Aged Care: Planning Ahead for the People Who Matter
Part 3: What Does Aged Care Really Cost?
Imagine two families preparing for exactly the same decision. Both have an ageing parent who needs residential aged care, both are considering facilities offering a similar standard of accommodation, and both want to ensure their parent receives appropriate care without unnecessary financial pressure.
Yet when the families begin discussing costs, they discover that the amounts they may be required to pay are quite different.
One parent owns a valuable family home but has relatively little income outside the Age Pension. The other has sold their property, holds substantial savings and receives income from investments. Their care needs may be similar, but their financial circumstances can produce different outcomes when aged care fees and accommodation payments are calculated.
This is one of the reasons I believe families should understand the financial side of aged care well before making major decisions. There isn't a single price that applies to everyone, and the amount advertised for a room is only one part of the overall picture.
In the first two articles of this series, I explored why families should begin planning before circumstances become urgent and where to start when Mum or Dad needs additional support. This week, I want to look more closely at the question that often creates the greatest uncertainty: what does aged care actually cost, and how do you work out what your family may need to pay?
Why aged care doesn't come with one simple price
When we think about the cost of accommodation, we're generally accustomed to relatively straightforward arrangements. A rental property has a weekly rent, a hotel has a nightly rate, and a retirement apartment has a purchase or occupancy arrangement with associated charges.
Residential aged care is different because the financial arrangements generally involve several components, each serving a different purpose.
There are costs associated with everyday living, such as meals, cleaning and laundry. There may be contributions towards personal care and other services, depending on the resident's financial circumstances. There is also the cost of accommodation, which can be met through different payment arrangements.
The Australian Government subsidises aged care, but that doesn't necessarily mean every resident pays the same amount. Services Australia assesses income and assets to determine whether an individual is required to contribute towards certain costs and whether government assistance is available for accommodation.
An important development is that the aged care funding arrangements changed on 1 November 2025. Many people entering residential care after that date are covered by the newer arrangements, although transitional protections mean some residents continue under earlier rules.
For this reason, I would be cautious about relying on figures or advice from someone whose parent entered aged care several years ago. Their experience may have been entirely accurate at the time, but the rules applying to your family could be different.
The everyday cost of living in residential care
Let's begin with the most straightforward component: the basic daily fee.
This is a fee paid by residents towards everyday living expenses, including meals, cleaning, laundry and utilities. It is linked to 85 per cent of the single basic Age Pension rate and is adjusted periodically.
Using a rounded illustration of $69 a day, the basic daily fee alone would amount to approximately $483 a week, or just over $25,000 a year.
That is not a quotation of the current fee, which changes over time, but it gives families an idea of why daily charges deserve attention when preparing a longer-term budget.
Under the newer aged care arrangements, some residents may also be required to pay a hotelling contribution. Despite the unfamiliar terminology, this is essentially an additional contribution towards everyday living services, calculated according to the person's financial circumstances.
There may also be a non-clinical care contribution, which applies to certain residents who have sufficient income or assets. This contributes towards services such as assistance with personal activities and other non-clinical care.
The non-clinical care contribution has daily and lifetime limits, including a four-year payment limit under the newer arrangements. The hotelling contribution has a daily limit but no equivalent lifetime cap.
These distinctions matter because families sometimes assume that a single advertised daily fee represents the total ongoing cost. Depending on the person's means assessment, there may be additional contributions to consider.
The important question is not simply what each fee is called, but which fees apply to your parent and how those payments will be funded over time.
The accommodation question: RAD or DAP?
Accommodation is often the part of aged care funding that creates the greatest confusion.
Families may encounter room prices expressed as substantial lump sums, sometimes several hundred thousand dollars, and understandably wonder whether they are expected to find that money immediately.
For residents who are required to meet the full accommodation price, there are generally different ways to pay.
One option is a Refundable Accommodation Deposit (RAD). This involves paying an agreed lump sum towards the accommodation cost. Under the newer arrangements, the remaining balance is refundable when the resident permanently leaves care, after applicable retention and other permitted deductions.
