Factoring medical costs into your retirement

The importance of saving for retirement is something often stressed by financial advisors. The later you leave your retirement planning, the more you will have to contribute towards it each month. While some of your expenses may fall away when you retire, there are those that may increase.

Medical costs as you get older often increase due to poorer health. These costs should form a part of your financial plan for retirement.

Saving for retirement

Boitumelo Mothoagae, a financial advisor at Liberty, highlighted you should start saving from your first pay check. “The earlier you start saving for retirement, the cheaper it will be for you, and the higher your returns will be due to compound interest. The later you leave starting to plan for retirement, the more you will have to pay and the returns may not be as high.”

Your retirement income will have to be about 75-80% of your annual package from the previous year for you to maintain your lifestyle, according to Mothoagae.

Among the retirement expenses you should consider and plan for are:

• Debt – Ensure that all your debt is paid off before you retire.
• Transportation – When it comes to retirement you may need to consider getting a small, more fuel efficient car as you likely will no longer need the larger family car. “This will also lessen your expenses. In addition, you do not want to have an old unreliable car when you are older as mechanical breakdowns may erode your capital,” said Mothoagae.
• Household expenses – This will include things such as rates and taxes. These are the monthly costs that may not change if you keep your house. Therefore if they are high, you will have to ensure that you can afford to pay them. Downsizing to a smaller property may be one way to reduce these expenses.
• Living expenses – Including things such as food, clothing and entertainment, this relates to your lifestyle. In order to maintain your lifestyle, you will have to determine how much of your budget should be going to these expenses.
• Insurance – There are certain insurance products that will expire when you retire, such as disability cover. However, you may need to take extra cover to ensure that you have cover if you require it. Short term insurance for your movable assets will have to be kept in place, noted Mothoagae.
• Family – Since some people are having children later in life, education and maintenance may still be a cost in retirement. This means that you will have to plan for this. Also if you have children with special needs who are financially dependent upon you, you will have to ensure that you can still take care of them post-retirement.

Planning for your medical expenses

In addition to the costs mentioned above, medical expenses should also be factored into you retirement savings plan.

“Planning for medical care post-retirement is very important, as the older you get, the higher the cost of your medical insurance. The reason for the increased cost is that older people are considered a higher health risk than younger people. Therefore it is important that when you are younger, you take care of your health, and that as you get older you maintain that healthy lifestyle.

“Some medical aids pay for medical care in retirement. This means that they continue to subsidise your medical aid contribution after you have stopped working in retirement,” explained Mothoagae.

If you do not have a post-retirement medical aid subsidy, healthcare should form a part of your pre-retirement planning. Mothoagae pointed out that some providers offer medical prefunding which enables individuals to plan for post-retirement medical expenses.

“Review your medical planning with every change in health that you experience in the pre-retirement years. For example, if you develop a chronic condition pre-retirement, you will have to ensure that the costs for the maintenance of the chronic medication will have to be considered in your planning. As you get older, go for your annual check-ups in order to ensure that you do not have any underlying health issues that you are unaware of, and secondly that any major health issues are picked up early and resolved. By knowing your medical status well, you put yourself in a better position to plan,” elaborated Mothoagae.

Furthermore, Mothoagae highlighted that in the five to ten years before retirement, you should look at the following with regards to your medical aid cover:

• Will your company medical aid cover you post-retirement?
• If they do cover you will it be comprehensive or will you have to contribute?
• What are you paying pre-retirement and how much will you have to pay for cover post retirement?
• What is the health-care inflation? (usually 2-3% higher than normal inflation) – This is important because it will determine whether you run out of savings for health-care quickly.
• What is the probability of you requiring long-term care post-retirement?

Financial products to consider

When planning for your retirement, it is important to consult a qualified financial advisor to help you determine how much you should save towards your retirement, as well as how much money you will likely need in retirement. Once this has been determined, you can look at the types of savings vehicles you can use to save for your retirement.

Mothoagae highlighted three financial products you can consider utilising pre-retirement. These are:

• Retirement annuities –A retirement annuity is a tax efficient savings plan that is used to save towards your retirement. The savings are only accessible after age 55 and are protected from attachment by creditors.
• Endowments – An endowment is a medium or long term savings vehicle that may be used to save for any financial goal. It is more beneficial if your marginal tax rate is higher than 30%, because it is taxed at the five funds tax rate (currently at 30%). It can be attached by creditors and has a five year restriction period.
• Unit trusts – This is a flexible collective investment savings vehicle that is most suited to an investor who wants high returns with managed risk. It is easily accessible and can be attached by creditors.

Mothoagae concluded: “People are living longer in modern times than they used to in the past – this is as a result of improved medical technology. However this technology comes at a cost, which means that planning for medical costs has to take this into consideration.

“In addition, when planning for retirement, you need to bear in mind that your pre-retirement years may be shorter than your post-retirement. Therefore your planning needs to be extensive and will require the assistance of professionals – such as financial advisers – to ensure that you do not have shortfalls in your savings post-retirement.”

 Handy tip: You can apply for retirement planning on Justmoney.