Planning for a better ending

WHY WE NEED TO RADICALLY CHANGE OUR RETIREMENT ADVICE FRAMEWORK

This is probably not going to change overnight. But it will happen at some point in the future. The question is, how could employers help their employees to better navigate this transitional phase?

The problem is, old conventions are hard to change. Most pension funds provide exiting employees with financial advisers who tend to guide the discussion to which annuity product you wish to purchase as you exit the fund. This is expected to address all your funding requirements during retirement. The exercise makes sense – after all, the money needs to go somewhere. But making this decision correctly means we need to carefully consider what it is that’s being funded.

A new framework for making financial decisions at retirement

The problem with this current model is that it doesn’t thoroughly allow for the true economics of what you might need to address during this second long phase of your adult life. Nor does the advice framework begin to address the extraordinarily complex set of decisions that lie ahead for those wading into waters of uncertainty. There is so much more that we now understand about this transitional period of one’s life that there is no question we need to reconsider both the savings model that funds this period as well as the advice framework that accompanies it.

Time for a serious revamp.

What we would like to set out in this section is a whole new framework for making financial decisions at retirement. This framework demands considerably more skills from a financial adviser than the traditional advice framework. But we believe that the pay-off for getting this type of assistance is so significant that either employers should seriously consider adding this to their array of employee benefits or financial services companies should consider how to offer this affordably as an advice service that’s not connected to a product sale. Understanding what is entailed could raise serious questions about the adequacy of the advice members receive when they exit their retirement funds.

A three-phase retirement model

Where do we start? Coping with increasing longevity demands one thing above all else: good planning.

We will argue here that it may be more helpful to think of this exercise as funding for the next phase of life, a phase that is likely to span three very different sub-phases. Given what we now understand about longevity, if you have made it this far and are in reasonably good health, the chances are very good that you may have to fund for a period that spans approximately two-thirds of the time you spent working. Think of this as a second time around – only this time, because of the increase in unknowns in your life, the decision-making can be signifi cantly more complex.

Assess your assets
Typically, this part of the exercise starts with an assessment of your assets and liabilities. In the three-phase model, we need to think about both of these concepts differently. For example, your liabilities (financing your lifestyle needs) will be different for each of the three phases: housing, care, medical care and transportation costs are all likely to place different financial demands on you at each phase.

So, too, should your definition of assets change. Here we are asking you to think more holistically about what will be required to get the very best out of this period of your life. This isn’t just about your finances, though. A helpful way to think about these assets is to break them down as follows:

• Productive assets: what could you continue producing for both yourself and your family during each phase?
• Vitality assets: what would you need to do to keep yourself healthy and happy?
• Tangible assets: this is the money, car and home part.
• Transformational assets: how do you ensure that you continue to grow in terms of knowledge, relationships and overall stimulation?

Now we can consider how to solve for your first active period, your second, more passive period and, finally, the frail-care period.

What makes financial planning here so difficult?
What is missing from this financial planning exercise is the greatest unknown of all: your health and its future prospects. As Figure 12 illustrates, the variability in outcomes for one’s physical well-being over this period are enormous – from having the physical strength of a 25-year-old to being on the verge of complete immobility. This will be the most significant financial factor of all. The only way to mitigate it is to be clear about exactly what is covered by your medical aid and what is not, and to be knowledgeable about the potential costs of long-term care.

Address the possibility of dependence
What makes decision-making for these three periods particularly complex is the fact that at some point in this three-phase end-run you will become dependent on the help of others. At what point this will be true will be a function of your health and mental state. Typically, the transition to the help of others occurs somewhere between the second and third phases. But it will come, unless the proverbial bus gets to you first.

This means that, by necessity, decisionmaking here is best done with those ‘others’ in mind: family, the community, friends, caregivers or medical professionals or, better yet, with them being part of the discussion. This dependence on others may be from the perspective of physical need: mobility, sight, hearing or just general getting-outand- about issues. It may relate to financial issues, household or personal care, or to the emotional demands of solitude or dementia. The care of others will somewhere be needed. The more you know about what might be available to you when that time comes, the more effective your planning will be.

