The hidden cost of retirement

The Hidden Cost Of Retirement: Healthcare

Many of us look forward to retirement. It is the time when we can finally enjoy our lives and the fruits of our labor. We envision that we can use the hard-earned money that we have save and invest in our wealth management journey to spend on the finer things in life.

The hidden cost of retirement

The hidden cost of retirement: I wonder why are retirement photos all at the beach.

However, as we grow older, there is this cost that keeps creeping up. If uncareful, may derail our retirement.

(This is a joint-post together with Life Finance. Do check them out. I think the quality of their article are great. They are certainly one of the better writers out there and I’m happy that there is someone like them writing on these important topics)

 

Healthcare costs in retirement

Healthcare costs will form a significant part of retirement spending. In Life Finance previous article, he documented that healthcare costs will shoot up from a bit less than 7% of household spending for a typical household before retirement to more than 12% after retirement. This is on top of health insurance spending. This 12% of overall spending is made up of the deductibles, co-payments and other outpatient expenses tat actually comes out of the retirees’ pockets (or Medisave account).

The hidden cost of retirement healthcare cost

The hidden cost of retirement healthcare cost

The higher percentage does not mean that a retired household spends less on everything else. In fact, once household size and inflation are accounted for, retired households actually spend the same amount after retirement as they do before. Hence planning for higher healthcare costs is crucial as part of retirement planning.

 

Why does healthcare costs go up in retirement?

It is no secret that while inflation has moderated for most goods and services in the past few years with slowing economic growth, healthcare inflation has continued unabated. But the rate at it is going up is not well known. Let’s look at some data.

From the data.gov website, we can see that healthcare inflation has outpaced general inflation, in the last few years.

The hidden cost of retirement healthcare inflation

The hidden cost of retirement healthcare: Inflation

But this chart gives a relatively benign view of healthcare cost inflation, showing that it is still manageable. This is however, not true at the patient level, especially for retirees. As life expectancy increases, Singaporeans are also seeing an increase in the number of years spent in ill health to more than 10 years out of a lifespan of 84 years. This means that the corresponding bills for healthcare will increase, as hospital stays becomes longer, and procedures become more complex.

To get a better sense of the increase in healthcare costs at the patient level, we can look at the Ministry of Health’s Fee Benchmarks Committee Report from 2018. While Class A public hospital bills grew by 4.9% per year between 2007 and 2017, private hospital bills grew by 9% a year in that same period!

The hidden cost of retirement healthcare bills

The hidden cost of retirement healthcare bills

Beyond that, healthcare costs have kept increasing. Mercer in 2019 indicated that in 2018, Singapore healthcare cost inflation was 10% and the same is projected for 2019 and 2020

In addition to hospital bills and healthcare costs going up, retirees are faced with the fact that the frequency of their hospital stays will also increase. The likelihood of hospitalization in any year will go up from between 20% – 27% for retirees in their late 60’s and early 70’s, to a staggering 70% – 80% when they reach their mid 80’s, or a three-fold increase at a minimum.

The hidden cost of retirement healthcare hospitalisation episodes

The hidden cost of retirement healthcare hospitalisation episodes

A three-fold increase over 20 years corresponds to a growth rate of hospitalization of 7% per year.

Hence, to get the true rate of healthcare cost increase in the retirement years, we need to consider both:
a) The higher frequency of hospitalization and healthcare needs
b) The growing rate of healthcare inflation

Putting both these figures together:

• Retiree patients in Class A wards in public hospitals will be faced with a 12% increase in healthcare costs per year (4.9% and 7%)
• Retiree patients using Private hospitals will be faced with a 18% rise in healthcare costs on a year-on-year basis

While it is true that with healthcare insurance, such as Medishield Life or an Integrated Shield plan, much of these rising costs can be transferred to the insurer, the retiree patient is still faced with the prospect of rising co-payments and other out of pocket costs. Furthermore, rising healthcare costs will ultimately be reflected in higher insurance premiums as well, which is what we discuss next.

