How to factor medical expenses into the retirement plan
Healthcare costs form a major part of the expenses for a person. They are additional expenses that rise with age. Medical inflation is said to be 25% per annum against normal inflation of 6-8% per annum.
Only the salaried class in India t have social security benefits. Most indians do not have a well planned social security, pension or long term health-care plan in place, unlike most of the other developed countries And unless one works in a public sector organisation, a person cannot depend on the employer for lifelong health care benefits. In fact, the group insurance also ceases on retirement, from company benefits.
More so a public sector company’s health policy pays only hospital bills. However, it doesn’t take care of all the expenses. For instance, most indemnity plans do not pay for domiciliary treatment and preventive health care. Also, pre and post hospitalisation costs are reimbursed only up to certain (usually sixty to ninety) number of days. It is, therefore, important to have a separate corpus for paying such bills.
Even without hospitalisation, there will be regular expenses with regard to medicines, ongoing check-ups and consultations,with onset of diseases.
As life expectancies increase and people spend more years in retirement, the money set aside to pay for health care will have to last longer as well!
It is, therefore, important to build a separate portfolio to take care of medical expenses.
The right age to start a comprehensive health policy
Buying Health Insurance as early as possible should be ideal since choices of plans become less as one ages. Starting late means a higher premium, less sum insured and higher co-payment.
Financial planners advice that a person must start working on the plan when one is twenty years of age.
Even if one could not start early with the plan and would be retiring in a few years time, it is good to buy health insurance so that pre-existing illnesses can be covered when the cover provided by the employer ceases at retirement. Also, opting for top-up plans and critical illness cover is very helpful. These extend the cover while keeping the premium low.
How much to save
To tackle the question of how much one should save for the safe-guarding of future health during retirement, it will be a good thing to consider the present expense scenario of expenses. It is always a good idea to provide for more funds than the present requirements.One need s to assume a rise in costs for the next few years and keep on adding 10-15 % to it.
Apart from the above, the following factors should help to arrive at a number for medical expenses :
- Factors such aslongevity and threat of out-living the corpus or deteriorating health as one age.
- It is important to take into account any lifestyle diseases that may occur.
- The possibility of contracting a hereditary disease should be taken into account too.
- The spouse’s medical expenses also should be taken in account.
- One’s health status should be considered, which might means planning for a longer or shorter retirement and a larger or smaller total cost.
Whatever approach is used to estimate health care expenses, including them in overall income planning helps to invest that amount appropriately so that health care costs are covered without the risk of selling or liquidating investments unnecessarily in future during retirement for exigencies.
Choosing the perfect Health Insurance Plan
Various important factors need to be considered during this research while trying to decide on a good health insurance plan. Mainly they are
- long-term renewability of the health plan,
- reputation of the insurance provider and
- ability of the insurance provider to meet health needs at the time of retirement.
- OPD benefits
- Renewal of Sum insured on using in the same year.
- Room coverage costs
- Pre Existing illneess
The Ideal Portfolio Mix for the healthcare plan
A good way to save money with regard to health Insurance is committing a fixed sum every month over a long period. Investing in a mix of equity and debt will give the portfolio both growth and stability.
The choice of instruments will also depend on their tenure, the expected return and the investor’s risk tolerance. For instance, public provident fund is a good option for people who have at least some ten or fifteen years to retire.
If one has fewer years to retire and are ready to take some risk, systematic investment in a balanced mutual fund is a very good option.
There are also dedicated unit linked health plans offered by life insurance companies that provide medical insurance and invest in equity and debt markets.
Last but not the least , the corpus should last for long. This can be done by investing the money in investments that provide liquidity along with capital protection.
Liquid funds, with a lock-in of a few weeks, offer six to eight per cent annual return, enough to beat inflation. One can also consider fixed deposits (FDs) with maturity of three-six months.
If one needs funds on a regular basis, the person should invest in a monthly income plan (MIP). MIPs invest mostly in debt and usually give better returns than Fixed Deposits.
If one can do with annual payouts, a non-cumulative fixed deposit can be ideal. One can get an assured return and the interest is transferred to savings account every year.
Whatever the way of investment, the ultimate goal should be, that enough funds are being factored into the retirement investment plan with regard to medical expenses.
We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us here.
We would be glad to help you with your planning and investment related decisions.
Debalina Roy Chowdhury
Para Planner – Dilzer Consultants