Retiree, beware: New residential village model charges more the longer you live

Residents in retirement villages who stay longer than the average nine years have long posed a problem for operators, but one company has come up with a solution: just keep charging them.

Contracts that started on July 1 will see new residents of TriCare villages charged up to 98 per cent when they leave. With some homes costing $1 million, that means residents could lose $980,000 at the end of their tenure.

One company has come up with a solution for residents in retirement villages who stay longer than the average nine years: just keep charging them.Credit: Getty

Retirement village exit fees are the original “buy now, pay later” arrangement, the aim being to keep the upfront purchase price low and compensate the operator for not profiting from the ongoing service fees (legislation prevents this).

The problem for village operators is that exit fees are a bit of a Goldilocks business model – residents who stay for too short a period and residents who stay for too long can substantially reduce their profit.

The TriCare contract is clearly aimed at those residents who stay longer. The exit fee is based on the price you pay for your home and calculated at 3.5 per cent per year, until it reaches 98 per cent if you live in the village for 28 years.

If you live in the village for the average duration of nine years, your exit fee of 31.5 per cent is in line with the industry – 86 per cent of operators charge an exit fee of 35 per cent or less.

The difference is that 99 per cent of businesses accumulate the exit fee in the first 10 years and don’t charge beyond that. With the TriCare model, living longer will mean you pay more, and living much longer could see you leave with almost nothing.

Let’s look at an example comparing TriCare’s fees with most of the industry.

If Shirley moves to a village, paying $1 million for her home and an exit fee of 35 per cent ($350,000) within 10 years, she will leave the village with $650,000 – whether she stays for 10 years, 20 years or more.

If Shirley moves to a TriCare village she will also pay 35 per cent if she stays for 10 years. But if she stays for 15 years she will pay 52.5 per cent ($525,000), and staying for 20 years will see her pay 70 per cent ($700,000).

If she leaves after 28 years she will pay a 98 per cent ($980,000) exit fee, leaving her with just $20,000 from her $1 million purchase. If Shirley has longevity on her side, moving into the TriCare village could cost her $630,000 more than almost any other village.

Residents staying longer than nine years is not unique to TriCare villages – after all, that figure is just the average.

The argument will be that very few people live in a retirement village for 28 years – and that is probably right – but very few isn’t none (and Australians are living longer than ever). There must be enough to warrant them creating such a contract.

TriCare is not hiding how its new contract works, so it really is a case of buyer beware.

Rachel Lane is the author of the bestselling book Aged Care, Who Cares? and Downsizing Made Simple with fellow finance expert Noel Whittaker. The new edition of Downsizing Made Simple is now available online.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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