Retirement villages provide an amazing product and service. It is not just the built form attributes of the retirement village product – purpose designed living spaces, recreational facilities and common amenity within a village – but also the peace of mind and reassurances that they provide against the concerns that getting older can bring to the individual and their families. Concerns about declining physical ability, isolation, loneliness, inactivity, boredom, independence, health and overall wellbeing to name a few. Despite the benefits, acceptance of retirement village living (penetration rate) could be considered low with only 12.4% of those over the age of 75 residing in retirement villages according to JLL research. So what is missing?

I believe there is one significant concern that is not well addressed by retirement villages and that is financial wellbeing. Financial concerns are one of the biggest issues facing many people in their retirement years, driven by the fact that such a significant portion of those over 65 are heavily reliant upon the limited income from superannuation to fund their living expenses. According to the 2013 Review of Retirement Income Policies by the Commission for Financial Literacy and Retirement Income, 40% of people aged 66+ have virtually no other income source other than New Zealand Superannuation and other government transfers, with a further 20% of those aged 66+ reliant upon New Zealand Superannuation and other government transfers for around 80% of their total income. Addressing the financial concerns of individuals is a significant opportunity for the retirement village industry and if done smartly will have benefits to both the resident and the operator. By doing more to address financial concerns retirement villages will meet the needs and appeal to a broader range of customers, in turn growing the size of the market by increasing acceptance of retirement village living and driving an increase in penetration rates.

So how can retirement villages address the financial concerns of their customers? One way would be to reduce the ongoing cost of living in a retirement village by restructuring and removing the weekly village outgoing fee charged by operators and therefore general living expenditure as a whole. Village fees range from $99 to $180+ per week (depending on the village and operator) and are a significant expense to a resident, especially when reliant upon superannuation. Currently a single person living alone on superannuation could expect to receive around $800 a fortnight after tax. Paying a village fee of $99 to $180 per week would require up to 45% of the income from superannuation and in this scenario leave the resident with only $220 per week to cover utilities, food, transport and other living expenses. Removing the weekly village fee and reducing outgoings would make a big step toward addressing the financial concerns and affordability of those looking to move into a retirement village who can afford the upfront capital cost but worry about the long term ongoing fees. According to research by the Financial Services Council, those over 65 have substantial property assets with 62% owning a home without a mortgage, however the value of other investments appears to be lower and provides smaller sums to supplement their superannuation.

Moving into a retirement village with no ongoing village fees would significantly reduce living costs and improve one’s ability to get by on superannuation alone, reducing longevity risk and financial concerns. Promoting a happier, stress free and active retirement. The upside to the retirement village operator is that retirement village living becomes more accessible to potential residents who are asset rich but income poor. Increasing affordability on an income basis will open up retirement village living and its many benefits to a greater number of people, increasing levels of interest and demand. Growth in the industry would be driven not only from favourable demographics of an aging population but also from an increase in the acceptance of retirement village living and therefore an increase penetration rates within the population.

How can the weekly village fee be removed, and who pays? Retirement village operators require the ongoing cash flow from the village fee to pay for the ongoing operating costs such as rates, insurance, village maintenance, staff salaries etc. and are unlikely or unable to simply stop charging this fee and absorb this cost fully. One way of removing a weekly village fee whist still maintaining a revenue stream to fund ongoing village operations is to make use of an annuity like structure. One option would be for the retirement village operator to purchase an annuity and receive an ongoing revenue stream to cover operational costs, with the operator having the option to pass through none, some or all of this initial cost to the resident within the Occupational Right Agreement (ORA) pricing structure. The second option would be to make annuities available to residents alongside their ORA when they purchase a unit to offset all or part of the weekly village fee should the resident choose to do so.

There are significant opportunities for retirement village operators to address financial concerns and improve the lives of those in their retirement years through smart financial products and services. Restructuring and removing the weekly village fees is just one of many potential ways in which retirement villages can look to address financial concerns of the elderly and provide their residents with greater choice to better meet their needs and individual circumstances.

What is weird today that will seem obvious tomorrow? Removing ongoing village fees is a challenging proposal but one with benefits to both the resident and the operator.

 

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