Facing Medical Expenses When You Retire
We all know that the older we get, the greater our need for healthcare cover. And more and more retirees are finding they have to provide for these medical expenses themselves.
If you want to avoid doing away with healthcare cover once you retire, and aren’t particularly keen on cutting back your lifestyle to fund medical aid, you’re going to need to plan and save for your medical expenses later on.
Future medical expenses
Let’s say you’re a 56 year old woman who plans on retiring in 4 years’ time. You’re going to need to have saved an average of about R1 million to be able to fund comprehensive medical aid cover throughout the course of your retirement. If you’ve failed to save that sort of money by that age, you’ll only have 4 years to try and make up for it. Or you might need to think about delaying your much-anticipated retirement. Or choosing lesser health care cover. Or relying on the state to pay your medical expenses at state hospitals and clinics, which no one wants.
There are two positive aspects to delaying retirement:
- You won’t need to provide for your healthcare needs for as long a period of time
- You have a longer period of time to save for medical expenses later on
The above example of a 56 year old woman assumes that she will live to be 88 and takes into account that medical aid contributions increase around 9.1% every year. It also accounts for growth on the remainder of your savings as you continue funding your medical expenses care into retirement.
What’s more, the above example assumes the woman won’t receive a post-retirement subsidy for medical expenses. The majority of employers don’t offer such benefits anymore and employees need to be more aware of the consequences of this on their retirement.
What About Men?
Let’s take a 58 year old man, planning to retire in 2 years. He needs to have saved as much as R2.1 million to enjoy continued health care cover for both him and his wife during retirement. And a married man who’s already 60 and plans on retiring at 65, needs to have saved in the region of R1.7 million to fund his and his spouses’ medical aid needs.
Medical Scheme Options
The medical aid option you choose obviously depends on what you can afford. However, scheme options are designed like this: when you’re young and healthy there is a basic, cheaper option that usually offers medical cover and limited or even no day-to-day medical expenses.
Once you’re married with a family, the options offer hospital cover and maternity cover as well as cover for some chronic medications and medium cover for day-to-day benefits.
Once you’re retired, the options become comprehensive and offer high chronic benefits as well as high day-to-day cover.
The best thing to do is choose the option that will meet your needs. If you’re limited regarding income during retirement, choose the best option you can afford for medical expenses. A hospital plan might be as much as you can manage.
What’s the difference between basic, medium and high medical aid benefits, you might be wondering? It’s all to do with the day-to-day benefits, level of chronic medication cover and also tariffs paid to healthcare professionals during hospital stays. Choice of providers and hospitals also come into it.
Basic options usually mean you give up the freedom of choice as they dictate which medications and providers, as well as medical facilities, you can use. But if you’re willing to settle for a lesser option, this can make a difference to how much you save during retirement.
You Can Change Options
If you do go for a lower option, you can always change up on 1 January. So choose something that will benefit you now and when you’re able, you can move up to higher cover as your needs change.
There are a few schemes that will let you upgrade your plans during the year should a major health even occur, such as contracting cancer.
Every option will offer hospital cover to different degrees – such as being restricted to which hospital you can use. If you can’t afford more comprehensive cover that will provide you with specialist treatment in hospital, don’t panic – there’s always the option to take out gap cover insurance.
Short-term insurers offer gap cover that will pay the difference between what the specialist charges and what the medical aid pays.
There are also alternative insurance policies like the hospital cash plan that pays a fixed amount for every day you spend in hospital. However, these do not cover medical expenses outside hospital.
But these plans should never be thought of as replacements for medical aid. Insurance policies are underwritten and tend to exclude certain conditions. Insurers can also refuse to renew policies. Such policies will often have a maximum entry age, too, which can in all likelihood exclude retired individuals.
Medical aids, though, cannot refuse you membership unless you fail to pay contributions or commit fraud. Medical aids use the funds you pay to pay your claims as well as their expenses. They are not-for-profit organisations so if there is a surplus, they hold it in a reserve to offset future claims.
So a scheme has two ways to balance the books, besides controlling expenses: cut benefits or increase contributions.
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What to Consider When Choosing a Medical Aid Scheme
- The Scheme’s Size
Bigger schemes are naturally more stable and tend to have less up-and-down claims patterns. That means contribution increases will be more stable. A scheme with over 100 000 beneficiaries is considered large. These schemes are also better able to negotiate competitive rates from their healthcare suppliers and providers and that has a good impact on contributions too.
- Age Profile
The average age of a medical aid’s members can affect what the scheme pays out in claims and can also influence contribution increases. So healthy, younger members who don’t require comprehensive cover have cheaper cover, but they’re relied upon to help subsidise healthcare costs of older scheme members.
- Solvency Ratio
It’s a law that schemes hold a minimum level of reserves, which should equal 25 percent on annual contributions collected. This is what’s known as the medical scheme’s solvency ratio. The 25% requirement makes sure that the scheme is sustainable when there are periods of high claims.
- Operating Results
When a medical aid scheme makes an operating profit, it’s in a position to grow its reserves. So if the scheme is operating at a loss, chances are you’re going to face high contribution increases very soon.
- Contribution History
Take a look at the scheme’s contribution history for an indication of how well they manage their claims as well as risks. If the contribution increases go up, let’s say, 13% in one year and then down 7% the next, it’s an indicator that the scheme isn’t managing risks very well. This can impact contributions and benefits.