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08 Jun 2021
SOURCE: Heartland Boy
When I checked my CPF balances last month, my heart warmed a little as I realised that my CPF MediSave Account (MA) has reached the Basic Healthcare Sum (BHS). BHS is the estimated savings required for basic subsidised healthcare needs in old age and is adjusted yearly for members below age 65 to keep pace with the growth in MA withdrawals (Source: Ministry of Health). That amount is $63,000 in 2021. Amidst the daily grind in my journey for financial independence in Singapore, reaching this milestone is cause for a small celebration. I shall elaborate on the significance of finally reaching the MediSave limit in 2021 through my CPF contributions.
1) PATIENCE PAYS OFF
In early 2019, I was invited as a guest speaker for CPF Hello Talk whereby the key message that I shared was how I have planned for my future retirement by turbocharging my CPF. One of the strategies that I mentioned was how reaching the BHS for my MA as soon as possible can help to turbocharge the growth of your CPF Special Account (SA) and Ordinary Account (OA).
Diagram 1: Heartland Boy sharing his CPF strategies at CPF Hello Talk 2019
During the presentation, I also revealed that I had only accumulated 2/3 of the BHS then. To expedite my goal of reaching the BHS, I did annual cash top-ups to my MA while enjoying tax relief in the process. However, we need to be mindful that even if the flesh (wallet in this case) is willing, CPF regulations is such that voluntary cash contribution to your MA is subject to both the BHS and CPF Annual Limit (which was $37,740 from 2019 to 2021).
(Read this article to understand how much you can voluntarily contribute cash to your MA)
That is why accumulation in one’s MA is a gradual process that takes time to bear fruit. Therefore, achieving this mini milestone serves as a good reminder that patience and dogged discipline can still pay off even in this current investment climate characterised by short-termism.
Diagram 2: Heartland Boy finally reached the BHS in 2021!
By the way, I have made my entire presentation deck for CPF Hello Talk available for download: CPF 101 Talk (30 March 2019).
2) ALL MA CONTRIBUTIONS SHOULD NOW FLOW TO SA
As my MA has now reached the cap/ceiling, future compulsory and voluntary contributions, including the ensuing interest generated, will be spilled over to the CPF SA/RA in a tap and bucket analogy as shown in Diagram 3.
Diagram 3: What happens when you have more than BHS (Source: CPF)
I rank this as the most important consequence of reaching this mini milestone and let me explain how the CPF is supercharged in this case with various scenarios.
Scenario 1: CPF member is below 35 years old, SA has not reached Full Retirement Sum (FRS) and MA has not reached Basic Healthcare Sum. The proportion of income contributed to CPF would be allocated as shown in Diagram 4.
Diagram 4: CPF Member (<35yo) without FRS and BHS
Scenario 2: CPF member is below 35 years old, SA has not reached FRS but MA has reached BHS. As a result, contributions meant for the MA would now overflow into the SA instead since the MA bucket is already full as shown in Diagram 5.
Diagram 5: CPF Member (<35yo) without FRS but achieve BHS
With 14% of the income contributing to the Special Account, it is now accelerating at twice the rate compared to the CPF member in Scenario 1. This ensures the CPF Member is well on track to achieve FRS well before retirement age.
Scenario 3: CPF member is below 35 years old, SA and MA have both reached FRS and BHS respectively. As a result, contributions meant for the MA would now flow into the OA instead since both the MA and SA buckets are already full as shown in Diagram 6.
Diagram 6: CPF Member (<35yo) achieves both FRS and BHS
The outcome is that 31% of contribution from income now goes towards the OA while the remaining 6% continues to get allocated towards the SA. This is definitely most welcome because funds in the OA are more flexible as they can be withdrawn and used for wider purposes, such as paying off housing mortgage or tertiary student loans.
Do note that I have also explained this effect in Slides 11-14 of my CPF Hello presentation deck.
3) INTEREST FROM MA ALONE SUFFICIENT TO PAY HEALTH INSURANCE PREMIUMS
At 4% p.a., the interest generated from a MA that has reached BHS is $2,520. That should usually be sufficient to pay for the premiums of MediShield Life and integrated shield plans for a family, subject to the MA annual withdrawal limit. Although do note that the interest generated from a MA that has reached BHS would go to SA since the MA bucket is already full (refer to illustration in Diagram 3)
Regardless of where the money goes, I think that it is comforting to note that I have at least secured the healthcare premiums for my family for the foreseeable future with no extra effort needed on my part. That is one less worry that I am happy to take off my load. However, do note that the riders of a H&S policy usually have to be paid with cash.
CONCLUSION OF BASIC HEALTHCARE SUM
At a personal level, I feel proud to have finally crossed this mini milestone as it brings me one step closer to a more secure financial future. On a side note, I did contemplate on the possibility that this blogpost would be interpreted by some as “showing off” and cause unnecessary offence. However, I think this is balanced by the possibility that there might also be some readers who may be inspired to maximise the possibilities offered by CPF to secure the foundations of their own retirement as well.
This article was first published on Heartland Boy.