 

Rising healthcare insurance premiums

As healthcare cost increase as explained above, premiums from medical insurance will go up due to the risk pooling nature of insurance policies. From 2015 to 2020, Singapore’s medical insurance premium began its steep incline. The Ministry of Health has stepped in on many initiatives such as co-payment, the use of preferred doctors and also pre-authorisation to help cope the medical inflation rates in Singapore.

The Medishield Life Committee gave their recommendation in 2014 with the proposal of the upgrade from Medishield to Medishield Life. In a nutshell, it means that the scope of coverage will increase and at the same time, the premiums will increase. There were a series of government subsidies over the last 5 years to help Singaporeans cope with the rising cost of medical insurance.

As the Integrated Shield (IP) plan is made up of Medishield (Now Life) and Additional Insurance Coverage from Insurance company, this directly increase the overall premiums that consumers have to pay.

The hidden cost of retirement healthcare medishield life

The hidden cost of retirement healthcare Medishield life

To the same time, insurance companies were making underwriting loses as net claims faced by the insurers outpaced premiums earned, particularly for plans covering private hospitals. Net claims are made up of the absolute cost of healthcare and the frequency of healthcare. The absolute cost of healthcare has gone up over the years as written above. At the same time, with medical advancement, it is more common for people now to seek medical treatment as compared to the past. These has made premiums unsustainable in the long run.

Between the years 2016 and 2019, the premiums of riders and the private insurance component of IP increase on average of 24% and 10% respectively each year. These trends are largely reflective of increases in private hospital insurance claims.

The raise in questionable claims also push up the claims experience of the insurance companies. (Quoted from source almost fully to retain the meaning of the article)

In one example, A 37-year-old woman stayed seven days in hospital for abdominal hernia repair. Of the $46,000 bill, the surgeon’s share was $31,900, or five times the norm. It transpired that while in hospital, she also had her breast augmented, and a tummy tuck with the fat transferred to her buttocks, but since these are not covered by insurance, none of this was stated in the bill.

A second example is for a woman was warded for 42 days for cervical sprain and strain (or pain in the neck) but received treatment only on seven days. She was given physiotherapy and painkillers for the other 35 days, something that could have been done as outpatient treatment. The bill was $84,000.

The combination of Medishield Life premiums increase, healthcare cost inflation, frequency of healthcare and the raise of questionable claims made the previous premiums charged unsustainable. This led to an inevitable increase in medical insurance inflation and also tightening of the claim procedures in the last 5 years.

 

Cost of Hidden Cost of Retirement

Medical insurance is one cost that people don’t usually take into account during retirement. We generally assume we will be well (why will we not) and plan for our living expenses with occasional holiday or two. However, we have to bring this to you to share with you the cost of medical insurance at your age of retirement.

The hidden cost of retirement healthcare great eastern shield

The hidden cost of retirement healthcare great eastern shield

The hidden cost of retirement healthcare great eastern totalcare

The hidden cost of retirement healthcare great eastern totalcare

Taking Great Eastern medical policy as an example (Disclaimer: We are not advocating any insurance policies from any company. We are using Great Eastern as an example for premium calculation. In my experience, the premiums for the other companies should be around the same).

At age of 65, we will need to annual cash premium of $2,226 ($967+$1259) for a private hospital coverage (with 5% co-payment). This comes out to be around $185/month.

In 5 years time, at the age of 70, we will need to pay an annual cash premium of $3,234 ($1695+$1539) which comes out to be around $269/month.

If this don’t scare you, at age of 75, we will need to pay an annual cash premium of $4,685 ($2650+$2035) which comes out to be around $390/month.

In Singapore, our life expantacy is around 85, I cannot imagine how one can afford those premiums when that time happens. All this is assuming that there is no future medical inflation which does not inflate the current premiums now.

PS: If you thinking that you can self-insure and not have any insurance, I hope that I have to burst your bubble.

 

Final Thoughts

The hard truth is that healthcare cost is going to continue to increase due to the factors explained above. The first thing I get my client to plan for is their paycheck. Remember that during retirement, there is a paycheck and a playcheck. The paycheck consist of items such as healthcare cost, phone bills, utilities, basic food and beverages and so on. Usually, we allocate money from “safer” asset class  to take care of those cost because it will have to be paid at whichever market conditions.

