Note: Aged care fees, thresholds, and caps are subject to regular indexation and government policy changes. The principles and strategies discussed remain relevant, but specific dollar amounts should be verified with Services Australia, My Aged Care, or your financial adviser when making decisions.
BY WEALTH ADVISER
Introduction: A Decision Most Australians Will Face
At some point, most Australian families confront one of retirement’s most complex financial decisions: how to fund residential aged care. Whether planning for your future, supporting aging parents, or facing unexpected care needs, understanding aged care costs can mean the difference between financial stress and confident decision-making.
Refundable Accommodation Deposits (RADs) now commonly range from $350,000 to over $700,000 in metropolitan areas, with premium facilities exceeding $1 million. This often represents the second-largest financial commitment after a home purchase—yet unlike buying a house, aged care decisions frequently need to be made within weeks, under emotional pressure.
This article provides a framework for understanding aged care costs, funding strategies, and wealth protection. Whether planning decades ahead or facing immediate care transition, the goal is ensuring quality care while making informed financial decisions that protect your retirement security and family legacy.
Understanding Aged Care Costs: The Four Components
1. Accommodation Payment (RAD or DAP): The room cost— pay as lump sum RAD (fully refundable), daily DAP (similar to paying interest), or combination. RAD amounts vary by location and facility. The RAD is refundable, not a lost cost.
2. Basic Daily Fee: Everyone pays this (currently 85% of the basic single Age Pension, excluding supplements). Covers meals, cleaning, laundry. Amount is indexed regularly.
3. Means-Tested Care Fee: Based on your assets and income. Subject to daily, annual, and lifetime caps. Calculated differently from Age Pension, creating planning opportunities.
4. Additional Services: Optional extras like premium meals or activities—negotiable and unregulated.
The RAD Decision: Lump Sum, Daily Payments, or Combination?
The government’s Maximum Permissible Interest Rate (MPIR) determines the daily payment equivalent of any unpaid RAD amount. This rate changes periodically based on market conditions.
For context, if the MPIR is around 8%, a $600,000 RAD would equal approximately $130-140 per day in DAP payments (roughly $47,000-51,000 annually). This means choosing full DAP over full RAD effectively costs the equivalent of the MPIR rate per year on the unpaid amount.
Important: DAP payments are not tax-deductible, even if paid from investment income or earnings.
Strategic Considerations
Pay more RAD (less DAP) if:
• You have sufficient liquid assets without compromising lifestyle
• You expect a longer stay in care
• You want predictable, fixed accommodation costs
• Your means-tested care fee would decrease by reducing assessable assets
Pay more DAP (less RAD) if:
• You need to preserve liquidity for other purposes
• Your investments have historically earned returns exceeding the DAP rate after tax (noting that DAP is a guaranteed cost while investment returns are variable and carry risk)
• You’re uncertain about length of stay
• Selling assets would trigger significant capital gains tax
Real Example: Sarah, 82, entered care with $850,000 in savings. The facility’s RAD was $550,000. She paid $400,000 as RAD and took daily payments on the remaining $150,000. This preserved $450,000 in investments earning income to cover her ongoing care costs, while the partial RAD payment reduced her means-tested care fee by lowering assessable assets.
Flexibility Note: You can adjust your RAD/DAP combination after entry, subject to the facility’s agreement. This allows you to adapt your payment structure if your circumstances change.
Funding Your RAD: Four Primary Sources
1. Selling the Family Home
Most common for single people entering care. The family home is typically CGT-exempt (principal residence exemption), provides ample funds, and eliminates property management. However, it’s emotionally difficult and permanent. The two-year means testing exemption gives time to decide without pressure.
2. Superannuation Access
Once you’ve met a condition of release (generally age 60+ and retired, or 65 regardless), super becomes accessible. Withdrawals are tax-free for those 60+ in pension phase, providing liquidity without forced property sales. Consider the impact on a surviving spouse’s income and Age Pension entitlements.
3. Investment Portfolio
Using non-super investments, term deposits, or savings avoids forced home sales and can be structured gradually. Be aware of potential capital gains tax on asset sales and ensure sufficient remaining funds for ongoing costs.
4. Keeping the Home
Some families retain and rent the home while using other assets for the RAD. This preserves the asset and potential growth, and generates rental income. However, you need sufficient other funds for the RAD, ongoing property costs remain, and after two years the home is assessed for means testing unless occupied by a spouse or protected person.
Means Testing: Minimizing Your Costs
The means-tested care fee is calculated based on both income and assets, using different rules than Age Pension means testing. Understanding these rules creates planning opportunities.
How Assessment Works
Your means-tested fee is calculated by combining both income and asset assessments:
- Income test: Includes Age Pension, investment income, rental income, and deemed income on financial assets. Income above certain thresholds contributes to your care fee.
- Asset test: Counts cash, investments, super in accumulation, and property (excluding your RAD and protected family home). Assets above certain thresholds contribute to your care fee.
The formula combines both assessments together – it’s not simply “whichever is higher” like Age Pension means testing.
Important Caps (amounts subject to indexation):
• Daily maximum
• Annual maximum
• Lifetime maximum
These caps protect against excessive ongoing costs. Check current thresholds with Services Australia or your adviser.
The Two-Year Home Exemption
Your family home is automatically exempt from aged care asset testing for two years after entry. After two years, it becomes assessable unless occupied by a spouse, dependent child, or certain close relatives. This creates a valuable planning window to make considered decisions about selling or keeping the home.