Ask the right questions
To a greater or lesser degree, the questions that need to be addressed in each phase focus on the same issues:

• Will I want to work, will I need to work, will I be able to work and, if so, doing what? Will I need to be reskilled?
• What would the critical financial questions and considerations for each phase look like and would I be able to meet them?
• Where will I live, with whom, and how will I pay for it?
• What basic protections will I need to continue to ensure I have a safety net (income, savings, medical aid, insurance, housing, transportation)?
• Who can I count on for help?
• How do I ensure that my voice will be heard when it’s needed?

Acknowledge that ageing is not a sickness
Perhaps the best insight we can take on in regard to this part of our lives is that ageing is not a sickness – but getting it right is all about maintaining quality of health! Let’s try to understand the relevant points here.

The World Health Organization provides a particularly effective way of illustrating why formulating a comprehensive plan around ageing is so complex. Using data from the large Australian Longitudinal Study on Women’s Health, they are able to capture how dramatically differently individuals may experience the ageing process.

Figure 12 illustrates that for any given population, the range of functioning increases within the population as we get older. The fact is, some 80-year-olds will have the same physical and mental capacities as many 20-year-olds². So, what the graph illustrates is that when we are younger, it’s easier to determine what sort of medical costs we are, on average, likely to incur. The older we are, the less precise that funding expectation becomes.

While the best predictor of how you are likely to fare during this period is the quality of health you’ve maintained over the course of your life, the fact is that even the smallest improvements to health habits at this point pay exponential dividends.

Scientists have a much better understanding of what keeps our brain going. No, it’s not blueberries or wine or brain games or sex. It’s actually exercise. Value for money, nothing will add more to your life after 64 than exercise – not hectic, thrill-seeking exercise necessarily. In fact, the best exercise, to engage in is free: walking.

That said, modern medicine has irrevocably changed the game around death and ageing. Estimates for developed economies such as the UK are that only about 20% of the population will simply ‘die in their sleep’. Another 20% will experience a relatively fast demise from stroke, heart attack or cancer. For the remaining 60%, the elderly could spend eight to ten years being seriously ill and debilitated until they die³. Gerontologists (specialists in the various aspects of ageing) call this an epidemic of frailty⁴.

For South Africa, the picture is slightly lagged but the trend is the same. Lifestyle diseases appear to be gaining traction fast and have become a significant factor in the spiralling costs of care as we age here. It is estimated that the accumulated losses to South Africa’s GDP between 2006 and 2015 from diabetes, stroke and coronary disease alone cost the country $1.88 billion⁵ (R24.4 billion).

Assess the costs beyond medical expenses
The problem with most of our assessments of the cost of ageing, though, is that the bulk of the analysis is focused on medical costs. We have a fairly clear idea of what medical aid cover is likely to cost individuals from age 65 through to their likely life expectancy. Equally, we know what that typically translates into in terms of the claims that need to be paid out by medical schemes over that period.

We also have a clear idea as to what happens to those medical costs during the four years preceding an individual’s death⁶.

Note, though, that these costs are based on private healthcare, which is probably beyond the reach of 80% of South Africans. Indeed, the cost differential between private and public healthcare is around 13 times. Given that 40% of the elderly in South Africa are classified as poor, private healthcare will service only a limited segment of the elderly population⁷.

As we shall soon see, understanding these costs in both the private and public sector is relevant, but this is perhaps not the most important health issue ahead. Here, we need to be cognisant of a different set of costs: the costs of this ‘epidemic of frailty’. The cost of the potentially eight to ten years of caring for the elderly when they are not sick as such, but are too frail to be on their own and care for all their basic needs. On top of these costs is the potential cost of administering an estate when someone is no longer capable of making their own decisions. These are the costs that are often ignored by financial advisers in the long-term planning for one’s so-called retirement. These are the costs that policymakers also have yet to really contemplate or plan for.

When understood from this perspective, the cost of ageing goes significantly beyond medical costs. While Table 2 provides a breakdown of the costs (and the pros and cons) of different types of retirement and frail-care housing and servicing arrangements, here is a back-of-the-envelope calculation just to spark some thought:

We can easily gauge that medical cover in South Africa may cost an individual around R28 000 a year during these later-life years. These are known costs. An individual’s need for long-term care, frail care or even intermediate remedial care is far less clear. What is known is what it’s likely to cost if you require it: the basic costs of frail care or in-home care are likely to add another R190 000 a year to expenses.

