What to do about mum. It's a big issue for baby boomers faced with decisions about the care of elderly parents just as they are beginning to plan their own retirements. For many people it's their first contact with aged care - and they don't like what they're seeing.

At one end of the retirement spectrum, affluent, younger retirees are driving a boom in lifestyle villages boasting gyms, golf courses, restaurants and 24-hour concierges.

But as people's health deteriorates and their savings run low, their aged-care options start to look less appealing.

The head of retirement living at Australian Unity, Derek McMillan, says the trend is to live at home for longer with the help of in-home services but there has also been strong growth in retirement villages catering to active retirees, some with a nursing home on site.

McMillan says this means people are entering aged-care hostels and nursing homes later in life when they need a higher level of care.

Earlier this year, the Federal Government announced it would create 37,000 new aged-care places. That sounds impressive until you consider the potential demand.

Australians are blessed with the world's second-longest life expectancy. There are 2.8 million Australians aged over 65 and this number is expected to triple in the next 40 years. Of course, not all retirees need residential aged care.

According to the recent Productivity Commission report on trends in aged care services, a third of 65 to 74-year-olds need some form of assistance, either at home or in a special facility, while 86 per cent of those aged 85 or more need care.

Insiders fear there is a crisis looming in terms of the availability, and affordability, of aged care. Unlike low-care hostels, high-care facilities are not allowed to charge an upfront accommodation bond and, because the majority of residents are pensioners paying a subsidised fee, operators say they can't afford to build new facilities. Industry appeals to be allowed to charge a bond have so far fallen on deaf ears in Canberra.

Rachel Lane, an aged-care specialist with financial planner St Andrew's, says the average person requiring care is a woman in her early 80s, recently widowed and on the full age pension.

"The biggest concern once people start looking at aged care is whether or not they can afford to keep the family home," she says (see box).

For the current generation of aged-care residents, the home is often the only asset. However, Lane believes superannuation will give future generations more options, now that super can be taken as a lump sum on retirement.

"Retirees will be able to use their super to fund aged care and preserve the family home," she says.

Count Financial technical services manager, Tim Sanderson, says the first question people need to ask is what type of facility the elderly person is going into, because that will determine the fees.

There are three different forms of retirement accommodation, with three different cost structures: retirement villages for people who wish to live independently, low-care hostels and high-care nursing homes. The last two are referred to as residential aged care and require some form of accommodation bond or charge.

Retirement villages

There are about 1700 retirement villages nationally, with another 300 planned or being built. Units are priced anywhere from $200,000 to more than $2 million, with most available under a loan and licence structure.

Let's say you want to move into a $500,000 retirement villa. Under the loan and licence structure, you lend $500,000 to the village developer in return for a licence to occupy the unit but there is no transfer of ownership.

You then pay a weekly service fee until you die or leave the unit, when the balance of the loan is repaid to you or your estate, after deducting a deferred management fee. This fee covers maintenance and other operating costs and is generally set at 20 per cent to 40 per cent of the then market value of the unit.

When choosing a retirement village, McMillan says people should think about whether they want a continuum of on-site care or just a lifestyle move. Australian Unity is one of a number of operators moving to a co-location model, where an aged-care facility is built within the retirement village.

However, residents need to be aware that retirement villages and residential aged care operate under different legislation and financial models, so moving from one to the other can involve complex financial arrangements.

Lane warns that some villages promote themselves as an aged-care facility when they are really just offering limited services to residents in their own unit. Once residents can't make it to a central dining area and look after themselves, they are asked to move out. She says this is not such an issue in Sydney and Melbourne but is prevalent on the NSW North Coast and Queensland.

Residential aged

Residential aged care is designed for people who are no longer able to live independently. An aged care assessment team will decide if potential residents need low-level care in a hostel or high-level care in a nursing home.

There are about 2900 aged-care homes in Australia. The average age of residents is 83, with an average length of stay of just less than three years. This means elderly people are forced to make complex financial decisions, and difficult emotional adjustments, at a time when their physical and mental health is deteriorating.

All residents entering a hostel or nursing home pay a basic daily fee of up to $32.95 to help cover the cost of meals, laundry and personal care. There is also a daily income-tested fee of up to $25.35 for part pensioners and $58.15 for self-funded retirees. Fees for accommodation and other charges are adjusted in March and September each year.

In addition, residents pay an accommodation bond to move into a hostel, or an accommodation charge for a nursing home, unless it's an extra services facility in which case it may charge a bond. These offer hotel-like services and charge an extra fee on top of the usual nursing-home fees.

Bond amounts vary - from as much as $1 million in wealthy areas of Sydney and Melbourne to as low as $130,000 in some regional areas - but you can't be left with less than $35,500 in assets after paying your bond.

