Amongst all the discussion around retirement savings and how Australians should position their investments, little is said about Australians who are nearing their life expectancy, and how the expected cost of residential aged care should influence investment choices.
The average Australian entering into care is about 83 years old, and as Australians age, the likelihood of spending time in full time residential aged care increases. So really, the older you are, the more the potential for aged care should factor into investment decisions. Further, it is not just residential aged care that costs, home care packages are means tested, and of course other care related costs may be escalating.
Unfortunately, not all Australians at this stage of life have choices around investment to make.
For those that do have savings at this stage in life - how are decisions being made?
From my experience, investment decisions are often being made without the understanding of the potential for residential aged care, and with little understanding of the prospect of paying for it.
And should the need for aged care arise, the right planning will be good for the resident and the estate.
What you may be missing
In working out how much the government will assess the resident's capacity to pay for care, all assets are considered.
Further, the way the system works, it can often make better financial sense to hand over funds for accommodation costs as a lump sum to the facility as a Refundable Accommodation Deposit. This will save on paying by interest rate (Daily Accommodation Payment) - which is levied at a high interest rate. Add to this the potential for a better Age Pension outcome, and having the funds available to pay the RAD seems like an obvious strategy.
Should this taken into account by families with a view of needing residential aged care “on the horizon”?
These are complicated issues that may or may not be relevant to an older Australians, because they may not even need full time residential aged care. However as Australians age, this path becomes more likely, and therefore the "investment profile" of an 80 year old should have some consideration for the cost of aged care, and the best way to have assets at the ready to fund it.
Your work is done
In helping older Australians and their families make the right decisions around how to pay for residential aged care, I am often surprised at the just how committed families are to investment assets - whether they be property or shares. Mum or dad may have had the assets “forever”, and may have seen significant wealth accumulation as a result and therefore be strongly convinced of the benefit of dividends or rental income.
On paper, if saving over a lifetime is for the objective of allowing choice in outcomes at a later life stage - the work is done.
Now they are at the later life stage - what is next?
Take this situation for example: An elderly client who owned their own house had savings that would easily cover the cost of a refundable accommodation deposit in a local aged care facility of choice, with substantial funds left over. These funds that should allow the ability to support aged care costs for some years, and take away pressure to make decisions around the house in a hurry.
These investment assets were in the form of an investment portfolio - one that had delivered a good dividend stream for many years.
Should the potential for aged care influence ongoing investment decisions for this person?
The Estate vs the Resident
This is where it gets complicated. Anyone who has dealt with families and the transfer of assets to one generation to the next will tell you that.
Children may see the investment of assets as a prudent way to ensure assets increase in value over a longer time frame. This growth in value may have been well demonstrated by mum or dad's investing over a lifetime.
What is overlooked is the potential to arrange the investment assets in a way that ensures a smooth transition to residential aged care, should the situation arise. The ability to hand over the full amount of the Refundable Accommodation Deposit out of savings, and then have time to make choices around the home, is pretty much the best situation for the resident in making the most financially efficient decision when paying for aged care.
Given this aspect of aged care funding, the resident and their family should be looking into the option of having the majority of investment assets in cash. The reason?
Consider that the advent of funding residential aged care is increasingly likely, so essentially the investment time frame is shortening, Assets held over a lifetime time horizon may in fact now have a shorter horizon. Basic investment risk profiling suggests holding assets like shares for a short term objective is a bad idea, as their is the risk that the value of the shares may not be where you want them when it is time to sell.
In terms of aged care planning, there is good reason for older Australians to convert their investment to cash. This will make it easy to pay the Refundable Accommodation Deposit (RAD) should residential aged care be needed.
Of course, capital gains tax may be an issue - and this should also be looked in terms of the marginal tax rate of an older Australian (with senior tax offsets), and the prospect of some deductibility in the cost of residential aged care. Also - of course, due consideration should be made to the likely outcome of these assets once handed on to beneficiaries - it might be the case these assets could be sold promptly to pay down mortgages anyway. Your accountant should be able to clarify the likely tax outcomes here, and help you understand choices.
How to plan
If you are helping mum or dad in supervising their investments (possibly because they are at a stage in life where they need your help), you may be looking at things as if it were you investing for your future. This may not be the right perspective, however it is understandable that getting a view on the right course of action for someone of this age is hard.
Let me help.
I would suggest you look at a few local aged care facilities and look at what is asked as a Refundable Accommodation Deposit (RAD). If your mum or dad have enough investment assets to cover this amount, I would be looking closely at the implications of converting existing investment assets (e.g ASX listed shares) to cash and having them sitting in the bank just in case the funds are needed. There may be capital gains tax issues and other costs to consider, but in my experience the biggest barrier to changing investment portfolios is habit.
Having an amount in cash to cover the Refundable Accommodation Deposit in full, and then have funds left over to cover other aged care costs will allow greater choice and significantly reduce the stress of making quick decisions should the move to aged care be upon you.
It could also improve the long term outcome of the estate.
After all - what else would an 80 year old be saving for?