Retirement 101 in Singapore Part 1 Planning for Contingencies
We address some of the concerns about the latest MediShield Life and whether the Private Integrated Shield Plan still has a role in one’s financial portfolio. We will also touch on how other protection plans can help one cope with the potential catastrophic cost of falling ill or being disabled during retirement
Recent years has seen a marked change in the social compact the government has with the citizens when it comes to retirement and healthcare security. It seems to be every other month that the government is making significant changes to our social security landscape with wide-ranging policies in place to address the “silver tsunami”.
The introduction of CPF Life, MediShield Life, the Pioneer Generation Package and Singapore Savings Bonds are but a few major initiatives taken to address the retirement and healthcare adequacy in Singapore. Together with the fine-tuning of other schemes, such as the increase in interest rates in CPF savings for those aged 55 and above from 2016 to the increase in the CPF contribution rates and limits, it seems that the government is more worried for our future than we ourselves do!
The statistics look grim and this could explain why there is so much action taken to address these issues. In the IPS Forum on CPF and Retirement Adequacy in Jul 2014, Associate Professor Kalyani Mehta noted1 that increasing life expectancy and its associated disability suggested that healthcare cost would increase. In addition, General Consumer Price Index and
“… the resources we have for retirement is likely to be more stretched in retirement to account for longevity and inflation.”
Healthcare Consumer Price Index are both rising2. What this means is that the resources we have for retirement is likely to be more stretched in retirement to account for longevity and inflation.
Under the current CPF Life framework, even if a pre-retiree turning 55 after July this year sets aside the full minimum sum of $161,000, he or she can only expect an income of between $1,137-$1,385 and $1,084-$1,2643 respectively depending on the scheme he or she chooses and the CPF interest rates. When adjusted for inflation at an average of 3% a year, this figure works out to be only less than $1,000 a month in today’s dollars. Clearly, this is a pittance compared to the monthly average household expenditure of $4,724 in 20134. How then, can the average family provide for their expected retirement?
1 Apex Private Wealth Management
In this 3 part series on retirement planning, we look at the 3 components of retirement planning, namely Planning for Contingencies, Replicating the Retirement Paycheck and Leaving behind a Legacy.
Part 1 of the series would address some of the concerns about the latest MediShield Life and whether thePrivate Integrated Shield Plan still has a role in one’s financial portfolio. It will also touch on how other protection plans can help one cope with the potential catastrophic cost of falling ill or being disabled during retirement
Part 2 discusses how one can make use of their various buckets of funds to address their retirement needs. Wealso compare some of the solutions one can use to replicate their paycheck at retirement.
Part 3 would focus on how we can ensure that our legacy for the next generation can be handed downeffectively and efficiently. We will also discuss some of the solutions that are commonly used in legacy planning.
MediShield Life vs. Private Integrated Shield Plans
Even before we look into retirement adequacy, we must first ensure that the bases are covered first. Bearing in mind that the monthly household expenses did not take into account large ticket items associated with medical contingencies, there is a need to ensure that such events would not create unnecessary financial stress to the family.
By Nov 2015, MediShield Life would have kicked in to address the basic concerns of Singaporeans when it comes to hospitalization and surgical expenses. Like all government schemes, they are designed to take care of the basic needs of most
Singaporeans. Hence, the payouts for MediShield Life are sufficient for subsidized patients in B2 and C wards. The MediShield Life Committee suggested that 9 out of 10 patients would pay less than $3,000 a year in cash or Medicate for B2/C ward patients5. However, if the patient desires B1 or A/Private hospital care, the coverage for MediShield Life would drop to cover only 43% and 35% of the bill, after the co-insurance and deductibles and sub-limits are factored in.
For clients who are comfortable with care in the subsidized wards, Basic MediShield Life would be sufficient for most of their needs, as the higher limits and lifetime coverage will minimize out of pocket cost should hospitalization or surgery be needed. In addition, being in subsidized wards allow cheaper follow-up treatments and medication.
Perhaps the only grouse with taking this route is the long wait time due to shortage of hospital beds and healthcare professionals, which might mean what are deemed “non-emergency” conditions being consigned to long wait times, sometimes for as long as up to a year! Imagine the pain and suffering onehas to go through in the meantime! After this, the queuing times at the public hospitals could also be a challenge, but it seems the government has been actively addressing this issue by building many new hospitals, which would come on-stream in the next decade.
