Rethinking the adequacy of retirement planning


Assyat David

When taking into account the costs of aged care, the current retirement planning approach taken by many advisers may fall short of predicting the real retirement income needs and leave clients with significant shortfalls.

Financial planners need to adapt their approach to retirement planning to ensure their service meets the real needs of their clients.

“The costs of aged care have been accelerating and are likely to continue to increase at a rate higher than inflation. The opportunities for home care are also increasing and adding to the pressure on retiree household budgets” said Assyat David, Director, Aged Care Steps.

“Industry standards for retirement living may fall far short of what might be needed to fund aged care, particularly with the emergence of home care, increasing longevity and the rising incidence of dementia” added David.

Retirees might expect to need increasing levels of support over the last 10-12 years of their life, with many people experiencing high levels of care dependency in the last 4-5 years.

This may require:

  • Additional and increasing income to fund home care costs
  • Capital expenditure to make the home suitable for the ageing person (e.g. widening doorways to enable wheelchairs and ramps)

“These costs could be significant for some clients and need to be included when calculating retirement needs and funding strategies. For some clients, this may also involve the use of equity drawdown strategies to use the home as part of the funding strategy” said David.

An example was developed for a single retiree seeking a comfortable retirement living standard and assuming future home care costs payable of $26,000 per annum[1] (in addition to government support up to $50,000 per annum) and one-off capital costs of $50,000 (in today’s dollars and indexed to inflation of 2% pa) to modify her home from age 85. In this example, the client is likely to underestimate the adequacy of her retirement savings by 14% of her superannuation balance, or in excess of $92,000.

If clients are not able to receive government support from a package, their care costs could be significantly higher with serious implications arising from the funding shortfall.

David said “Advisers need to rethink their conversations with clients and start factoring in the costs of aged care and anticipating home care needs with pre-retirees”.

“Advisers may also need to modify their portfolio construction approach to retirement. For example, advisers using the bucket approach to allocate ‘buckets’ of assets to fund different income needs in retirement may wish to expand the range to add a fourth bucket for future aged care costs” David added.

Ms David concluded: “What is certain, is that advisers who do not start to address the issues of aged care and adequacy of retirement funding are increasing the risks for clients and placing greater potential burdens on the families of those clients”.

[1] Assuming full user maximum contribution for home care of $14,000 per annum plus $1,000 per month additional private.

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