"Bonds are usually negotiated between the provider and the resident," Sanderson says. "Centrelink will do an assets assessment if you need to work out the maximum bond that can apply."

From the bond the care provider deducts a maximum payment of $292 a month for up to five years and the balance is returned when you leave the hostel or to your estate when you pass away.

Pensioners moving into a nursing home pay an accommodation charge of up to $21.39 a day, while self-funded retirees pay up to $26.88 a day.

Avoid the traps

If you are looking into aged care for yourself or family, then it is worth seeking financial advice because of the complex interaction between a resident's assets, cost of care and age-pension entitlements.

Lane says families often jump in and sell the family home to pay an accommodation bond and put the rest in a term deposit. The upshot is that they have traded a non-assessable asset for assessable income and mum loses some or all of her age pension.

"One issue we face is that a full pensioner can't afford the cost of living in a nursing home," says Lane. The age pension barely covers the ongoing cost of accommodation, let alone incidental living costs. And because a single pensioner can only earn $3588 a year before they begin to lose 40 cents in the dollar from their pension, they need to think carefully about how they structure their finances.

"The biggest trap is only thinking about funding the bond and the daily care fee and not considering the income-tested fee," says Lane.

This is a common oversight because the Government doesn't assess new residents for the income-tested fee until a month after they move in, by which time irreversible decisions have been made about the family home.

A free financial service is offered through Centrelink on 13 23 00.

For information on aged-care fees and charges, contact the Department of Health and Ageing's Aged Care Information Line on 1800 500 853 or see health.gov.au.

Good planning

Judy Fairbanks tells a familiar story. For years, her 92-year-old mother, Agnes, resisted suggestions that she move into residential aged care until the decision was finally made for her.

"In the six years since Dad died she'd been living alone and struggling, with a lot of help from me," Fairbanks says.

The crunch came when Agnes was in hospital with heart failure. When it came time to leave, the hospital said she was no longer able to look after herself and would have to go into respite care until the family could find suitable accommodation for her.

Fairbanks had her eye on a new extra-services facility at Georges Hall in south-western Sydney, a few minutes from her home. As a former nurse she knew what to look for in a good nursing home but she sought financial advice from financial planner Rachel Lane, the Department of Veterans Affairs and from the facility itself.

Agnes had a small amount of money invested but not enough to finance her accommodation bond, so the family decided to sell her modest home.

Renting it was ruled out because Fairbanks knew she and her husband would be responsible for looking after it. "We've been looking after his mother and my mother for a long time, we're both exhausted," she says.

Fairbanks was advised that by paying a higher bond than required, they could reduce the extra-services fee and not have to pay the $292 a month that is otherwise deducted from an accommodation bond. When Agnes leaves the home, the bond will be fully refunded.

Agnes still receives a full pension, which covers her daily fee, and uses the income from her remaining investments to pay for things like clothes and having her hair done.

"She's close to me so I can see her every day and she seems to be enjoying it," Fairbanks says. "It's worked out well for us."

How to maximies centrelink benefits

One of the hardest decisions faced by people moving into aged care is whether to sell their home to pay an accommodation bond or keep it and rent it out to supplement their income. The decision can have a big impact on their age-pension entitlement as the following example shows.

Anne is moving into a hostel with an accommodation bond of $250,000. She owns her home valued at $500,000 and has $300,000 in the bank.

If Anne sells her home and pays the accommodation bond up front, she will be left with $550,000 in assets. Because these are all assessable under the Centrelink income and assets tests, her pension will immediately reduce to $181 a fortnight.

However, if Anne keeps her former home then she can take advantage of two powerful exemptions under the Centrelink assets and income tests.

If Anne pays the bond up front and keeps her home, it will remain exempt from the assets test for two years.

This means that she will be entitled to the maximum age pension of $562 a fortnight for the first two years.

However, when the exemption ends, her pension will reduce significantly to about $181 a fortnight.

Alternatively, if Anne pays at least part of the bond as periodic payments and rents out her former home, it will stay exempt from the assets test and rental income will be exempt from the income test indefinitely.

It's worth keeping periodic payments to a minimum because interest charged on these payments is set at 11.31 per cent.

For example, if Anne pays all but $1000 of her bond upfront and then pays the remaining $1000 in periodic payments, she would be entitled to the full age pension as her assessable assets are only $51,000 (after deducting $249,000 of her accommodation bond from her $300,000 cash in the bank). What's more, rental income would not be included for income-test purposes.

By using this exemption, Anne has not only been able to retain her home but has also maximised her pension entitlement.

Another benefit for residents taking advantage of this second exemption is any rental income is not counted when calculating the income-tested fee.

Source: Count Financial.