The playcheck is the one we are more familiar with. It consist of items such as exotic holidays, a roadtrip, etc.

Whichever the paycheck or playcheck, it is part of our retirement journey.

Thank you Life Finance for your contributions. If you like this article, do comment before and leave a message for me or Life Finance.

 

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!

5 mistakes people make on their cpf

5 mistakes people make using their CPF

Wealth Management in Singapore typically entails the use of CPF. Given the wealth of knowledge shared by finance bloggers and planners out there, there is no lack of information but only misunderstanding of information. There are merits for each hack below but if used unwisely, it is often irreversible and regrettable.  The below are the top mistakes 5 people make using their CPF.

I will be writing on the hot hacks and why it won’t be good strategy for a certain group of people.

5 mistakes people make on their cpf

5 mistakes people make on their cpf

Mistake Hack #1: Transfer from OA to SA when…

I have a friend who transferred his CPF-OA amount into his CPF-SA after reading many articles available. He certainly benefited from the higher interest in his SA. He was happy until the day he wanted to purchase a house. After realising that his OA is empty, he would have to use cash or wait for his OA to accumulate back to a significant lump sum before he can buy the desired property.

 

Mistake Hack #2: Top Up $7000 into SA for Tax Relief when…

The same friend decided on top up $7000 into his SA and thought he could do it indefinitely to claim for tax relief. He thought it was a win win situation as his $7000 can grow from the higher SA interest rates and also reduce the amount of tax her have to pay.

5 mistakes people make on their cpf SA Top Ups

5 Mistakes People Make On Their CPF SA Top Ups: https://www.iras.gov.sg/IRASHome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals/CPF-Cash-Top-up-Relief/

He didn’t realised that it is only applicable if his CPF-SA has not reached the current Full Retirement Sum (FRS). As he already transferred his OA amount into SA, he will be able to meet FRS in a few years time and won’t be able to have the relief anymore.

 

Mistake Hack #3: Our Returns are Guaranteed…

While this is not a hack, most people think the returns are guaranteed. In fact, the rates are reviewed every quarter. However, CPF hasn’t change their rates in years and so most people think the returns are guaranteed. Most people might have forgotten that it was changed once in 1999 (Post Asian Financial Crisis) from 4.41% to 2.5% for CPF-OA. I’m personally in favor of the rates not changing.

5 mistakes people make on their CPF Interest

5 mistakes people make on their CPF Interest

You can find out more on the change in 1999 here: https://www.cpf.gov.sg/Assets/common/Documents/InterestRate.pdf.

 

Mistake Hack #4: Topping up their CPF when…

This is a common one. In most of my conversations, people top up their CPF when they have a “feel” or “sense of urgency”. While, we are living in a fast pace world, there is only one month in the calendar year to top up your CPF that make sense.

CPF interest takes the lowest balance of the month to calculate monthly interest, compound it and credit it at the end of the year. As of the time of writing, I unable to find the source from CPF board that states “lowest balance of the month”. It is based on tribal information from seedly etc.

In this case, we should ideally top up our CPF in (around 3rd week) January (compounding effect for the rest of the year), so that in February onward, the lowest balance is already been boosted by the top up and taking into account any tax reliefs from the financial year.

 

Mistake Hack #5: Allowing SA and OA to be transferred to RA..

For those that are servicing your home loan with CPF-OA, you can continue to do so by stopping your OA balance to be transferred to the RA. One of my friend got a shock of his life when he realised his OA is empty after 55. If you still depend on your CPF-OA on your housing loan, please do set aside some saving for that purpose.

5 mistakes people make on their CPF Housing

5 mistakes people make on their CPF Housing: https://www.areyouready.gov.sg/YourInfoHub/PublishingImages/CPF%20Retirement%20Booklet.pdf

 

 

Conclusion

Please do take the CPF-Hacks in their respective context. CPF is not easy to understand but is still relevant and important as part of your wealth management journey.

Thank you SK/PG Mastermind for the inspiration for me to write this article.

 

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!