Many South Africans face a bleak retirement because they are either not saving enough, cash out their retirement savings when changing jobs, or are following an inappropriate investment strategy.
However, even those fund members who are keeping their eyes on the prize risk being blindsided by an unfortunate and unexpected life event.
This is according to Nashalin Portrag, head of FundsAtWork at Momentum Corporate, who warns that illness and disability, or the premature death of a spouse, can seriously hamper the probability of members reaching their retirement goals.
“While the ultimate aim is to save sufficiently for retirement, all members need to be aware of these unpredictable, yet often sudden and life-changing events. In addition to derailing a member’s retirement plan, a hurdle such as being diagnosed with a critical illness or losing a spouse can have a major negative impact on someone’s lifestyle during retirement.”
Regarding the impact of disability and critical illness, Portrag reveals that cancer and psychiatric claims lead across all sectors and types of disability cover in South Africa. “Momentum Corporate has seen an overall increase in cancer claims of 48% since 2012, representing 15% of all disability benefit claims in 2018.
“To make matters worse, the costs associated with treatment for this non-discriminatory disease continue to rise, with the typical medical costs for cancer treatment estimated to be as high as R1 million,” he adds.
Over and above these medical costs, which may normally be covered to some extent by one’s medical scheme, Portrag notes that there are also many non-medical related or lifestyle expenses associated with cancer such as transport cost to chemotherapy, home nursing care and equipment and certain lifestyle adjustment expenses.
“These additional expenses add up very quickly and can cause significant financial vulnerability at a time when patients need to focus their energy on recovering. In addition, members’ levels of disability cover may not be sufficient which means they may receive a lower income during disability.”
Another unexpected hurdle that Portrag says can seriously affect retirement outcomes is the untimely event of a partner’s death. “The unexpected death of a life partner or spouse can have a severe impact on the retirement outcomes of the surviving partner. Due to the sudden loss of an additional income, the cost of a funeral and other related costs such as grief counselling, they may find themselves under severe cash flow pressure if their partner was not adequately covered.
“Besides most South Africans being underinsured and only able to replace approximately 38% of their salaries in the event of death, many do not take out spouse’s life cover,” he highlights. “This insurance gap may force members to dip into their nest egg or to reduce their retirement contributions or pensionable salaries, and even cash out their preservation fund savings to cover their expenses.”
While there is no way to prepare fully for the impact of such unpredictable pre-retirement hurdles, Portrag believes that an integrated and comprehensive approach can help. “The impact of these pre-retirement risk factors on retirement outcomes highlights the important role that financial advisers play in ensuring that their clients’ employees’ retirement planning stay on track despite unforeseen life events.”
In this sense, he says that partnering with the right umbrella fund will promote a holistic approach to financial planning that will reduce the inherent conflict between saving for retirement and making sure members’ insurance cover is at the right level for their needs. “A highly integrated and flexible umbrella fund solution that is coupled with a rewards programme encourages a healthy lifestyle which leads to improved physical health, reduces the risk of disability and critical illness, and reduces medical expenses and insurance costs.
“The right umbrella fund also offers integrated value added benefits to alleviate some of the financial pressures caused by death such as transporting the remains of the deceased and grief counselling,” he adds.
Furthermore, Portrag highlights that an innovative integration between the rewards programme and the fund can create a virtuous cycle in which employees’ healthy behaviour choices generate financial returns that can be used to cover medical expenses and can even be channelled towards retirement savings.
“With the right umbrella fund, all parts work together to fill the financial gaps that are associated with pre-retirement risk factors such as death, disability and critical illness,” he concludes.