It can significantly reduce the wealth available to pass between generations and reshape how retirement assets should be invested. A retirement plan built around a steady drawdown over 20 years may need rethinking if several of those years are instead consumed by care costs exceeding six figures a year.
So let us do the maths, because nobody tells you the real numbers until you need them.
Long-term rest home care is charged at a maximum rate set annually by the Government, currently around $1500 a week, depending on your region. That figure covers your healthcare and a bed in what the sector calls a “standard room” – nothing flash, the most basic option going.
Most new rooms are now “premium”, offering features like an ensuite, garden outlook or even just carpet, with extra charges ranging from around $50 a week to several hundred.
Care suites take this further, requiring residents to buy a licence to occupy, sometimes costing more than $700,000 on top of ongoing fees.
Theresa Donnelly, head of legal at Perpetual Guardian.
Theresa Donnelly, head of legal at Perpetual Guardian, recalls a family who wanted this option for their mother. After doing the maths, they realised she would have needed to die within nine months for them to afford it. Knowing they could only afford the level of care for nine months created an impasse between siblings, which was ultimately resolved through the court process. Not ideal.
None of this is scaremongering. It is why doing your homework matters.
The part where most people get confused is how you pay for residential care, and what happens if you cannot?
While the Government caps what families are expected to contribute, don’t assume it automatically picks up the rest. The maximum contribution is currently around $1500 a week, hardly loose change for most New Zealanders.
If you can demonstrate that you cannot afford to meet those costs yourself, you may qualify for the Residential Care Subsidy, which is designed to help cover the cost of care. But accessing it is far from straightforward. Eligibility is subject to strict rules and you’ll need to satisfy a series of financial and clinical tests before any support is available.
In theory, there are three tests. In practice, a degree in calculus sometimes feels equally useful.
First, there’s a clinical assessment confirming you need long-term residential care.
Second, an asset test showing your assets are below the relevant threshold – currently $300,000 if you include the family home, or $164,000 if you don’t.
Third, an income test determining how much you can contribute towards your care.
If your assets are above the threshold, you are expected to sell your assets or apply for a Residential Care Loan, where the Government provides an interest-free loan (secured against your home) to help you cover the cost of care.
Don’t try to outsmart the system. Donnelly warns that artificially reducing your assets or income can “disentitle you from any payment of subsidy”. The thresholds also change over time, making them another moving target for families already under pressure.
The bit families consistently get wrong on the asset test is that owning your own home does not automatically disqualify you from the Residential Care Subsidy, but the asset threshold changes.
If you have a spouse still living in the family home, you can choose to have that home and car excluded from the asset test.
If you are single, or both partners need care, the family home is included in the asset test and may need to be sold to fund care until your assets fall below the threshold.
Hannah McQueen. Photo / Michael Craig
An alternative is the Ministry of Social Development’s Residential Care Loan, a bridging loan secured against the property. However, to qualify, you can hold only limited cash: up to $15,000 for a single person or $30,000 for a couple.
Trusts offer far less protection than many people assume. They were once widely recommended to preserve eligibility for the Residential Care Subsidy. Families often spent years gifting assets into a trust, little by little, believing that if the assets were owned by the trust rather than them personally, they would fall outside the subsidy asset test.
It no longer works that way. Changes to the rules mean the Ministry of Social Development can look through trust structures when assessing eligibility. Assets that many people assumed had been safely ring-fenced may still be considered. The ministry also treats couples as a single economic unit, regardless of how assets are held.
Donnelly warns that “a trust-owned home does not count as a family home that can be exempt” when calculating subsidy eligibility. A trust established years ago may no longer provide the protection it was intended to, making specialist advice essential.
The point families fear most, and often misunderstand, is what happens when the money runs out.
Running out of savings does not mean you are asked to leave the rest home. Once your assets fall below the threshold, the Government pays the contracted cost of your care through the subsidy. Your care needs do not change and will be covered by the taxpayer.
Tracey Martin, chief executive of the Aged Care Association, says the only thing that changes when someone moves into care is their address, not their right to healthcare. “Aged care is healthcare,” she says.
What might change is the room you live in. The taxpayer covers the contracted cost of your care, not the premium room charge. If you’ve chosen the premium option and your money runs out, the family can cover the daily shortfall or you can move to a standard room. Standard rooms are typically smaller and more basic, often with shared bathrooms and fewer extras. If your provider doesn’t have one available, you can ask to be transferred to a standard room at another nearby facility, although families are not always told this is an option.
Longevity is something to celebrate. It also means the sums – and the investment strategy – need to last longer and stretch further than most of us assume. Do the maths early. Ask the awkward questions. Your future self, and your parents, will thank you.
Stay ahead of crisis: Four steps to action now
Know what you’re actually paying for
The government-funded weekly rate covers your care and a basic standard room, not premium extras like an ensuite or better view. Before agreeing to additional charges, ask exactly what you’re paying for.
Invest in your health before you need care
You are around 10x more likely to enter residential care after a hospital admission. The best way to reduce future care costs is to focus on preventing the common reasons older adults end up in hospital in the first place, such as falls, medication problems, dementia, infections and frailty.
Get your Enduring Powers of Attorney sorted now
Put Enduring Powers of Attorney in place for both property and personal care while everyone still has capacity. Consider recording your wish to remain in a premium room for as long as possible if you can afford it, otherwise family members may choose to reduce costs earlier than you would have wanted.
Understand the rules before a crisis
Residential care funding is complex. Learn what you’re entitled to, understand the difference between retirement villages and rest homes, and seek specialist advice early. Families who understand the system before they need it almost always have more options.
Hannah McQueen is the founder and director of Age Brightly. She is also the host of The Next Bit podcast on iHeart Radio.