These, of course, are private arrangement costs. The assumption is that if these kinds of costs are not affordable – and they won’t be to the vast majority of South Africans – our families will step in and take over the burden of care. Indeed, 47% of South Africans have indicated that they will depend on their children when they reach middle age⁸. But this arrangement is far from free. For example, HR professionals frequently identify ‘resignation or unpaid leave to care for a family member’ as a significant factor behind the resignation of black females. One way or another, caregiving costs. It costs families, employers and the economy – even if the caregiving takes place outside the healthcare system. And this cost of care is about to radically increase.

What can mitigate these costs, though, is a better understanding of what we should concern ourselves with here. We strongly urge you to review the findings that we set out in 'Re-imagining long-term care'.

Ageing is not a medical problem, it’s a quality of life problem. Understand that the healthcare that’s required here is far different from the medical attention required when the average adult is sick. At the risk of repeating ourselves, the table below demands your attention ... again.

Getting started

The start of retirement is the fun phase. Assuming good health, the world is still wide open to you. Here are some important points to consider, though:

• Whatever benefits your employer provided, such as life cover, disability cover and medical aid, find out which ones you could continue with after you have left employment.
   
• If you need to continue earning an income, there are options besides taking a life’s worth of savings on the gamble that you might suddenly become a successful entrepreneur.
  • To find out if you have what it takes, talk to a group like the Awethu Project. They’ll give you a sense of what’s required and provide some measure of guidance. Or find a mentor you can partner with.
  • If you would rather just find a way to turn your skills or other assets into cash, go to www.betterwages.co.za and explore the myriad ways you could earn an additional income.
  • Find out if your employer (or other employers) will pay for you to provide continued training and mentoring.
     
• The medical profession is beginning to recognise that stopping abruptly may actually be bad for your health. Negative health shocks (and mortality) are higher following retirement. Maybe, don’t retire completely – consider working part-time or at least stay active.
   
• Psychologically, our sense of self is often tied up with our profession or jobs. What happens when there’s no work? What’s your purpose? This sense of your self is inextricably linked to health and happiness. Don’t retire from something but rather to something (and for more than a few months). If you don’t have your ‘to’ then don’t retire. Don’t just exist, live with purpose.
   
• Studies suggest that as we get older, we get happier. That should be good news. That dividend pays out best, though, when we recognise that friendships, relationships and community are integral to our health and happiness.
   
• Withdrawing from work may be akin to withdrawing from a community. Frequently, people decide not to retire because they can’t imagine how to fill that gap. Your significant other may not be ready to shoulder the full responsibility there.

Case study/lesson

Phase 2: Passive retiree
Things may start to slow down here. This is where the planning needs to begin in earnest with whomever will look after you and wherever you think you will likely live in the last phase. Consider reading Atul Gawande’s book, Being Mortal. This book provides invaluable insights into how to master the story of your life.

Relationships are what will matter most in this period. What the Harvard 80-year study on ageing has highlighted is that the role of genetics and ancestors with long lives proved less important to longevity than the level of satisfaction with our relationships. Now, it’s about securing that quality of life to the end. Make sure you are ready for this now and in Phase 3.

Phase 3: Frail retiree
At this stage, companionship, exposure to people of all ages, and being around living things are crucial to seeing out your days. Make sure you are familiar with community services that provide the kind of interaction you seek. 

Keep on top paperwork
Throughout each phase, it's important that you the people who help to manage your affairs have easy access to important information and documents throughout your retirement:

Weigh up your options for long-term care

Table 3 gives examples of housing and care arrangements you can consider at or during retirement, and suggests some pros and cons for each.

Make a point of investigating facilities that subscribe to The Eden Alternative model.

References

2 World Health Organization. 2015. World report on ageing and health, p. 7.
3 The Economist. 29 April 2017. End-of-life care: A better way to care for the dying.
4 Harper, S. 2016. How population change will transform our world. Oxford: Oxford University Press, p. 82.
5 Benefits Barometer 2016, p. 153.
6 Ranchod, S, Abraham, M, and Bloch J. 2015. An actuarial perspective on healthcare expenditure in the last year of life. South African Actuarial Journal 15 (2015), pp. 31 - 40.
7 Dr Sabastiana Kalula, Albertina and Walter Sisulu Institute for the Ageing.
8 Old Mutual. 2015. Old Mutual Savings Survey 2015.
9 Kilbourn, L. 2008. Retirement villages: an introduction to their legal nature, applicable legislation and the risks faced by investors in such schemes (2). Smith Tabata Buchanan Boyes.