Have you considered your Post-Retirement Health Care Costs?
By Colin Horwitz
I trust that you and yours have been able to remain safe during these past few months and that you have adapted to the life of a hermit. Personally, I am finding that the hardest part is not being able to enjoy the regular weekly dinners with my family.
But this too shall pass, and then we will have to adapt to the new way of life as the world as we knew it will have changed drastically.
You have been a member of your retirement fund for 25 years. You are now at retirement age … a day you have been looking forward to for the last few years. Let us assume that your gross monthly taxable income in this, your final year of employment, is R35, 000. Your pension is going to be roughly R17, 500 per month before tax. Yes, roughly 50% of what you are used to receiving. If that’s not bad news, here is the “worse” news. This figure is before tax and the monthly contribution of your medical aid. The long and the short of it is …… you are in financial trouble before you have enjoyed the first day of your retirement as at least one third of your income is going to be chewed up to pay your healthcare costs.
Since the late 1990’s soaring medical costs and a change in legislation ensured that most employers took a very close look at their post-retirement healthcare care commitments. Suddenly these commitments had to be valued and reflected as a liability in the financials of the company. What was simply an annual company expense became a frighteningly huge number and many, if not most, employers rushed to find methods to make this go away. Today the majority of employers have adopted a cost-to-company remuneration model which means that they are able to control expenses and their budgets in an efficient manner. The downside to all of this is that the onus to prefund for all your post-retirement needs, including your post-retirement healthcare costs rest squarely on your shoulders.
Unfortunately, the bad news just went from “worse” to “worst”. It is a fact that medical inflation is a lot higher than normal inflation (which for you is most likely a lot higher than what CPI is). Look at this little example. Assumptions used are:
- Inflation (CPI) is stagnant at 6% and this is what you get as an annual increase;
- Medical inflation is stagnant at 9%;
- Initial numbers have no basis;
- All numbers are for illustration purposes only.
Med Aid Contribution
% of Remuneration
Now you may be saying, but if I am earning R153 716 per month I can easily afford the R40 824 medical expense. Not really and here is why. You are retiring after 25 years on the same job. The pension money that you earned whilst working at the previous two companies were spent on education for the children, new TV’s, and a new car. After all you are no different than 95% of all other South Africans. So, as previously stated, your pension only pays 50% of what you were earning at retirement. This means that your pension before tax is R76 858 per month. Let us assume that the tax rate is 20%.
R76 858 – R15371 (tax) – R40 824 (medical costs) = R20 663 Still not bad?
It actually gets worse. Your salary increases were CPI linked so the R153 716 in the future can only buy the same amount of groceries, food, petrol etc. as the R20 000 you were earning 35 years ago ; this is however not the case with medical expenses. The R20 653 disposable income that you have after tax and medical expenses will buy you the equivalent of R2 688 in today’s money.
Now you can see the problem! Unfortunately, here is “utmost worst” news!
This gap will not get better after you have retired. In fact, the chances are it will get worse as you battle to find returns that will allow the pension increase that will enable you to pay your ever-escalating medical expenses.
It is a well-known and documented fact that 60% of life-long medical expenditure takes place during the last five years of a person’s life. As a consequence, medical bills soar after retirement. Already feeling the pinch of reduced purchasing power on a fixed income, pensioners find their medical aid contributions, medicine costs and doctors fees start to climb at an alarming rate.
An ever-increasing proportion of a pensioner’s income is used up by the rising medical costs, their standard of living has to drop and, at the time when they need it most, they could be forced to cancel their medical scheme membership because the premiums have become unaffordable.
With medical expenses soaring and likely to increase even further in the future, can you afford not to save for such costs now? If adequate provision is made, the life-long annuity paid out by a properly structured Retirement Annuity could be used to continue paying for medical aid membership and other medical expenses, ensuring that medical costs are covered for the rest of your life.
My parting shot is that procrastination wastes time and simply put “Time = Money”. Nip this problem in the bud and ensure that you are part of the 5% of South Africans that have a comfortable retirement.
Please note that we welcome any and all interaction and if you would like to find out more regarding how to ensure that the above is not applicable to you somewhere in the future, need a question answered, or need assistance with a personal finance related matter all you have to do is e-mail us at firstname.lastname@example.org. You have our management, professionals, and staff at your service.
Oh… please feel free to pass this document on to whomever you may think can benefit from it.
Kind Regards and stay safe