What you need to know before turning 40

2014-08-20 00:00

WHILE they say 40 is the new 30, the reality is that you are no longer “young”.

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 40.

Saving later for retirement: Save more, get less

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.

Jane and Mark both invest the same amount but over different periods:

• Mark is a sensible young man and starts saving R500 per month and over the 20 years he has invested a total of R120 000.

• Jane on the other hand only starts saving 10 years later. She realises that she has started late so she doubles her contributions and invests R1 000 a month for 10 years, also investing a total of R120 000 over that period.

They have both invested exactly the same amount of money and both receive exactly the same return of 10% per annum, yet after 10 years Jane’s R120 000 is worth R205 000, while Mark has turned his R120 000 into R380 000.

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 Jane by a massive R175 000 (85% 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 penalty

Medical schemes are allowed to charge late joiner penalties if a person is 35 years of age or older, but has not had medical scheme coverage for four years. 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 that has been diagnosed before joining the medical scheme such as a back problem.

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 April 1, 2001, you will pay an additional 0,5% on your premiums. That’s an extra R100 per month on a R2 000 medical scheme contribution or R1 200 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

By taking up risk cover early on, you can ensure that the premiums are affordable for the rest of your life.

Life cover premiums become more expensive should your health deteriorate, which means it will be unaffordable when you need it the most. 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 gives 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.

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