Another option is a Daily Accommodation Payment (DAP). Rather than paying the full amount upfront, the resident pays an ongoing daily amount calculated using the agreed accommodation price and the applicable government-set interest rate.
A third option is to combine the two, paying part of the accommodation price as a refundable deposit and the remainder through daily payments.
For example, imagine an aged care room with an agreed accommodation price of $500,000.
A family might consider paying the full amount as a RAD, retaining the funds elsewhere and meeting the accommodation cost through a DAP, or paying a partial RAD and a smaller daily payment.
Each approach has different implications.
Paying a larger lump sum reduces the daily accommodation payment but ties up capital that might otherwise be available for other purposes. Paying daily preserves more accessible capital initially but creates an ongoing expense. A combination may provide a balance between the two, depending on the resident's circumstances.
Under the newer arrangements, RADs and refundable accommodation contributions can also be subject to retention deductions, generally calculated at 2 per cent annually for up to five years. Daily accommodation payments are also subject to indexation under the applicable rules.
This means families should not assume that a refundable deposit will necessarily be returned in full, or that a daily payment will remain unchanged indefinitely.
The choice between these arrangements deserves careful consideration because the most suitable option is not always the one that appears cheapest at first glance.
What if Mum or Dad doesn't have enough money for a large deposit?
One of the concerns families raise is whether residential aged care is only available to people who can afford a substantial accommodation deposit.
That is not how the government-supported system is intended to operate.
Residents with limited financial means may qualify for government assistance with accommodation costs. Depending on their assessment, they may be required to pay an accommodation contribution rather than the full accommodation price, or the government may meet the relevant accommodation cost.
The amount and payment arrangements depend on the individual's financial circumstances and applicable rules.
This is why completing the financial assessment is so important. It helps establish which contributions may be payable rather than leaving families to make assumptions based on a facility's advertised room price.
It is also worth remembering that families should consider the suitability and quality of care alongside affordability. The cheapest arrangement is not necessarily the most appropriate, just as the most expensive facility is not automatically the best choice.
The objective should be to identify care that meets the person's needs and understand how the associated costs can be managed sustainably.
The family home can change the calculation
For many older Australians, the family home is their largest asset, and the question of what to do with it can quickly become central to the aged care discussion.
A parent may have lived in the same property for forty or fifty years, with very little debt and substantial equity, but relatively modest income.
On paper, they may appear financially comfortable. In practical terms, however, most of their wealth is tied up in an asset that doesn't necessarily produce income to meet ongoing care costs.
This can create a difficult decision for the family.
Should the property be sold to release capital? Could it be retained and rented out? Would using other savings to fund accommodation be more appropriate? And what happens if a spouse continues living in the home?
There is no universal answer.
The treatment of the family home under aged care means testing can depend on whether certain people, such as a spouse or another qualifying protected person, remain living there. Different rules can also apply when assessing Age Pension entitlements.
These distinctions can have significant consequences.
A decision to sell the home may change the resident's assessable assets, income and pension position. Retaining it may preserve flexibility or future options, but could involve maintenance, insurance, management costs and the need to fund accommodation through other means.
Renting out the property introduces another set of considerations, including rental income, taxation and the interaction with government assessments.
I think this is where families can unintentionally make decisions in the wrong order. They assume that selling the home is necessary to pay for aged care, arrange the sale and only afterwards investigate whether another funding approach might have been suitable.
Before taking that step, I would encourage families to understand the financial consequences of the available alternatives.
We'll explore this question in greater detail in Part 4 of the series because the family home deserves more than a passing mention in any aged care financial plan.
A simple illustration of why the details matter
Consider a hypothetical resident whose basic daily fee is approximately $69 and whose accommodation arrangement involves a daily payment of $100.
Before any additional means-tested contributions or optional services, those two costs would amount to approximately $169 a day.
Over a year, that is roughly $61,700.
If the resident also has to pay a hotelling contribution, a non-clinical care contribution or other agreed charges, the annual cost could be higher.
