Comprehensive medical cover and retirement

It is a dilemma faced by many retired South Africans. Health needs versus the ability to pay.  During your active working life your ability to pay for medical aid cover far exceeds your health needs on average, but when you move into retirement your income is fixed and often your health needs greatly exceed your ability to pay for it.

This situation is depicted in the graph below.

Screen Shot 2015-03-23 at 5.19.20 PM

Source: Alexander Forbes (Age is shown on the horizontal axis.)

Speaking at the Ready Set Retire Conference hosted by Alexander Forbes, Anthea Towert, health funding expert, said unfortunately there is no easy solution to this problem.

It requires that investors save for their medical aid cost and contributions in retirement, prior to retirement (prefunding), she said.

The case of John

To illustrate how this could work – Towert used a case study.

The main member is John, a 55-year old married male with a spouse four years his junior. He is due to retire at the age of 65 and will carry the full costs of his medical aid contributions in retirement.

Towert said the assumption is that medical scheme contributions are increasing by CPI plus 4% a year and that any pre-funding John is able to do would increase by CPI plus 1% with a return of 4% above inflation.

Although the assumptions are fairly conservative, it is realistic, she said.

If John were to set aside a lump sum at the age of 55 (today) to prefund for comprehensive cover in retirement (and not add to it for the next ten years until he retires at 65), he would need R1.5 million to invest.

To prefund for medium cover, he would need R850 000 today and for basic cover a R630 000 lump sum would be needed, she said.

Unfortunately there are very few South Africans with the financial means to invest large lump sums to provide for their retirement health needs prior to retirement.

Towert said if John wanted to start making a monthly contribution today (at age 55) for the next ten years to provide for a comprehensive level of cover in retirement, it would cost him R15 200 a month. For medium cover it would be R8 400 a month and for basic cover R6 200 a month.

This suggests that even monthly contributions over a relatively short period of time, could still be beyond the reach of many South Africans.

Towert said when considering to set aside money for healthcare in retirement an important consideration to bear in mind is the investment return, as medical inflation is running at 4% above CPI on average.

Investors need to be able to generate an investment return on their prefunding money that is at least equal to medical inflation (if not more than that), she said.

If John is able to invest in a vehicle that provides him with a return of CPI plus 6%, as opposed to CPI plus 4%, he would be able to reduce his monthly contributions by as much as 28% over the ten-year period, she said.

“Investment returns are an important consideration when you are looking to prefund for your retirement.”

Out of reach

These numbers are quite daunting and many investors may feel overwhelmed by their situation.

Towert said currently private healthcare cover is preferred to public health and it will likely be the situation for at least another ten years as National Health Insurance (NHI) still has some way to go before it can replace private healthcare cover.

Until such time as the NHI becomes a reality, South Africans will likely have to go the private funding route. However, there are some tweaks they can make to provide for medical care in retirement, she said.

Steps to take

Towert said the first step is to understand your current healthcare needs.

“Choose an option today that meets your health risk but don’t over-insure,” she said.

If John today at age 55 was on a medium option as opposed to a comprehensive plan, he could save R3 000 a month, which he could invest in a pre-retirement, prefunding vehicle in order to invest for his post-retirement medical aid contributions.

Secondly, maintain a healthy lifestyle for as long as you can, Towert said.

It may not be necessary to be on a comprehensive medical scheme the day you retire. It depends on your personal circumstances.

If you are able to eat healthily, exercise and keep yourself healthy, you can delay the point at which you would need to purchase comprehensive cover, she said.

Thirdly, save as much as you can now – every little bit will help, she said.

And lastly, work for longer. Get a second job, do some consulting work or do the books for an organisation – something that generates an income.

Towert said if John delayed his retirement by five years and instead of retiring at 65, delayed his retirement to 70, the lump sum he would need for medium cover would reduce by 19%.