Planning for retirement is different from planning for a better quality of life. Apart from sound financial health and informed planning, it is also important to consider options associated with age-linked medical costs and other later life transitions. Longevity planning can tie the many moving parts to help an individual navigate the future in a more secure way.
27 June, 2021
Missing Links in Retirement Planning
Retirement plans put a smile on everybody’s face. For many that can afford to stop working, it is the culmination of family and work responsibilities, and the start of a new journey. It may result from the natural end of a career (60 to 65 years) or through a planned event (early retirement, etc). Each individual and family plans differently and have a set of different priorities. Some people look forward to it with a fresh set of plans, others intend to spend more time with their family and friends, and some others prefer to take it easy. Without going into nuances, Aegon’s 2015 Retirement Readiness survey points to Indians having a very positive perception of retirement, and a majority are comfortable with their retirement plans.
Over the last decade, one can notice the professionalisation of retirement planning, thanks to more financial products and services, and rise in SEBI registered financial advisers, and this has allowed for investments in market-linked returns adjusted to risk profiles. These options through conventional institutions and new digital platforms, aided by rise in economic opportunities, could be reasons for such optimism among the young. Traditional media and aggregator platforms continue to cover this space through various articles, insights and tools.
A large proportion of older adults in India continue to co-habit homes with their families, and manage their expenses with returns from fixed instruments (FDs, senior citizen schemes, etc) or through pensions and rental income, where available. They have very little wiggle room when it comes to deviation from their planned finances.
With average lifespans rising by almost 10 years in two decades, the impact on longevity on such plans are largely underestimated. While most (retirement) planning calculations work on simple inputs – age of retirement, life expectancy, inflation, expected rate of return, current savings, future expenses, etc, – they also tend to look at life after retirement as a stable set of years with an incremental rise in household/family spend.
Today, it is not difficult to find a bunch of retirement calculators with such simplistic assumptions. The question is, what are they missing?
Health Spending, Medical Debt and Out-of-Pocket Expenditure (OOP)
According to the LASI study, it is estimated that by 2030, 45% of India’s health burden will be borne by the older population. Low levels of public spending (particularly in geriatric care), longer lifespans, rise in chronic conditions (cardiovascular diseases, hypertension, diabetes etc.) and multiple co-morbidities will further push the cost of healthcare for very many of us.
In 2019-20 alone, 5.5 crore Indians were pushed to poverty by medical debt, which can be attributed to many factors including lack of insurance coverage, limited coverage, high cost of care, medical inflation, etc. The out-of-pocket (OOP) expenditure on health care depends on many factors; household income, type of illness, age, sex, type of health facility and quality of care. OOP expenditure on health stands at a worrying 60-65 percent, the highest in the world. While private sector dominance in healthcare provision in urban India (out-patient care, hospitalization, etc) is well known, lack of serious healthcare/medical regulation is unlikely to bring such expenses down in the near future.
According to this study, the monthly per capita expenditure (MPCE) of elderly households is higher than that of non-elderly households possibly due to higher health spending of elderly households compared to non-elderly households (3 times more).
Impact of medical debt and OOP expenditure can be particularly acute in elderly households and households with elders given their sources of revenue are limited and/or fixed.
Health Insurance Market, Medical Inflation and Treatment Costs
With only 137 million lives covered in FY20, India is also a largely underserved market for health insurance. As per the LASI study, only 18.2% of those aged 60 years have health insurance; it is at 23% for those in 45-59 age group; overall 21% of those aged above 45 years are covered by insurance.
This article highlights the market failure and unimpressive outcomes from opening up the health insurance market more than two decades ago, and the rise in cost of insurance premiums.
Retail health insurance has always followed an ‘age-band pricing’ approach where policyholders in a particular age band pay an identical premium and see their premium jump as they move bands, especially amongst higher age groups. Adding to this is the premium revision by insurers, usually in a block of two-four years to keep pace with medical inflation. These factors together can see premiums jump to as high as 50 percent on renewal leading to large risks of selective lapsing.Deepti Bhaskaran, Personal Finance Expert
Premium revision linked to medical inflation and age-band pricing can have a particularly negative impact on insurance premiums of older adults. Furthermore, health insurance purchase is an onerous task for older adults without family or professional support. While exclusions for older adults have improved over the years, insurance sales, repurchases and claims processing continues to be a very messy operation, and infrequently regulated by IRDAI.
A report by Mercer Marsh Benefits said forecasted medical trend rate will be 10 percent in India, while inflation will be at 5 percent. With respect to the diseases, respondents from Asia (including India) said that increased non-communicable diseases will increase employer-sponsored healthcare costs over the next 3 years. These diseases include heart disease, cancers, stroke, chronic respiratory diseases, diabetes, Alzheimer’s disease, mental illness and kidney diseases.
The cost of healthcare, and particularly medical treatment, has been rising in India, and has particularly accelerated due to the pandemic. Higher hospitalization charges due to covid-related protocols, additional procedures, etc. have been par for the course. It is estimated that the healthcare expenditure will rise two-fold, and form 11% of private consumption expenditure from the current 5% thus sucking away hard-earned rupees away from other expenditure items. While healthcare facilities and access to modern medicine have improved significantly, affordability continues to be a major challenge. For example, a major medical treatment expense can affect a well-planned retirement plan. An expert tracking the space advised purchase of health insurance early on (to avail differential pricing) and a medical treatment corpus as two ways to deal with such emergency situation. There are likely other options to be explored in the context of one’s support system. For example, Beshak’s Critical Illness Handbook provides a deep-dive into insurance options as an independent and unbiased voice of experts, and is thus highly recommended.
Planning for retirement is different from planning for a better quality of life over a longer anticipated lifespan. Apart from sound financial health and early planning, it is also important to consider options associated with age-linked care assistance (home care services), short- and long-term medical care, alternate living/custodial arrangements, and other aspects of later life transitions (wealth management, insurance costs, legal rights, end-of-life protocols, etc). While there is no perfect algorithm that can help arrive at the right plan, it is also never too late to ponder over the question, be it 40 or 75!
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