Aged-care costs should be part of an overall retirement plan.
A review of aged-care funding that leaves accommodation bonds in place and introduces means testing for government-subsidised home care underlines the need for people to plan for lump-sum expenses later in retirement rather than just focusing on their "bucket list" in the early years.
"People prepare for retirement financially, but the retirement they're preparing for is the carefree, 'grey nomad' phase," Equity Trustees' head of wealth management, Phil Galagher, says. "And the way they structure their finances for that grey nomad phase is almost diametrically opposed to how they need to be structured once their health has declined and they need care."
The Productivity Commission's Caring for Older Australians review concluded the aged-care system would struggle to cope because of the ageing population and proposed that accommodation, everyday living and care services be treated differently, with people contributing more towards the cost of the first two if financially able.
The federal government will not implement all its recommendations, in particular rejecting a proposal that at least a portion of the family home be drawn into the assets test for aged care subsidies.
However, from July 1, 2014, an income test will apply to those seeking access to a significantly expanded home-care program. The government says this puts home care on the same footing as residential care, where income testing already applies.
Self-funded retirees with income greater than $43,186 will pay a home-care fee on a sliding scale up to $10,000 a year, cutting out at a lifetime cap of $60,000. Full pensioners will not pay this care fee and part-pensioners will pay no more than $5000 a year.
Galagher says the problem remains that many Australians entering retirement focus on the early years and the need to generate income, sometimes to the detriment of capital preservation.
"They want to be able to do all the things they've put off - overseas travel, towing a caravan around Australia, taking up hobbies. Early retirement can be a fairly footloose existence," Galagher says of those aged in their 60s.
People start to slow down in their early 70s and then they need to really focus on preserving capital, he says.
"They need to continue to take a view to the future, and because of increased lifespans their future may well include formal aged care," he says. "They should start to migrate their assets away from income towards capital preservation in a way that will enable them to handle a lump-sum expense later."
Accommodation bonds average about $300,000 but can exceed the $1 million mark in desirable parts of Sydney and Melbourne, he says.
The government has said that in future all residents will have to be given the choice of paying for a place in an aged-care facility via a fully refundable lump sum, rental-style periodic payments or a combination of the two.
Currently, each facility decides if it will accept periodic payments, and providers have been able to hold back a "retention amount" when refunding a bond at the end of the resident's stay.
Phases of retirement
Financial services firm ipac recently came up with what it sees as the four phases of retirement.
- Defining phase: Retirement is a serious consideration and there may be a move to part-time or consulting work. A plan is needed on how much money you need and how you will make it last.
- Active freedom phase: You still have your health and lifetime dreams become your focus. A reliable income is required.
- Consolidation phase: Life becomes quieter and more domestic. You spend less on goods and more on health. This phase can last up to 20 years.
- Dependency phase: You may need home help or an aged-care centre. Most spending is on health and there's less involvement in daily financial affairs.