The older we get, the more likely it is that we will need expensive medical treatment, David Bombal, the business development manager for Old Mutual Healthcare, the administrator of Oxygen Medical Scheme, says. At a recent meeting of the Personal Finance/Fairbairn Capital Investors Club in Cape Town, Bombal discussed how much money we may need to cover our healthcare expenses in retirement, and how to plan now to ensure we can meet those expenses.
If medical inflation continues to outstrip inflation by three percentage points a year, people who are 35 years old today could be spending up to a third of their pensions on healthcare when they retire, David Bombal says.
Bombal says medical inflation is currently 10.5 percent, which is 6.1 percentage points higher than CPIX, an inflation measure which was 4.4 percent for the year to April.
The large difference between the two inflation rates is fuelled, he says, by the rand-United States dollar exchange rate and constant advances in medical technology, which raise the price of diagnostics, medicines and other healthcare expenses.
High medical inflation is only one of three reasons why you must start providing now for your post-retirement healthcare needs.
In the past, many employers continued to subsidise the medical scheme contributions of their employees after they retired. However, it is becoming increasingly rare to find an employer who offers a post-retirement medical scheme subsidy, and those that do so are moving to limit these subsidies.
Secondly, after you retire you will need healthcare cover more than before - the average person incurs about 60 percent of his or her lifetime's medical expenses after age 60.
Retirement is also the time in your life when you usually receive a fixed income from a pension. You need to be sure that you have adequate cover to pay for the medical catastrophes that may befall you.
For example, Bombal says, heart bypass surgery in a private hospital can cost you up to R150 000 at today's prices if there are no complications. A kidney transplant can cost you R80 000, but before you get the kidney you may have to wait up to five years and undergo expensive regular renal dialysis treatment. After the transplant, Bombal says, you will need to take immunosuppressive medication to prevent your body rejecting the kidney - this could cost as much as R12 000 a month.
Since health problems can result in such high bills, you must be sure that you are adequately covered for this kind of expense, Bombal says.
You can either take a one in 13 983 816 chance that you will win the lottery and retire with enough money for your healthcare expenses, he says, or you can start planning now.
Planning for medical expenses
Provision for your post-retirement medical expenses should be included in your current retirement plan, Bombal says.
At the same time, you should be aware that because medical inflation is higher than regular inflation, your medical expenses may grow faster than your retirement fund.
You can use a tax-deductible vehicle, such as a retirement annuity (RA) or a pension or provident fund, to accumulate capital for your post-retirement medical expenses, or you can invest after-tax money in savings vehicles such as endowments or unit trusts.
To give you an idea of how much you will need to save, Bombal considered two examples:
- A single person who currently enjoys unlimited private hospital cover and R3 500 of day-to-day medical cover (for visits to a general practitioner, optometrist, dentist and for acute medication) per year. The cost of this cover on Oxygen is about R900 a month.
- A couple who currently enjoy unlimited private hospital cover and R6 000 of day-to-day cover per year. The cost of this cover on Oxygen is about R1 600 a month.
To illustrate how much these people would need to save to cover these contributions in their retirement, Bombal made the following assumptions:
- The person or the couple live for 15 years after retiring at age 65 (15 years is mid-way between the current 17-year average life expectancy of women aged 65 and the 13-year average life expectancy of men aged 65).
- They receive an annuity income from a capital lump sum which grows by 10 percent a year.
Working on these assumptions, Bombal says, the single person now aged 65 would need to have R165 000 in capital to cover his or her medical scheme contributions, while the couple would need R290 000.
However, should the single person now be aged 50, he or she would need to set aside by age 65 an amount equal to R680 000 in today's terms. A couple now aged 50 would need R1.2 million.
A younger person of 35 years of age would need R2.8 million to fund his or her post-retirement medical expenses, while a couple aged 35 would need R5 million.
Click here to find out how much capital you need to save, relative to how old you are, to fund your healthcare expenses in retirement.
Bombal says the longer you wait before you start saving for your post-retirement medical expenses, the more money you will need to put away each month.
If you start saving to accumulate R600 000 for your post-retirement medical needs when you are 30 (35 years from retirement at 65), and you get a return of 10 percent a year on your savings, you will only need to put away R177 a month. But if you only start saving when you are 60 years old (and you are five years from retirement), you will have to save R7 837 a month.
Tax relief
In planning for your medical expenses after retirement, Bombal says, you should be aware of the tax relief that is available.
Before the age of 65, tax deductions for medical expenses are limited, because you can only claim for medical expenses which exceed five percent of your taxable income. Medical expenses include your contributions to a medical scheme as well as any medical expenses not covered by your scheme.
If you have a physical disability, you can claim all the costs you incur as a result of the disability.
When you reach the age of 65, however, you can claim all your medical expenses against your taxable income.
Bombal says currently it is possible for people over the age of 65 to get double tax relief. This can be achieved by contributing to an RA and then using the annuity income to pay medical expenses. The money going into the RA is tax-deductible and you can continue contributing to an RA until the age of 69. Then the money you receive from the RA as a monthly pension can be used to pay for tax- deductible medical expenses.
Good news
Bombal says some proposed changes to legislation are likely to have a positive impact on the cost of your post-retirement medical scheme cover.
He says these changes are:
- The introduction of the risk-equalisation fund. This fund is expected to equalise the cost of providing a basic package of benefits across all medical schemes. It will mean that schemes with more older and sicker members will not face higher costs for providing these basic benefits than schemes with healthier members.
- The medicines pricing regulations, which, after an initial bumpy introduction, are expected to reduce the cost of medicines.
- The government's long-term plan to make medical scheme membership mandatory for everyone who can afford it. This will increase the number of medical scheme members and reduce the financial risks that medical schemes face.
- The proposed government medical scheme for state employees, which is expected to increase medical scheme membership, introduce more affordable cover and possibly improve the services of state hospitals.
Nevertheless, Bombal says, you should be aware of the increasing cost of post-retirement medical care and of the need to draw up a comprehensive plan to provide for your needs.
Once you have a plan in place, he says, make sure you constantly revise it in line with developments in the government's healthcare policy and the medical schemes industry.