Don’t overlook how much health care will cost you in retirement
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MEDICAL costs during retirement can be high, because the older you get, the more medical attention you need. But this is often overlooked, making it very difficult for many South Africans to afford quality health care in their retirement years.
In 2019, Statistics South Africa (Stats SA) noted that 47 million South Africans were without medical cover.
Farzana Botha, the segment solutions manager at Sanlam Savings, says people do not realise to what extent medical costs will deplete their retirement income.
According to Stats SA, 38% of South Africans over the age of 60 use chronic medication, around 20% use assistive devices such as spectacles, 10% wear hearing aids and 5% use wheelchairs, all of which are not necessarily fully covered if you are on medical aid and would need to be paid for out of pocket.
Not only will you need more in the way of medicines and treatments, you also need to take into consideration that medical inflation is 3 to 5% higher than standard inflation.
“This means that the ability to afford your health-related expenses years down the line will be hampered by the eroding effect of inflation on the buying power of your money,” says Botha.
To be able to afford the same medical care you are accustomed to today in 20 years, you must budget a larger part of your income towards medical expenses than you do currently, she says.
Research shows the average replacement ratio (the proportion to which your post-retirement income matches your pre-retirement income) for South Africans is estimated at just 25 to 30%.
Botha says this implies that, on average, people with some form of retirement savings can expect to receive in retirement just over a quarter of what they were earning before they retired.
Botha outlines what forms of cover should be considered to manage health-care expenses in retirement:
1. Retirement Annuity. An RA can be a useful savings tool during retirement, offering tax deductions on contributions. At a certain age, when you need the extra money, the RA can be converted to a living annuity, which can then supplement your income for medical expenses.
2. Medical aid and gap cover. “With medical aid in place, you are covered for in and out of hospital expenses. By having gap cover as well, you are safeguarding yourself by being able to cover any shortfalls in medical expenses or emergencies that result in additional unforeseen expenses,” Botha says.
3. Dread disease cover. “This is an important consideration to cover against severe illnesses like dementia or cancer which can have immediate consequences for your lifestyle, with big financial implications. With cover in place, you will receive a lump sum upon diagnosis which will help with expenses and lifestyle adjustments,” Botha says.
He says Sanlam has a useful tool, Sanlam goal manager, which gives you a real picture of what the cost of medical aid will be in the future and how much you should be saving to be able to afford medical aid in retirement.