to ensure your parents don’t need to skimp when they are at their most vulnerable.

ANZ Financial Adviser, Scott Riddell, divides retirement into three phases, the first and third of which are the most costly. “It’s dangerous to make generalisations but, usually, people go through three stages of retirement,” Scott says. “There’s an ‘active stage’, which lasts around 10 years, when retirees are still usually in good health. Pre-COVID, this is when people would have taken around-the-world cruises. Then comes the ‘passive stage’, which also, on average, lasts around 10 years. At this stage, people can still look after themselves but typically they’re slowing down. The third stage is when people’s physical or mental health starts to deteriorate and they need help. That’s when people go into aged-care facilities or require regular visits from aged-care workers.”

The Aged Care Assessment Team (ACAT) catalyst

Scott and his colleagues often get visits from clients in their 80s, following an ACAT appointment. “Typically, one member of a couple will be in declining physical or mental health,” Scott says. “Following an ACAT assessment, it will be clear that care, beyond that being provided by family members, is needed. Those in financial hardship are provided with this care at a greatly subsidised rate. But those with assets are means-tested and have to contribute towards the cost of their care.”

Asset-rich, super-poor boomers

Most people entering residential aged care are around 75-85 years old. They probably own at least one property and that property will have likely appreciated significantly in value. However, if they’re now 85 years old, for example, they would have been 55 before compulsory super was introduced. “Before retirement, single-income households were common with that generation, so often women in this age group have next to no super,” Scott says. “And super contributions haven’t always been 9.5%; they started at 3%. So, even if a man from this age group was a well-paid employee, he may not have an impressive super balance. If he was self-employed and made few super contributions, he may not have much of a super balance at all.”

What aged care help do you need?

The Association of Superannuation Funds of Australia (ASFA) estimates that a couple who own their home and who qualify for at least a partial age pension will need $640,000 in super to have a “comfortable lifestyle” (i.e. the kind provided by a $62,562 annual income).

However, Scott warns that those used to a six-figure annual income aren’t likely to enjoy embracing relative austerity late in life. “People with different backgrounds have different understandings of what constitutes comfortable,” Scott says. “My advice to high-income earners is to aim to have $1.5-$2 million in super, which should provide an annual income of around $100,000. People often don’t understand how expensive retirement is. On top of the standard outgoings, you’re probably going to start paying people to clean your house, take care of your garden and provide personal and medical care.”

Australia’s aged-care funding options

Scott says that, for those with the means to have options, several decisions need to be made in relation to aged care planning.

“The first decision the elderly and their families need to make is whether to stay at home and have aged carers visit or go into an aged care facility,” Scott says.

It’s cheaper to care for older Australians in their homes than in aged care facilities, so successive Australian governments have provided increasingly well-funded aged care packages aimed at encouraging this.

“People’s homes aren’t means-tested when they are lived in by a protected person, or are capped at a value of $173,075 in most other cases – except where a decision has been made to sell the home,” Scott explains. “Their other assets, such as the money they have in super, are means-tested. But even the wealthy have their care subsidised. Long story short, home care is now affordable for Australians of all income levels and doesn’t involve large upfront costs.”

But there often comes a time when those in the 80-90 age range do need to go into residential aged care. If they have few financial resources, they are placed in a no-frills aged-care facility that takes 85% of their age pension. But if they do have financial resources, they will usually have to come up with hundreds of thousands of dollars, immediately or over time, to pay for quality aged care.

“If someone wants to get into an upmarket facility that provides well-appointed living quarters, good food and lots of recreational activities, they will need to pay a basic daily fee and means-tested care fee,” Scott says. “But the major expense is paying for their accommodation. This can involve paying an upfront Refundable Accommodation Deposit (RAD), which is likely to be in the region of $500,000-$600,000. This is equivalent to ‘buying’ your aged care accommodation. Alternatively, you can pay a Daily Accommodation Payment (DAP). This is equivalent to ‘renting’ your accommodation. The DAP represents the interest on the amount of unpaid RAD and is calculated using the maximum permissible interest rate (MPIR) which is currently set at 4.01% per annum. There’s also a ‘combination option’ where you put some money down upfront in return for a reduced DAP.”

The role of children and financial advisers

The issue affluent Australians face, Scott observes, isn’t lacking the money for quality aged care. It’s working out exactly how to fund it.

“The individual and societal-level solution to aged care funding that’s often suggested is to ‘eat your house’,” Scott says. “That is, boomers, who generally own at least one property, should sell it to free up the funds required to pay for their aged care.”

When this is the only choice available, the decision-making process is straightforward. However, things get more complicated when there are multiple options and a range of agendas.

“Let’s say an elderly couple, with three adult children, have assets other than the family home,” Scott says. “For instance, money in super, or an investment property, or a share portfolio. Now they have to decide what asset to liquidate to fund their aged care. The parents are often torn between wanting to sell a particular asset or leave it for their children. Also, the children frequently have conflicting agendas. One child may want the parents to sell the family home, another may want them to rent it and the third may be living in the home and want to continue doing so. To make things even more complicated, liquidating different assets could have different tax and aged care funding implications.”

An ANZ Financial Adviser can prove invaluable when difficult and often emotional discussions around aged care can no longer be put off.

“An adviser brings two things to the table,” Scott says. “First, they have the knowledge to educate everybody involved about all the options available, as well as the pros and cons of those options. Second, and perhaps even more importantly, they are a neutral third party. A third party that can facilitate productive discussions and, all going well, help come up with an aged care funding solution that everybody is satisfied with.”