When we are planning for our financial independence, one of the key considerations or areas to plan for is our healthcare needs.
If we are unable to take care of our well-being, then the quality of our early retirement or traditional retirement (retiring after 65 years old) will drastically drop.
There are a lot of considerations and that will be a topic for another day.
Today, I would like to explore how much we may need to get ready to pre-pay the premiums for our health insurance.
The Role of Our Health Insurance or Shield Plans in Singapore
In Singapore, our health insurance is our shield plans from various private insurers: MyShield, PruShield, NTUC IncomeShield, Axa Shield, HealthShield, Raffles Shield.
The main objective of our shield plans is to offset a large hospital bill. This can be inpatient or outpatient.
For example, a transplant at a hospital may cost around S$300,000.
If we need to pay $300,000 out of pocket, then that will greatly stretch our household finances.
These shield plans make us pay a certain deductible and also copay 10% of the bill. In this example, the bill may be reduced to $33,000.
This is still a large sum of money, but it is very much manageable. Even if we do not have the money and have to borrow to pay this bill, $33,000 is still a better sum to pay off than $300,000.
For those who wish to offset more of this bill, the private insurers have come up with riders that would make you copay 5% of the bill and limit the bill payment to a particular sum if you opt for lower than panel specialist doctor.
Your Desired Healthcare Quality Determines How Much You Need to Set Aside for Your Financial Independence Healthcare Needs.
As a planner, how much you should set aside for your financial independence for health insurance greatly depends on the range and quality of healthcare you wish to get.
If you have to experience the public health system and cannot stand the slow waiting and would always opt for private, and worry less about the specialist that you choose, then you have to set aside much more.
However, if you would like access to private but are comfortable with public hospital treatment for a lot of things, then how much you set aside will be different.
Generally, the higher the quality, the greater the range, then you would need to set aside more.
If you are planning for the worst-case grade of health scenario but would work yearly to ensure better care, then the amount would be different.
Thus, your healthcare philosophy matters a lot.
Which Aspects of our Future Healthcare Needs are we Planning for Today?
For today’s discussion, let us constrain to discussing how much we need just to pay for our basic shield plan premiums upfront.
Let us leave the planning for rider premiums and the out-of-pocket cost aside.
If we can decide on how to model the main shield plan premiums, the rest would be easier.
We want to create a Health Sinking fund:
- We will pre-fund the health sinking fund with enough money.
- The fund will be allocated to a low-cost, diversified portfolio to ensure it grows above inflation.
- Annually, we will take out a portion to pay for the premiums of our shield plan.
On a high level here is how the sinking fund will look like when working with the other portions of your wealth:
I think I would prefer the health sinking fund to pay for more things, such as out-of-pocket health costs, but that would complicate things so for now, let us imagine it is for just one thing, paying for shield plan premiums.
The nature of the spending needed for our health insurance premiums is:
- The spending has to be periodic.
- The spending in earlier years is lesser.
- The spending in later years goes up over time.
- There cannot be a break in the income stream.
- Income needs to keep up with inflation.
I will elaborate more on the nature of spending next.
The Challenges in Planning How Much to Set Aside Just for Shield Plan Premiums
I am currently 41 years old so let us pretend we are planning for me.
There is no other way you can pay for health insurance premiums other than coming out from your pocket. Well in general, we can use our CPF Medisave to pay for a portion of it, up to a certain amount of premiums.
Suppose that I prefer to keep my options open and ensure that if I need to go to a private hospital, I have a health insurance plan that dramatically reduces the out-of-pocket payments.
Suppose I will choose to go for the highest grade of shield plan from NTUC which allows me to reduce my healthcare costs if I were to admit to private hospitals.
The highest grade of NTUC’s shield plan is their Preferred.
Here is the premium schedule for NTUC IncomeShield Preferred as of April 2021:
What you will notice is that the premiums you have to pay are divided to:
- Paid with Medisave
- Paid with Cash
I reached the age where if I choose a premium grade of healthcare, it will come from cash.
Another thing we observe is that the premiums go up over time. As we get older, the probability of us suffering from aliments that require hospital treatment increases.
And if you very much prefer the highest grade of care, you can take a look at the premiums at 95 years old. It will cost $7,130 a year.
It is no wonder that we are fielding questions from the public or clients about whether they should downgrade their shield plans.
The premiums are not cheap.
This escalating premium will also mean it is very challenging to just plan this healthcare cost as part of an overall annual expense.
Planning your Premiums as part of One Consolidated Annual Retirement Expense Becomes Challenging
A lot of us or planners make it simple by deciding how much you need in retirement based on your spending needs today.
But your premiums today at 45 years old is $564 a year but at 75 years old is $3959 a year.
I think we are underprovisioning our future medical needs if we are planning this way.
But this premium schedule does not stay static. It goes up over time.
It will be easier to plan if the premiums do not change.
But that premium schedule goes up over time due to the cost of healthcare, which factors in inflation.
And in recent years, every year there is a new table published, the premiums increased dramatically.
To give you an example, in 2017, the annual premiums for MyShield Plan 1 was $8022. In 2019 it’s $9097. That is a 6.4% a year increase.
What we notice is that the increase for different age bands is not uniformed as well. Thus, planning to a granular level is challenging.
In the table below, on the right side, I calculated the premiums if it grows at a compounded 4% a year:
Now, we can see at age 100, the figure instead of $8102 a year becomes $81,962 a year!
If we don’t expect our health sinking fund to grow, we need to set aside $1.26 million today.
Is that realistic at all?
Remember that every year, or every two years, any of the premiums in the age band will be adjusted upwards.
I still have my premium table for my Aviva MyShield Plan 1 from 2006, which is 14-15 years ago. At age 70 the growth in premium is 4%. At age 100, the growth in premium is 3%.
