What Comprehensive Medical Cover Means in Retirement
It is a fact that most people’s health needs increase when their ability to pay for them decreases. So while living a healthy, active life, working and earning a living, most people can afford to pay for health care. But when they go into retirement and really need health care, their needs generally surpass their ability to pay medical and health bills.
Alexander Forbes recently hosted a conference, Ready Set Retire, at which a health funding expert, Anthea Towert conceded there were no easy solutions. However if people saved for future medical aid contributions and costs they would be covered in retirement. This was, in essence, prefunding medical aid contributions, she said.
Towert used a case study to make her point.
AntheaTowert’s Prefunding Medical Aid Costs Case Study
John Smith is the main member, 55 years old and married to a woman of 51. When he retires in 10 years time he will cover his own medical aid contributions.
Her conservation but realistic assumption was that contributions to the medical aid fund would increase by the consumer price index (CPI) plus four percent per annum, and that any prefunding Smith was able to do would increase by the CPI plus one percent, promising a return above inflation of four percent.
To be able to prefund for sufficient comprehensive medical cover during retirement at age 55, Smith would need R1.5-million. For medium cover he would need R850 000 and R630 000 for basic cover.
Since few South Africans have the means to invest these types of large amounts for health cover in retirement, the other option would be to make monthly contributions from age 55 to 65. To ensure sufficient comprehensive cover Smith would need to pay R15 200 a month, R8 400 for medium cover and R6 200 for basic cover, she said.
But even this would be impossible for many people in South Africa.
Towert emphasized the importance of investment return, stating that medical inflation currently runs at four percent above the CPI. She said it was vital to generate sufficient investment returns on money used for prefunding. These should be equal to, or preferably more than medical inflation.
Alternatively, if Smith could invest in a vehicle that provided him with a return of CPI plus six percent (rather than only four percent), he could reduce his monthly payment costs by up to 28 percent over the decade (from age 55 to 65), she explained.
Few People Can Afford This Kind of Investment
While the current situation overwhelms many potential investors, Towert said that private healthcare in South Africa would continue to be preferable to public healthcare for at least another decade. It would be at least another 10 years before the newly proposed National Health Insurance (NHI) would be likely to replace current private healthcare cover options.
However there were a few steps that people could take to ensure they had sufficient medical care when they retired, she said.
Ways to Provide in Advance for Medical Healthcare in Retirement
Towert’s suggestions were to:
- Choose options that meet personal health risks
- Downgrade from comprehensive to medium plans now and invest this saving by prefunding a vehicle
- Live a healthy lifestyle
- Save as much as possible now
- Work for longer, retire later, and possibly even get a second job or supplementary form of income
Ultimately by retiring at age 70 Smith could reduce the money needed for medium cover medical aid by 19 percent.