For many Malaysians approaching retirement or already retired, one of their biggest fears is having a massive hole blown through their nest-egg which they have painstakingly built up over the decades to see them through their golden years.
For many people, the situation becomes even more tenuous as their retirement funds are barely sufficient to provide a comfortable level of living or last till end of life.
Two of the major risk factors that can reduce individual retirement savings are health and income shocks, says Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd.
Health shocks are defined as unpredictable illnesses that diminish health status, he says. “Individuals facing health shocks are often affected by significant out-of-pocket (OOP) healthcare expenditures incurred to obtain healthcare and the income loss from an inability to work.
“The OOP spending has particularly serious effects on poor households, who tend to spend more on healthcare as a share of their income compared to their richer counterparts,” he says.
On the other hand, income shocks are referenced by how many significant drops in income a person has suffered over their working career, says Mohd Sedek.
“For example, the current Covid-19 pandemic has caused the unemployment of large numbers of people, while others are facing pay cuts. The income shock during the pandemic is more severe among young adults.
“Income shocks are strongly associated with an expected spending reduction and, at a certain level, the individual will liquidate their savings in order to put food on the table.”
Mitigating Against The Risk Factors
Mohd Sedek says like other expenses in retirement, planning can make a difference in managing such risks. He says healthcare costs influence retirement income planning, and as such, the impact of rising healthcare costs should be a priority consideration.
“The most economical way to absorb the health shock is by changing lifestyle,” he adds.
He says research studies on people’s behaviour have shown a causal relationship between unhealthy lifestyles and healthcare expenditure, where individuals who practise unhealthy lifestyles need more healthcare services, forcing them to spend more on healthcare expenditure.
Taking steps to improve health can reduce annual medical expenses, he adds. In the case of Malaysia, hypertension stands as an important area of worry for economic evaluations because of the wide range of issues involved for the individual and for society.
“It is one of the most expensive diseases as far as treatment is concerned, as it generates higher healthcare expenses than those produced by individuals with normal blood pressure.”
However, he notes there is a reduction in total direct costs of the hypertension population if each patient’s blood pressure becomes controlled.
“This reduction in direct costs can be achieved by changing lifestyle habits, for example: reducing dietary sodium intake, decreasing body weight, quitting smoking, and reducing alcohol intake. In addition, anti-hypertensive medications can lower the risk of cardiovascular mortality in hypertensive individuals,” he adds.
High Cost Of Medical Insurance
R. Sathia, co-founder and CEO of GFlex40, a Malaysian insurance technology company, concurs the highest risk factors that would lead to reduction of wealth for a majority of Malaysians are health issues, either for themselves or their closest family members.
“As it has been well researched, the cost of medical insurance in Malaysia is among the highest in Asia and continues to rise,” he adds.
He points out that Malaysia also suffers from among the highest obesity rates in Asia. “The risk factors increase chances of individuals falling ill, and when combined with the cost of healthcare can quickly result in depletion of any savings that have been built by individuals,” he adds.
To reduce the risk of this happening, Sathia says that apart from investing in maintaining one’s own health by way of exercise, diets, etc, another supplementary and important mitigant would be investment in the appropriate health or medical insurance plans.
“By procuring such a plan early in life, individuals can ensure they are covered for unforeseen circumstances later in life,” he advises.
For the individual there is little they can do to prevent the rising healthcare cost across the board in the market. “However, on a personal level, everyone can work towards limiting their exposure to such costs by living a healthy lifestyle from early in their life,” he says, adding this would include proper healthy diets and exercise.
Sathia notes that exercise is a particularly interesting topic when it comes to health/medical insurance.
“More and more insurance and Takaful companies are investing in health and exercise related insurances that track the lifestyle and exercise habits of customers through the use of electronic gadgets and apps.
“By availing oneself to such an insurance early and leading a healthy lifestyle, not only would the average person be able to improve on their overall health but they can also potentially reduce their own premiums as a result of their healthy lifestyle.
He also says there have been efforts across the world to factor in lifestyles and exercise behaviours through electronic monitoring as inputs in pricing health and medical insurance by technology driven insurance companies.
“These efforts coupled with efforts to optimise operations of third party administrators and hospitals would eventually be able to lead to a reduction of pricing,” he adds.
Wealth Protection Measures
So, whatcan we do to prevent rising healthcare costs from eroding our retirement nest-egg?
UOB Kay Hian Wealth Advisors’ Mohd Sedek says reviewing one’s current insurance plan is vital to ensure it does not eat up the retirement saving.
“As healthcare costs continue rising, it is important for each individual to have life and medical insurance. According to the Employee Benefit Research Institute (EBRI), healthcare expenses are the second largest component, and these expenses steadily increase with age.”
Further, it is important for the policyholder to review their insurance policy from time to time, to ensure having adequate protection for the future and safeguard the income-earning abilities.
Sound financial advice also plays an important role when it comes to retirement planning.
“Individuals, regardless of their income level, should engage with a certified financial planner to ensure the retirement saving is not just sufficient but also sustainable, to hedge it against healthcare cost,” advises Mohd Sedek.
A financial adviser, he says, will review the individual’s overall financial situation and address the solution based on their needs. From the analysis, the financial planner will help the individual to address the challenges by:
- Estimating their expected out-of-pocket healthcare expenses, such as insurance premiums;
- Creating contingency plans for unexpected expenses such as long-term care; and
- Working closely with the client to help protect their wealth by integrating healthcare costs into the overall retirement plan.
He adds there are a number of insurance types and riders that can help to hedge the rise in healthcare costs, such as investment-linked products, medical card, critical illness coverage and specific elderly insurance.
In addition, the financial planner can explain the cost–benefit for each insurance plan, creating trust funds and other advanced planning strategies.
Risk Management Needed To Absorb Income Shocks
To mitigate against income shocks, individuals should do planning that includes matching up income streams, including guaranteed income, to fund recurring healthcare expenses such as insurance premiums.
Individuals may also plan on maintaining an emergency health savings fund for non-recurring health expenses, says Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd.
Also, delaying withdrawal from the EPF can create a larger monthly benefit. “Hence, personal budgeting is important to achieve a clearer vision of personal finances so you can begin to plan your spending and saving and take control of your money.
“In short, budgeting helps you to ensure you have the right amount of money at the right time.”
And when doing budgeting, both regular events and extremely uncertain events must be dealt with. It is advisable for individuals to set aside at least six to nine months of living expenses in a money market account, one that offers liquidity and the safety of the principal.
“An emergency savings fund should be established so you don’t have to consider tapping your retirement savings,” he adds.
Dealing With The Medical Insurance Conundrum
If they can afford it, it is prudent for senior citizens to have medical insurance as it can help offset the medical expenses that they’ll incur as they age.
However, the flipside is that medical insurance premiums increase dramatically as we grow older, ironically at a time when we are no longer generating income.
So, is there a way out of this predicament?
Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd, notes that age is one of the prime elements in the health insurance premium calculation because it impacts the medical support a policyholder may require.
It is significant to understand that an elderly insured individual will possess medical conditions quite different from those of a young or adult insured individual, he says.
“Typically, the premium amount increases on average about 5% to 8% for every year of age; it can be as low as 5% annually if you’re in your 40s, and as high as 12% annually if you are over age 50,” he says, adding that high-risk health status also has the potential to greatly increase costs.
As such, Sedek says it is advisable to buy health insurance “at a young age to avoid high insurance premiums”, as the policyholder is able to lock in lower premiums and reduce the total amount they will spend on life insurance over the course of a lifetime.