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Innovation in retirement… it’s time

01 April 2017 Discovery Invest

In today’s ever-changing finance industry, there is a growing need for innovative ways to ensure that people are adequately prepared for a comfortable retirement. Research shows that as little as 6% of South Africans can afford to comfortably retire at the age of 65.

One of the reasons for this is the fact that South Africans have a poor culture of savings, on average spending more on debt repayments and unneeded luxuries. The vast majority of those who do save put away less than 8% of their salary towards retirement.

There are several other factors that have contributed to the need for innovation in our evolving retirement landscape.

Trends affecting retirement

• The impact of longevity
Exacerbating the retirement savings challenge is that a growing number of people are living longer in retirement. The number of people living beyond the age of 100 has been doubling worldwide each decade, and is expected to reach 2.2 million by 2050. For South Africa, this trend would add over 10 million pensioners to the country, placing a burden on resources if the savings culture is not radically changed.

On an individual level, people have an unrealistic perception about their future, making decisions based on present-biased assumptions, with many continuing to delay saving for the future.

• Exponentially rising healthcare costs
Medical scheme costs in retirement are becoming a significant burden for retirees. The reasons for this are increases above inflation and higher usage of healthcare services.

Rising medical inflation is a global phenomenon, with demand for healthcare growing and new medical technologies costing more every year. Since 2008, the Consumer Price Index (CPI) in South Africa has increased by 6.3% a year on average, with medical scheme contributions increasing by at least CPI+3 to 4% annually.

Rapid advances in healthcare technology are giving people far better health outcomes than before – in some instances certain diseases can be completely reversed or cured. The result is increased longevity with better quality of health and life. This means the ‘typical’ retirement age and life expectancy are quickly becoming obsolete.

• A lack of post-retirement healthcare provision
With only 6% of South Africans being able to retire comfortably, the vast majority fail to make adequate provision for post-retirement healthcare. This is particularly problematic because it is after age 65 that we need access to quality healthcare the most. A 45-year-old investor would need to save R350 today to fund R1 of monthly medical scheme contributions for 20 years of retirement from age 65.

When investors do not make provision for their healthcare during retirement, they will end up needing to use their accumulated savings to cover their ever-increasing medical scheme contributions, which will erode their spending power.

Addressing the need
With the risk of outliving retirement savings as a result of increased longevity, exponentially increasing healthcare costs and a lack of post-retirement healthcare provision, there is a clear need for innovative retirement investment solutions.

Investors can consider starting separate investments for their healthcare costs, or they can start putting a little extra away every month.

Creating innovative funds

In response to this, Medical Investment Funds can be utilised. These funds use a post-retirement medical scheme cost index that determines how much money a person would need at retirement to cover medical scheme costs in retirement.

Consumers often do not take the impact of healthcare costs on the income they will receive in retirement into account. Therefore, innovative funds should be designed to target the ongoing cost of medical scheme contributions in retirement for at least twenty years, even in times of market volatility.

 

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