At age 100, my healthcare cost have almost 60 years to compound!
For the conservative people, if the inflation compounds at 5%, instead of $90,065 the number will be closer to $162k!
How Much Do We Need Today to Plan for Our Future Health Shield Premiums?
Setting aside $1.47 million just to pay for premiums is a bit crazy.
I think our investment can do some heavy lifting.
If we invest in our Health Sinking Fund at a greater rate of return, we can set aside less.
Suppose we allocate our Health Sinking Fund to a diversified portfolio of bonds and equities with a 30% bond, 70% equity split.
We can work backwards based on the growth rate, how much we can set aside in our sinking fund today.
Currently, we already have one health sinking fund: Our CPF Medisave.
As of now, our CPF Medisave grows at 4% a year.
As most of our premiums will come from cash in the future, we will need a sinking fund other than our CPF Medisave.
I will use a compounded rate of return of 3% a year. Here is how much to set aside:
We added a third section where it shows how much we need to set aside today. How much required is the present value of the “Premiums in Future (after inflation)” section.
This means that if I were to retire today, to ensure that I can pay for the premiums from 41 to 100 years old for my shield plan only, I need $45,300 in my CPF Medisave and $255,646 in a Health Sinking Fund.
It looks like if we have a sum equal to our current CPF Medisave Limit of 63,000, we should have that portion catered for.
But what about the Health Sinking Fund in cash?
Am I being too conservative? Am I buffering too much?
Let us go through some of the considerations.
Why do I use a 3% Rate of Return for a 70% equity and 30% bond portfolio?
In my calculation, I discount the inflated premiums back to today’s value with a 3% discount rate.
To those who don’t invest, this feels high. To those who invest in equities, this feels damn conservative.
The reason I use 3% is due to the nature of the income we need.
The income die die needs to be there. It cannot be lesser.
By deploying 70% in equities and 30% in bonds, I created a portfolio that gives the Health Sinking Fund a higher probability of keeping up with inflation yet be relatively stable.
To find out more about volatility and your portfolio when you are spending it, you can refer to my post on volatility drags and retirement.
We will expect a higher compounded rate of return than 3% based on our portfolio allocation. But if we are unlucky, and live in a period of poorer equity returns, or much higher inflation, we have provisioned for more money.
Actually, due to the nature of the spending, I can see the rationale for going towards a 100% equity portfolio for some people.
The spending needs start off small and scale up over time. The real lump sum needs to happen closer to 65 years old.
This means that I have a 24 years time horizon before the real need comes in. During this period, I can afford to take more volatility.
If we try to review my figures by using the safe withdrawal rate method, at age 45, my premiums from cash come up to $39 a year.
Current withdrawal rate at 45 years old = $39/$255,646 = 0.01%
The premium payment won’t even put any stress on the portfolio.
If you wish to use a less conservative rate of return here is how much you will need:
|Rate of Return of Investment||Health Sinking Fund Value Today|
If you are closer to 65, I would not suggest that you use too high of a planning rate of return.
Is our premium inflation growth rate too low?
Maybe it is too low but the actual data, which includes the recent premium escalation, show that the growth rate is in the 3-4% range.
We won’t know the inflation rate in the future. That is what makes things more challenging.
I could tell you the growth rate is 6% and in the future, it grows at 3%. Would you come back and flame me that we overplanned?
There are a few uncertainties here:
- Growth of premium between the age band.
- Inflation of premium.
- Future market returns
- Your longevity.
It will be challenging to plan for a foolproof scenario but we can provide enough upfront.
But if we set aside too much, we spend a large part of our lives working for it.
Early Retirement is Not the Issue with Health Insurance Planning
Here is the amount we need to have in our Health Sinking Fund if we wish to cater for our lives before 65 years old:
|Rate of Return of Investment||Health Sinking Fund Value Today|
As you can see, catering for the premiums for early retirement is not too big of an issue, regardless of the rate of return in your Health Sinking Fund.
The healthcare problem is challenging because the premiums when we are old is drastically higher.
Adjusting Our Grade of Healthcare Demands Might be Needed
You might notice that we haven’t even done any computation on the out-of-pocket expenses, premiums for Careshield Life, medical supplements and the shield plan premiums have practically eaten up our entire CPF Medisave.
If the quality of our healthcare needs is high, then we will have to set aside more.
We can always downgrade our NTUC Incomeshield to a grade lower.
Here is the value of our Health Sinking Fund needed in contrast:
|Rate of Return of Investment||Health Sinking Fund Value Today (Preferred)||Health Sinking fund Value Today (Advantage)|
What you need to set aside is dramatically lesser.
I can see someone working 1 more year to get ready $39,000 just to ensure they can pay for their premiums.
Going through this exercise does highlight a certain danger.
We cannot afford to stop paying for the health insurance premiums because that will leave us unprotected.
Depending on what age you retire, if you wish for a greater range in the grade of healthcare, you might need to set aside $107k to $255k in a Health Sinking Fund in cash.
I think there will be enough individuals or their advisers not realizing how big the premium cost can be if you are planning for a traditional or early retirement.
This is because they would usually plan the premium expense into their annual expenses.
But when they do their planning, their annual premiums were fully paid by CPF Medisave.
So their annual expenses do not include their health insurance premiums. That likely means, they may have miscalculated how much they need for their retirement.
In a way, I didn’t expect the number to be this big and may have even under catered for myself.
Most of the math should be correct. The most contentious part is the inflation growth of the shield plan premium table. That made the future premium figure look damn bombastic.
I am open to critique of my calculation. It makes my model stronger.
Unfortunately, premiums for health insurance is just one aspect of the cost we need to cater for. I think hopefully in the next few months, I have the bandwidth to model the rest.
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