Post-retirement-healthcare-costs Post-retirement healthcare costs

The amount you need at retirement to cover your medical scheme contributions and the amount you need to save to reach that capital value depends on several factors, including the specific medical scheme option you're considering, your current age, the age at which you plan to retire, your dependants, and the expected medical inflation rate.

Here are the general steps to calculate these amounts:

1. Determine current and retirement medical costs: Start by estimating your current medical scheme contribution and project it to your retirement age.
2. Calculate future value: Use a future value calculation to determine how much money you need to save now in order to cover the projected total contributions from retirement.
3. Regular contributions: If you're planning to save through regular contributions, you can use financial calculators or spreadsheet functions to determine how much you need to contribute each period to reach the calculated future value.
4. Monitor and adjust: As you approach retirement, periodically review your progress and adjust your contributions as needed to ensure you're on track to cover your medical scheme contributions.

This is a simplified explanation, and the actual calculations can be more complex due to various factors. It's also crucial to consider unexpected medical expenses and factors that can affect your investment returns.

To get precise calculations, it's recommended to consult with a financial adviser, or to use dedicated retirement planning tools.

The below is a summary of what is required after retirement, based on specific assumptions.

Medical scheme contribution: (for example, hospital plan plus savings component)

Current contribution amounts:

• Main member: R4 060
• Adult dependant: R3 202

Lump-sum requirements:

• Timeframe for calculation: 10 years
• Discount rate (Investment Return): 12.18% per annum
• Healthcare cost inflation: 9.02% per annum (CPI + 2%)
• Adjustments: Standard adjustments, including factors like a longevity assumption and spouse age gap

Savings calculation:

• Savings approach: Monthly contributions
• Savings increase: Adjusted according to healthcare cost inflation at a rate of e.g. 9.02% per annum
• Below are examples for a married male/female at different retirement ages (monthly savings requirement assuming retirement age is 60)

Lumps-sum requirement at retirement:

Monthly savings requirements:

Below, we highlight the benefits and potential pitfalls of some investment vehicles available to make provision for post-retirement healthcare costs.

Additional pension fund or retirement annuity contributions

Benefits:

1. Tax advantages: Contributing more to your pension fund and/or retirement annuity allows for pre-tax contributions, thus reducing your taxable income and potentially lowering your overall tax liability up to the tax limits.
2. Compound growth: The earlier you start contributing and the more you contribute, the bigger the benefit from compound interest and tax-free investment returns.
3. Generally, pension fund and retirement annuity investments are protected from creditors.
4. In retirement, retirement funds provide an ideal investment vehicle to provide a guaranteed monthly income to fund medical scheme contributions.

Potential pitfalls:

Locked-in funds: Pension funds often have restrictions on accessing the money before a certain age. If you need liquidity for emergencies or unexpected expenses, these funds might not be readily available.

Savings into a unit trust fund

Benefits of unit trusts:

Accessibility: Unit trusts are accessible to a wide range of investors, including those with small amounts of capital. This makes it possible for individuals to invest in a diversified portfolio that they might not be able to create on their own. A unit trust deals more easily with lump sum requirements, such as hospital expenses.

Potential pitfalls of unit trusts:

1. Market risk: Although diversification helps reduce risk, unit trusts are still subject to market fluctuations. If the overall market performs poorly, the value of your investment could decrease.
2. Tax Implications: Unit trust investments are made from post-tax income; investment returns are taxable and any withdrawal from a unit trust is subject to potential capital gains tax liabilities.

Saving into a savings account (e.g. money market account)

Potential benefits:

1. Safety: Savings accounts are generally considered conservative investments.
2. Liquidity: Savings accounts provide easy access to your money. You can withdraw your funds at any time without facing penalties or waiting periods, making them a suitable option for emergency funds or short-term savings goals (as long as it is not a term deposit).
3. Low risk: Savings accounts carry minimal risk compared to more volatile investments like stocks.

Potential pitfalls:

Inflation risks: Inflation erodes the purchasing power of your money over time. If the interest rate on your savings account is lower than the inflation rate, your money’s real value may decline.

Closing remark

You can consider many investment vehicles to make provision for your post-retirement healthcare costs, each with its own advantages and disadvantages. The funding for post-retirement healthcare costs, however, requires careful long-term planning, due to it being a considerable part of post-retirement expenses.

Consulting with a financial adviser can help you tailor a contribution strategy that aligns with your overall financial situation and retirement goals.

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