From my experience with clients who have been warded, it seems that most prefer higher class wards not just for the comfort, but more importantly for the shorter wait times as a non-subsidized patient. The option of being able to choose a doctor who they believe can best treat their condition or who has been attending to their condition is also crucial to their healthcare decisions.
The million -dollar question always asked during the presentations I make at seminars is whether one should continue with their integrated Shield plans. To answer this question, there is a need to balance the cost and benefits of upgrading. Do not just look at the current cost of the upgrade, but also consider higher premiums with age as well as with medical inflation. This should be balanced by the quality of care one would desire when the need for hospitalization or surgery arises. In this information age, many of us turn to Google to find the best outcome for even minor ailments and when catastrophic conditions such as cancers or heart conditions arise, I am sure we will do likewise and find the “best” doctor to treat our or our loved ones’ condition.
The flexibility to choose the right medical professional should not be undermined. In addition, to be able to be attended to quickly might also aid in the recovery of a patient’s condition and this should also be taken into consideration.
Long Term Care Coverage
Another major concern of an aging population is the need to have sufficient long term care coverage. A hot debate a few years ago revolves around the suggestion by a Minister who thought it might make economical sense for us to export our grand daddies and grannies to Johor for their nursing homes there are approximately a quarter the cost of Singapore’s.
Indeed, the government introduced Eldershield in 2002 to address the long-term care needs of Singapore. This opt-out scheme for Singaporeans and PRs turning 40 started with a payout of $300 a
month for 5 years for people who are unable to perform 3 out of 6 activities of daily living. Sensing the insufficiency of the payouts, they further enhanced it in 2007 to provide $400 a month for up to 6 years.
Obviously, this is still insufficient since staying in a local nursing home cost $1,000 – $3,500 a month6. For those who are able to afford higher coverage, there are insurers who are able to cover up to$5,000 a month in monthly benefits for a lifetime and they have also made it easier to claim by admitting a claim when a person is unable to perform just 2 out of 6 activities of daily living.
Critical Illnesses Coverage
The last major class of protection a pre-retiree or a retiree should look into would be to provide adequate coverage for Critical Illnesses. For a pre- retiree, the need for critical illness coverage would be higher as this would cover both the potential loss of income as well as the additional expenses of treatment when critical illnesses strike.
Generally, a rule of thumb for the level of coverage for critical illness is to ensure that one has about 3-5 years of replacement income for critical illness so that this could alleviate the financial stress one faces when dealing with critical illnesses. Not only would this cover provide for their cost of living in the time they require to recuperate, it would also allow a peace of mind to
be able to choose to potentially retire earlier than preplanned. In addition to the replacement of income, critical illness coverage would also be useful for additional expenses associated with an episode of critical illness.
Even with a comprehensive, as-charged medical plan, there could still be out of pocket expenses in relation to a critical illness condition. The non -standard drugs prescribed bythe doctor in private practice, the medical fees for the donor should one requires transplant or the supplements and other medications out of hospitals could quickly add up when critical illness happens.
Understandably, there is the concern that premiums for a pre-retiree or retiree for critical illness would be high. However, there are various solutions in the market that can help cover this gap at a reasonable cost to address the critical illness gap. They can range from term plans to whole life plans that could cover this risk for as long as one requires the coverage.
The last thing one would want when retired is to retire from retirement. Hence, it would be most prudent to ensure that these potentially large ticket contingencies are well covered even before structuring a suitable retirement income solution. Do speak to your personal financial adviser representative to ensure your coverage is up to date and sufficient!
- http://lkyspp.nus.edu.sg/ips/wp-content/uploads/sites/2/2014/07/CPF-Forum_P1-S1_Kalyani-Mehta-The-future-Retirement-Landscape_210714_V2.pdf
2http://www.singstat.gov.sg/docs/default-source/default-document-library/publications/publications_and_papers/prices/cpiaug15.pdf
3https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/lifecal/Life_Estimator.asp
4http://www.singstat.gov.sg/docs/default-source/default-document-library/publications/publications_and_papers/household_income_and_expenditure/hes1213.pdf
5https://www.moh.gov.sg/content/dam/moh_web/MediShieldLife/Others/Recommendations/MediShield_Life_Review_Committee_Report_Final.pdf Page 54
Contributor – Lee Song Yong PIAS Financial Adviser Representative, Chartered Financial Consultant ®
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