Aged Care Costs and Your Retirement Plan
Aged care is one of the most significant and least-planned-for expenses in retirement. With accommodation deposits reaching $1,000,000 or more in major cities and ongoing daily fees adding up quickly, understanding the costs now can save enormous stress later.
Understanding the Fee Structure
Aged care in Australia involves multiple layers of fees, some of which are fixed and others that depend on your financial situation. The system can feel overwhelming, but breaking it down into its components makes it more manageable. Whether you're entering residential aged care or accessing home care, the fees follow a structured framework set by the Australian Government.
The key fees for residential aged care include the basic daily fee, accommodation costs, means-tested care fees, and additional service fees. Each serves a different purpose and is calculated differently. The basic daily fee is standard for all residents, while accommodation and care fees vary based on your assets and income.
It's worth noting that the aged care system underwent significant reforms with the new Aged Care Act taking effect from 1 July 2025, replacing the previous Aged Care Act 1997. While the fundamental fee categories remain similar, some thresholds and calculation methods have been updated.
The Four Main Aged Care Fees
- Basic daily fee: Everyone pays this -- approximately $61 per day (85% of the single Age Pension)
- Accommodation costs: RAD (lump sum) or DAP (daily payment), or a combination
- Means-tested care fee: Based on your income and assets assessment
- Additional services fee: Optional extras like premium meals or pay TV
Accommodation Costs: RAD vs DAP
The biggest upfront cost of residential aged care is accommodation. Depending on your financial assessment, you may be asked to pay a Refundable Accommodation Deposit (RAD), a Daily Accommodation Payment (DAP), or a combination of both. The choice between RAD and DAP has significant financial implications.
Refundable Accommodation Deposit (RAD)
The RAD is a lump-sum payment that functions like an interest-free loan to the aged care provider. The amount varies enormously depending on the facility and location. In metropolitan areas of Sydney and Melbourne, RADs of $500,000 to $1,000,000 are common for quality facilities. Regional areas tend to be significantly cheaper, with RADs of $200,000 to $400,000.
The critical advantage of a RAD is that it is fully refundable when you leave the facility (less any agreed deductions). Your estate receives the full RAD amount back, which means it preserves your capital for beneficiaries. However, tying up hundreds of thousands of dollars means foregoing investment returns on that capital.
Daily Accommodation Payment (DAP)
The DAP is the rental alternative to the RAD. Instead of a lump sum, you pay a daily amount calculated using the Maximum Permissible Interest Rate (MPIR) set by the government. The DAP is not refundable -- once paid, that money is gone.
Example: RAD vs DAP Comparison
A facility advertises a RAD of $550,000. If the MPIR is 8.38%:
Full RAD: Pay $550,000 upfront (refundable on departure). No daily accommodation charge.
Full DAP: Pay $550,000 x 8.38% / 365 = approximately $126 per day ($46,090 per year). Not refundable.
Combination: Pay $300,000 RAD + DAP on remaining $250,000 = approximately $57 per day ($20,950 per year).
If the resident stays for 3 years, the DAP option costs $138,270 in non-refundable payments. The RAD option costs nothing ongoing (but the $550,000 could have earned investment returns elsewhere).
Means-Tested Care Fees
The means-tested care fee is an additional daily charge based on your combined income and assets assessment, conducted by Services Australia (Centrelink). This assessment determines how much you can afford to contribute towards the cost of your care, with the government subsidising the remainder.
The assessment considers your income (including deemed income from financial assets) and your assets (including your home in certain circumstances, super, investments, and other property). If you're a member of a couple and only one partner enters care, the assessment is adjusted to account for the partner remaining at home.
The family home: If your spouse or dependent continues to live in the home, it is excluded from the assets test. If the home is vacant, only a capped portion of its value is included ($197,735.20 for 2024-25). This capping of the home value can significantly reduce means-tested fees for homeowners.
There are annual and lifetime caps on means-tested care fees to protect residents from unlimited costs. For the 2024-25 year, the annual cap is approximately $33,309 and the lifetime cap is approximately $79,942. Once you reach these caps, you don't pay any further means-tested care fees.
Home Care as an Alternative
Many Australians prefer to age in place, receiving care services at home rather than moving into residential care. The Commonwealth Home Support Programme (CHSP) and Home Care Packages (HCP) provide varying levels of support, from basic help with daily tasks to comprehensive care.
Home Care Packages are divided into four levels based on care needs:
- Level 1: Basic care needs -- approximately $9,500 per year in government subsidy
- Level 2: Low-level care needs -- approximately $16,800 per year
- Level 3: Intermediate care needs -- approximately $36,500 per year
- Level 4: High-level care needs -- approximately $55,500 per year
Home care recipients pay an income-tested care fee and a basic daily fee, similar to residential care but generally at lower amounts. The cost of home care can be significantly less than residential care, though this depends on the level of support required and whether family members can assist.
How Super and Pension Assets Affect Fees
Your superannuation balance directly affects your aged care fees through the means-tested assessment. Super held in an account-based pension is counted as a financial asset, and deemed income is applied regardless of your actual investment returns. Accumulation-phase super is also counted as an asset.
This creates an important planning consideration: the more super you have, the higher your means-tested care fees are likely to be. Some strategies that are beneficial for retirement living (such as maximising super) can increase your aged care costs.
If you receive the Age Pension, entering aged care can affect your pension entitlements. The family home may be treated differently for aged care purposes compared to Age Pension purposes, and the interaction between the two systems needs careful analysis.
Planning Ahead: Key Considerations
- Start researching aged care options and costs well before they're needed
- Understand how your home, super, and other assets affect fees
- Consider the RAD vs DAP choice in the context of your overall financial position
- Factor in potential aged care costs when planning your retirement drawdown strategy
- Discuss preferences and financial arrangements with family members early
- Seek specialist aged care financial advice when the time approaches
How Talk Through Wealth Helps
Aged care is one of the most complex financial planning areas in retirement. Talk Through Wealth helps you model potential aged care scenarios so you can plan with confidence.
- Estimate potential aged care costs based on your assets and income
- Compare RAD vs DAP options using your specific financial circumstances
- Model the impact of aged care costs on your overall retirement plan
- See how different drawdown strategies affect potential means-tested fees
- Project whether your retirement savings can sustain a period of aged care
Plan for Aged Care Before You Need To
Model potential aged care costs and build them into your retirement plan.
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