Now consider a different resident who pays a substantial accommodation deposit upfront, reducing or eliminating their daily accommodation payment. Their regular cash-flow requirements may be lower, but a considerable amount of capital is committed to the accommodation arrangement, and applicable retention deductions must still be considered.
Neither example tells us which person is financially better off.
To answer that question, we would need to understand their other assets, income, pension entitlements, expected care costs, available capital and broader family circumstances.
The figures are deliberately simplified and are not intended to represent a particular facility or an individual fee assessment. Their purpose is to show why looking at one daily charge or one accommodation price in isolation can be misleading.
For families, the more useful exercise is to calculate the likely annual cash-flow requirement, identify how it will be funded and consider how the arrangement may affect financial security over several years.
What happens to the Age Pension?
Another area that deserves attention is the interaction between aged care arrangements and Age Pension entitlements.
A person entering residential care does not automatically lose their pension. However, changes in their income, assets, living arrangements or the treatment of their home can affect what they receive.
For couples, the situation can become particularly important when one spouse enters residential care and the other remains living independently.
The couple may face additional expenses associated with maintaining two living arrangements, while their pension assessment and aged care contributions may also change.
Decisions about accommodation payments, selling property or restructuring investments should therefore be considered in the context of the person's overall financial position, rather than solely as a way of meeting an immediate aged care expense.
This is one reason I believe the financial assessment and appropriate advice should be part of the planning process before major assets are sold or funds are committed.
The real question is whether the arrangement is sustainable
When families begin comparing aged care costs, it is natural to concentrate on the amount they need to pay when their parent first enters care.
But residential aged care may continue for several years, and the financial arrangements need to remain manageable as circumstances change.
Income from investments may fluctuate, pension entitlements may be reassessed, and ongoing expenses can increase. A spouse remaining at home may have their own living costs and financial needs, while unexpected personal expenses can still arise.
I would encourage families to consider not only whether an accommodation arrangement can be funded today, but how it might affect the older person's financial flexibility in the years ahead.
That may involve reviewing expected income, maintaining accessible savings, understanding the applicable fee limits and considering what happens if the person's circumstances change.
It is also worth asking providers for a clear explanation of all applicable fees and optional services, including what is included in the standard arrangements and what would attract an additional charge.
The financial paperwork may seem less urgent than choosing a suitable room or arranging a move, but it is an essential part of making a well-informed decision.
Understanding the costs before making the commitment
What I find most important about aged care financial planning is that it allows families to move beyond the immediate anxiety of unfamiliar figures and begin making decisions with a clearer understanding of the consequences.
A $500,000 accommodation price may sound overwhelming until the family understands the different payment arrangements. A daily fee may appear manageable until it is considered alongside other contributions and calculated over a full year.
Equally, a family home that seems to provide an obvious source of funding may deserve closer examination before anyone decides to sell it.
The objective is not simply to minimise every fee. It is to find a financial arrangement that supports appropriate care, preserves reasonable flexibility and reflects the older person's circumstances and preferences.
As we approach the end of the year, I would encourage families who are beginning to explore residential aged care to take the time to understand these financial arrangements before committing to significant decisions.
You don't need to become an expert in every aspect of the aged care system, but you should feel comfortable asking how the fees have been calculated, what alternatives are available and how the proposed arrangements may affect your parent's longer-term financial position.
The cost of aged care is not always straightforward, but the decisions become easier to approach when the different components are understood.
And sometimes, the most valuable part of financial advice is not simply calculating what someone will pay. It is helping a family understand the choices available before they make a decision that may be difficult to reverse.
If your family is considering aged care and you would like to understand the financial implications, particularly around accommodation payments, the family home or retirement income, you're welcome to reach out to me directly on LinkedIn for a confidential conversation.
Next in our aged care series: Part 4, Should We Sell Mum's House to Pay for Aged Care?
General information only. This article does not take account of individual objectives, financial circumstances or needs. Aged care fees, accommodation arrangements and government entitlements depend on personal circumstances and the rules applying to each resident. Figures are illustrative and are not individual fee quotations. Consider obtaining appropriate financial, legal and aged care advice before making significant decisions.