What you need to know before turning 40

Piggybank with hourglassWhat most 40 year-olds discover is that the choices they made ten years ago are now limiting their options when it comes to retirement, risk and medical cover.

When you are in your 20s, it is hard to imagine what it would be like to be 60 years old; it is understandable that saving for retirement is not a priority. You are healthy and fit so medical schemes seem like a rip-off; you don’t have a family so life cover seems irrelevant and the chances of you getting seriously ill are negligible so why waste money on critical illness cover when you can pay off your car?

There are far more pressing financial issues facing a 20-something year-old like building a career, buying a house or car and starting a family, but the reality is that within 15 short years everything changes and the decisions you make in your 20s and early 30s will have a significant impact on your finances at the age of 40.

Saving later for retirement: save more, get less

It is really, really hard to make retirement savings a priority in your 20s. After all, you have another 35 years to go to retirement – that is practically forever! Yet it’s this huge amount of time you have until retirement that is your most powerful wealth creator. The sooner you start saving, the less you have to save and the more money you will have thanks to the miraculous power of compounding interest.

Sore Cloete, senior legal manager at Old Mutual provides the following example:

  • Mike and Mark both invest the same amount but over different periods:
  • Mark is a sensible young man and starts saving R500 a year, so over 20 years, he has invested a total of R10 000.
  • Mike on the other hand only starts saving ten years later then Mark. He realises that he has started late so he doubles his contributions and invests R1 000 a year for ten years, also investing a total of R10 000 over that period.

They have both invested exactly the same amount of money and both receive exactly the same return of 7%, yet after ten years Mike has only R14 784 saved while Mark has turned his R10 000 into R21 933.

By saving less each year but spreading out his investment over a longer term, the effect of compound interest gave Mark a bigger return than Mike by a massive R7 149 – that is 50% more for the same contribution. That gap widens even further if the investment returns are higher.

What it will cost you at 40: You would have to save 35% of your salary to have the same amount at retirement than if you started saving 15% at the age of 25

 

Medical Scheme: late-joiner penalties

When you are young and healthy, medical schemes feel like a complete rip-off as you hardly use them yet they cost you the equivalent of an overseas plane ticket each year. Now you are reaching your late 30s and starting a family; you realise you need to get some medical protection except you suddenly discover that your medical cover will cost you more than you expected due to your age.

Medical schemes work on the basis of cross-subsidisation: younger members supplement the costs of the older members – the logic is that you too will get older and benefit from the next generation’s contributions. Older members tend to claim more, they start families and then age catches up and their physical condition deteriorates, therefore medical schemes are allowed to charge late-joiner penalties.

Cloete explains that a late joiner is a person that at the date of application for membership is 35 years of age or older but has not enjoyed medical aid coverage with one or more medical schemes from 1 April 2001 without a break. So unless you were a regular member of a medical scheme for the last twelve years your premiums will be higher. The older you are, the higher the penalty.

There is another problem with waiting until you need a medical scheme. Around the age of 40 your body starts to take strain and you may already have a pre-existing condition, such as a back problem, that was diagnosed before you joined the medical scheme. Cloete says the Medical Schemes Act allows for a general waiting period of up to three months to apply and a condition-specific waiting period of up to 12 months. So for a 12-month period you are unable to claim any expenses incurred for your back injury.

What it will cost you at 40: If you are 40 years old and have not been a member of a medical aid for four consecutive years in the last 12 years since 1 April 2001, you will pay an additional 0.5% on your premiums. That equates to an extra R100 per month on a R2000 medical scheme contribution or R1200 a year more. As medical premiums increase by around nine percent a year, so your penalty premium increases by the same amount. Over the next 20 years you will pay R61 000 in additional penalty premiums.

 

Risk cover: Age comes quickly

In our 20s we think that we are immortal and even if we did die, what difference would it make to our finances? The question you really need to ask is: what if I don’t die? By taking up risk cover early on, you can ensure that the premiums are affordable for the rest of your life.

Jaco Gouws, risk product manager at Old Mutual explains that life cover premiums become more expensive should your health deteriorate, which means it will be unaffordable when you need it the most.

The benefit of getting risk cover when you are still young also ensures that you have sufficient cover for the rest of your life. “By procrastinating, you run the risk of having specific exclusions applied if you’ve had health issues in the past and the higher the chance of developing health issues in the future,” says Gouws.

This comes back to the fact that a 25 year-old today will, in just 15 years’ time, no longer be considered “young” – and there is a good reason for that. Ask around your office or community how many people in their 40s have back or knee injuries or developed some form of mild but chronic illness? Back strain for example is a fairly common complaint, yet it can significantly increase your risk premiums or even result in any back-related disability being fully excluded from your policy.

Gouws says if you cannot afford the level of cover that you need, you can select a premium pattern that starts out at a more affordable level but increases more significantly as you age. If you are worried that your health may deteriorate over time and will prevent you from obtaining risk cover in the future, there are benefits available which give you (future) access to risk cover with reduced medical requirements.

What it will cost you at 40: Life cover of R1 million for a female aged 30 can increase by as much as 70% by the time she is 40 years old.

 

This article by Maya Fisher-French first appeared in City Press

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