This blog post involves CPF talk. To spare you the agony, if you are not keen on the topic, do not read any further! I have no interest in arguing, convincing, or justifying anyone or anything here.
CPF And Its Role
Central Provident Fund (CPF) is a compulsory comprehensive savings plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare, and housing needs. The CPF is an employment-based savings scheme with employers and employees contributing a mandated amount to the Fund.
CPF is split into three separate accounts, each with its intended use and purpose.
- Ordinary Account (OA) – for housing, pay for CPF insurance, investment and education.
- Medisave Account (MA) – for hospitalization and approved medical insurance.
- Special Account (SA) – for old age and (strongly recommend not to use for) investment in retirement-related financial products.
The OA and SA is combined to form the Retirement Account (RA) when one turns 55. The RA is used to meet basic needs during old age.
CPF-OA Is For Housing Only?
The primary short-term use of CPF-OA is obviously for housing for me. I use it for the following –
- Repayment of my monthly HDB housing loan installments till May 2041.
- Dependants’ Protection Scheme (DPS) – The Dependants’ Protection Scheme (DPS) is a term insurance that provides insured members and their families with some money to get through the first few years should the insured members pass away, suffer from Terminal Illness or Total Permanent Disability.
- Home Protection Scheme (HPS) – The Home Protection Scheme (HPS) protects CPF members and their families from losing their HDB flat in the event of death, terminal illness or total permanent disability.
I have enough in my CPF-OA (let’s call it amount $X) to pay for my remaining 22 years and 7 months of monthly installments, and I’m not planning to make an early repayment. I have written about my rationale for getting a maximum 30-year loan duration and no, I’m not actually paying that much more in interest. If I die before the 30-year mark, I don’t have to repay the rest of the amount due courtesy of HPS.
Try this out if you’re curious: How long will my money last with systematic withdrawals?
This also means that any amount in excess of the amount $X, I can safely use it for investment or transfer them into CPF-SA. Yes, I know I have said before that I have neither done (nor advocate) a transfer of money from CPF-OA to CPF-SA. That is because most people actually need the money (and flexibility/security) in it for (our increasingly expensive) housing.
However, my situation now has changed. If I had wanted to, I can clear my HDB loan at any time. I simply choose not to. Some folks love to be debt-free. I don’t feel like I have such a need. Having a $X debt with $X cash works very well for me.
I have catered enough in CPF-OA for my existing housing situation and insurance. Having said that, I’m not inclined to make any quick decisions yet. Besides, at the 35-year-old mark, contribution rates have shifted slightly: minus 2% for CPF-OA and plus 1% for CPF-MA and CPF-SA.
What about a second property purchase? My HDB purchase price versus resale price has a nice $200k cushion so I’m not too worried about that. Especially when I have no condominium aspirations. My current focus would be to prepare for retirement income.
CPF-MA : Enough For Healthcare Or Not?
CPF-MA is even more straight-forward than CPF-OA.
- Medishield Life
- Private Integrated Shield Plan
- Possible use for parents medical-care
The Basic Healthcare Sum (BHS) is the estimated savings required for basic subsidized healthcare needs in old age. The BHS is adjusted yearly for members below age 65 to keep pace with the growth in Medisave withdrawals. For 2018, it is $54,500 and I have just managed to hit this personal milestone.
A safe projection is to assume an increase of about $2,500 for the next two years. I’m expecting the annual CPF-MA interest of 4% to 5% earned to be sufficient to cover all subsequent yearly increase. Yes, the self-fulfilling BHS sum. For the 2019 figure, we can expect the official number to be out sometime in November 2018.
Oh, and don’t forget, CareShieldLife is coming in 2020 🙂
CPF-SA Is The 24/7 Compounding Machine
I can’t touch it now. I can’t use it now. Let it compound away!
With my CPF-MA already hitting the BHS this year, any excess from CPF-MA will start flowing into CPF-SA. Contribution rate into these two buckets is also up 1% each as mentioned in my previous section due to my new age-group bracket. I am expecting this double-bonus to be rather substantial in helping with the long-term accumulation and compounding effect.
It means my actual contribution rates will look more like CPF-OA 21% | CPF-SA 16% | CPF-MA 0%.
Having said that, I’m not looking at too far into the future. My 2020 target goal of hitting Full Retirement Sum (FRS) + BHS of $240,500 remains on track.
This is also why I’m happy to let my excess CPF-OA sit where it is for a chance to enter the market if and when it crashes.
So, This Is Where I Stand
An exercise like this is pretty refreshing and ought to be done as part of retirement planning (awesome advice by Christopher from Providend), which is basically achieving the simple three points below –
- You must have a fully paid house.
- You must have a good medical expense insurance.
- You must have a lifelong stream of income.
Three points. Easier said than done. CPF can be a strong pillar of support. Use it well rather than fight against it.
I’m pounding away at point #3 at this point in time, with #1 and #2 already largely in place. Gambatte!
Edit : It happened that the NDP Rally took place yesterday, and it is inevitable that housing issues would take center-stage once again. Do you think that our housing situation sucks? I enjoy travelling and staying in Airbnb properties. How about looking in from the outside, from the perspective of Hong Kong?