Lodgings versus lifestyle: Can older Australians have it all?
Home is where the heart is for many older Australians. Stephen Hardy weighs up their desire to keep the family home with the challenge of funding decades in retirement.
The home is far more than just a valuable asset – for many older Australians, it’s the centrepiece of their memories, community and family.
This dual nature means the home plays a critical role in people’s financial and overall wellbeing. The two are deeply intertwined; however, broad economic and societal shifts are potentially now driving them apart.
In recent years, the value of homes in Australia’s two largest cities, Sydney and Melbourne, has skyrocketed, locking many first homebuyers out of the market. Many older Australians are naturally keen to help their children gain a foothold in the market, including by leaving the family home as an inheritance.
At the same time, Australia’s population is rapidly ageing thanks to health care improvements and a new retiree can now expect to live for another 19 years, according to the government’s intergenerational report. Yet many older Australians’ superannuation balances haven’t kept pace.
This creates a rising tension.
Many older Australians are unwilling to tap into their largest store of wealth thanks to the intricate emotional webs binding them to the family home. Meanwhile, social security laws also encourage older Australians to hold on to the home given the asset test for Age Pension eligibility excludes their principal place of residence.
Poor communication and a lack of planning, often sparked by a health crisis, can easily ignite a flashpoint between generations.
Home is where the heart is
The post-war generation of Australians have worked and saved particularly hard during their lives. For many, the home is their main asset.
About 80 per cent of older Australians own their home and it accounts for more than half of their total household wealth, according to a recent Productivity Commission report.
That proportion is likely to have risen even more in recent years. Since June 2012, capital city dwelling values have increased by a cumulative 47.3 per cent with Sydney prices climbing 74.9 per cent, according to CoreLogic data.
But the home is much more than a store of financial worth – it’s a part of homeowners’ identity and the place where the vast majority of older Australians want to see out their retirement.
These perceptions of the family home are intertwined with older Australians’ concerns about outliving their savings, the impact of inflation, and how to pay for health and care costs.
Attempting to balance these disparate goals requires financial planning and estate planning advice well in advance of issues arising.
Raising standards of living in retirement
Sadly, many asset-rich older Australians end up living a frugal lifestyle in an attempt to self-insure against the chance they will outlive their savings. Many draw down the lowest legislated level of income they can from an allocated pension.
But standards of living often suffer, according to the Financial System Inquiry (FSI) report, and there are a range of other options that can make retirement more enjoyable while still helping to insure against longevity risk.
There is a vast pool of emotional and behavioural biases that stop many people from considering these alternative options, which makes the role of advice crucial.
Complex products are rarely a good fit thanks to the natural impact of cognitive decline that comes with age. Reverse mortgages or equity release products remain deeply unpopular and just one to two per cent of older home owners have gone down this path, according to the Productivity Commission’s post-retirement report.
The FSI pointed to annuities (prompting the upcoming launch of default comprehensive income for retirement products) but a new perspective on the family home may also potentially improve lives.
An irrational fear of losing the family home drives many decisions but a good adviser can reveal a retiree’s true motivations and goals. While older Australians often joke about ‘spending the kids’ inheritance’, the reality is they rarely do. It’s crucial that the discussion involves any children who may be beneficiaries.
For example, some older Australians may want to leave an inheritance for multiple children. This raises the potential for a split in the family if those children have different ideas about what to do with the largest asset.
If a retiree needs to move into an aged care facility, they may wish to consider selling the home instead and using the proceeds as a refundable accommodation deposit. The balance of that deposit can ultimately go back into the estate after death and the children effectively receive the proceeds from the home in a more streamlined way.
However, every situation is different. Selling the home may still be too much for some.
Another potential option for those who need to move into an aged care facility is to rent the home out, producing income that can pay for daily accommodation payments. This potentially allows retirees to keep the home, avoid any impact on government benefits, and then bequeath the home to their children through their will.
These are difficult decisions. For many Australians, moving out of the family home is a last resort and many stay in the home for too long.
Health issues that increasingly occur as lifespans continue to rise is a key reason why older Australians move, with the average age of admission into residential aged care now 83 years and lasting only two to three years.
This is why it’s crucial that retirees plan well ahead.
Issues of elder abuse are all too common and there is a very real danger that if they lose capacity and are forced to move out of the home it may already be too late.
Appointing a family member, such as an adult child, as an enduring power of attorney is often a natural decision – but they may also want to inherit the house. This can make them reluctant to sell it – even though the retiree needs those funds – and become miserly in spending the money their elderly parent needs for quality care.
Slightly more than one-third of investors said they have a suitable plan in place if their decision-making abilities decline, according to a State Street Global Advisors’ survey. More people need to consider these issues as they live longer and want to use their home for multiple purposes.
It takes a working lifetime to reach retirement and older Australians should enjoy it to its fullest. The home plays a central (but complex) role across financial and emotional factors and only careful planning can bring them together in the way that retirees deserve.
Stephen Hardy is the national manager, estate planning at Equity Trustees.
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