Solving the RAD jig saw

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By Sophie Doyle
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25 August 2020, 10:30 AM

Solving the RAD jig saw

Rent or buy? This is your effective choice when deciding how to pay for a room in residential aged care. But pulling together all the considerations to make the choice on your own is like solving a jigsaw puzzle without the lid of the box.

Hand putting together a puzzle

A challenge for us all is to find somewhere affordable to live. When our health declines and we move into the frailty period of retirement, this challenge continues but our focus and choices shift from independent living to supported living in residential aged care.

Like any accommodation decision, you will usually need to pay for a room in residential care. The most expensive room is around $2 million with the average across Australia just over $400,000. But if the thought of paying $400,000 or $500,000 or $800,000 or more for a room in residential aged care scares you, you may find it reassuring to know that you have choices.

With most decisions on where to live, you can choose to buy or rent. Aged care is the same. While the prices are quoted as a lump sum you have the choice to pay the lump sum and “buy” the right to live there or to pay a daily fee and “rent” the right to live there.

How to make the choice

While the agreed accommodation cost (called a refundable accommodation deposit - RAD) remains unpaid, it is like having an interest only loan with the care provider. You pay interest to the provider on the amount outstanding. If you pay all or some of the lump sum, the interest reduces accordingly.

The choice may depend on what liquid assets you have available to cash out as well as the relative earnings rates. The interest rate on the unpaid RAD is currently 4.1% per year. If your money is invested at a lower rate, you might consider cashing in those investments to pay the RAD. But the choices depend on a range of financial factors and personal considerations.

The estate planning factor

To take away some of the fear, remember that any amount paid as a RAD is not lost money. When you pass away it is refundable to your estate, with two adjustments:

  • Any outstanding fees, or fees that you have asked the provider to deduct along the way, reduce the amount to be refunded, and
  • You do not earn any interest on your money while you live in aged care but you will earn interest from the date you pass away until the date that the money is refunded by the care provider.

It can take a number of months to arrange probate and organise the refund, so it is good to know that your money is earning interest (payable by the care provider) while waiting for the refund.

Advice for your unique situation

The factors to consider when making the choice are like solving a jigsaw puzzle with lots of pieces. It is also important to ensure you can continue to meet other ongoing expenses and consider how your estate will be impacted. Every family situation is unique and advice can help you to pull together the jigsaw.

Find out more

Sophie Doyle is a Financial Aged Care Specialist at Morgans Gosford and is passionate about helping families answer questions like " do we have to sell the family home, what are the fees, how do we complete all the paperwork? " Sophie works through all these questions, plus many more. She creates financial strategies tailored to meet your loved ones goals and objectives, including covering their ongoing care needs. Sophie provides families with options and peace of mind.

If you would like to discuss getting financial aged care advice for yourself, or a loved one, please contact Sophie on Sophie.doyle@morgans.com.au or via (02) 4325 0884

General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions. Current as at 1 August 2020.


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