Optimization Strategies
RAD Payment Strategy: Paying a larger RAD reduces assessable assets (the RAD itself is exempt), which can lower your means-tested care fee. This saving may partially or fully offset the DAP you’d otherwise pay.
Gifting: Limited gifting is permitted (currently $10,000 per financial year, maximum $30,000 over five years). Gifts above these limits are treated as deprived assets and continue to be assessed as if you still own them, for both income and asset testing purposes, for five years.
Investment Structure: Growth-oriented investments with minimal distributions may reduce income assessment compared to high-yielding assets. Professional advice ensures compliance while maximizing legitimate opportunities to reduce fees.
The Family Home: Keep or Sell?
There’s no universally right answer—it depends on your circumstances.
When Selling Makes Sense
Provides immediate RAD funds, is CGT-exempt (principal residence), eliminates ongoing property costs, and simplifies estate settlement. May improve Age Pension if proceeds fund the RAD. However, it’s emotionally difficult and permanent.
When Keeping Makes Sense
Retains an appreciating asset, can generate rental income, and is protected from means testing if your spouse lives there. Provides return flexibility if care needs change. However, requires alternative RAD funds, ongoing property costs and management, and after two years is assessed unless occupied by a protected person.
Two Scenarios
Couple: John and Margaret kept their $650,000 home (Margaret remaining) and paid RAD from savings. Five years later when Margaret needed care, they sold the appreciated home to fund her RAD. The delay captured significant capital growth.
Single Person: Robert sold his $600,000 home, paid the full RAD, and retained his investments for ongoing income. This eliminated property stress and provided cost certainty.
Estate Planning Integration
RAD Refunds: Fully refundable to your estate (less any accrued charges). Facilities typically have 14 days to process the refund after receiving probate or letters of administration, though delays can occur if estate paperwork is slow. This creates guaranteed estate liquidity once documentation is complete.
Powers of Attorney: Essential before capacity declines. Enduring Power of Attorney (financial) authorizes aged care decisions including home sales. Medical Power of Attorney covers health decisions. Both should be in place in your 50s 60s, not when care is imminent.
Superannuation Considerations: If using super for RAD funding, review binding death benefit nominations. Super doesn’t automatically go to your estate—the RAD refund does. This can affect tax outcomes for beneficiaries and estate distribution.
Practical Action Steps
Planning Ahead (Age 50-65)
1. Have family conversations about care preferences, home ownership intentions, and values 2. Review financial position – estimate assets at aged care entry age, identify potential RAD funding sources
3. Update legal documents – Enduring Power of Attorney (financial and medical), will, super binding nominations
4. Consider home strategy – would downsizing before care entry be beneficial?
5. Structure for flexibility – work with adviser to optimize asset positioning for aged care means testing
Facing Immediate Decision (Care Entry Now)
Week 1-2: Secure temporary accommodation, contact My Aged Care (1800 200 422), arrange ACAT assessment, gather documentation.
Week 2-4: Visit facilities, request detailed fee schedules, complete Services Australia financial assessment, understand your means-tested costs.
Week 3-6: Work with adviser to model RAD/DAP scenarios, evaluate home sale timing, review Age Pension impact, consider estate implications.
Week 4-8: Choose facility, negotiate RAD if possible (noting that facilities can only negotiate below their published maximum, and only before signing the agreement), decide payment structure, arrange funding, execute documentation.
Important: You typically have 28 days from entry to agree on terms. Extensions may be available for genuine asset sales or settlements. Don’t rush—use the time to make informed decisions.
When to Seek Professional Advice
Contact your financial adviser urgently if you’re:
• Uncertain about keeping or selling the family home
• Facing unexpectedly high means-tested care fees
• Dealing with complex assets (trusts, business interests, overseas property)
• Unclear on super or Age Pension implications
• Experiencing family disagreements on approach
• Being pressured to decide quickly without full information
Your adviser can model scenarios, identify cost-minimization opportunities, and ensure decisions align with your broader financial and estate planning goals.
Conclusion: Planning for Dignity and Choice
Aged care costs represent a significant financial challenge, but informed decision-making ensures quality care while protecting your financial security and family legacy.
Key Principles:
• RAD payments are refundable—a loan, not a lost cost
• Means testing can be optimized through proper structuring
• Home decisions involve both financial and emotional factors
• Early planning provides options that disappear in a crisis
• Professional advice adds significant value given the complexity
Your Next Step
If planning ahead, schedule a conversation with your adviser about aged care scenarios in your retirement plan. Discuss funding sources, means testing implications, and estate planning while you have time to implement optimal strategies.
If facing immediate decisions, contact your adviser urgently. They can model your situation, identify cost-minimization opportunities, and ensure choices align with your broader financial and family goals.
Aged care planning is about maintaining dignity, receiving quality care, and protecting your legacy. With proper guidance, you can navigate this transition with confidence.
References
1. Australian Government Department of Health and Aged Care. “Fees for residential aged care.” My Aged Care. Accessed January 2026.
2. Services Australia. “Aged care fees and charges.” Australian Government. Accessed January 2026.
3. Australian Government Department of Health and Aged Care. “Schedule of Fees and Charges for Residential and Home Care.” Updated regularly.
4. Services Australia. “Means assessment for aged care.” Australian Government. Accessed January 2026.
5. Australian Government. “Aged Care Quality and Safety Commission – Consumer Guide to Fees.” Accessed January 2026.
6. Services Australia. “Income and assets tests for aged care.” Australian Government. Accessed January 2026.
