iDeCo vs Fuka Nenkin

Which makes more sense for you?

This post is just for people who pay into kokumin nenkin. Regular employees, who are likely enroled in kosei nenkin, don’t have to worry about this. Neither do dependent spouses.

And if you pay into kokumin nenkin kikin, you already pay fuka nenkin as part of that.

Phew.

The question

This question actually came from a RetireJapan member, who asked why I was paying into fuka nenkin, ie wanted to see the numbers.

And I had to reply that I hadn’t run the numbers, I was basically doing it because it would give me a bit of diversification in retirement income.

I am paying 67,000 yen a month into iDeCo, so an extra 1,000 yen is not going to make much difference, whereas getting a larger pension from the government is desirable because it is not going to depend on the stock market doing well, and will be easier to deal with when I get old and (even more) decrepit.

But it made me curious, so I am going to run the numbers now.

Benefit of paying into fuka nenkin

Fuka nenkin is a funny one. It is mathematically very attractive, but the amount is so small it is almost comical.

How it works is that each month you pay an extra 400 yen on top of your normal kokumin nenkin payment. This is all done by the pension office, once you sign up it gets added automatically. Very easy.

This 400 yen uses up 1,000 yen’s worth of your monthly iDeCo contribution allowance. Instead of being able to pay in 68,000 yen a month, you can only pay in 67,000 yen a month if you are paying into fuka nenkin.

Then in retirement you will get an extra 200 yen per year for each month that you paid in. Yes, 200 yen per year. Told you it was comical.

Another way to think about it is to assume you will receive your pension for 20 years. In that situation, for each year (4,800 yen) you pay in, you would receive 10x as much money back (48,000 yen in extra pension).

I am 47 now, so I can pay nenkin until I am 60 or voluntarily until I am 65 under current rules. Let’s assume I keep paying so I can pay in 213 months.

I will pay a total of 85,200 yen, and my pension will go up by 42,600 yen a year. Mathematically very attractive, but so small it will make very little difference.

Benefit of paying into iDeCo

Instead of paying into fuka nenkin, I could instead put an extra 1,000 yen into iDeCo every month. This would reduce my taxable income by 12,000 yen a year (I don’t pay much income tax though, so this is not significant for me).

Assuming an average return of 8% for the stock market, I might end up with 449,402 yen extra in my iDeCo account.

But this will likely be taxed. Paying into iDeCo at the higher rate of 68,000, soon to be 75,000 yen a month, means that you are going to end up with a fairly large balance in the end. iDeCo taxation is complicated and has many factors. Let’s just assume that I pay 10% on my extra investments, leaving me with 404,461 yen.

Assuming a 4% withdrawal rate, that would give me 16,178 yen a year extra income in retirement. Quite a bit less than 42,600.

And there is more! I will assume I invested the 600 yen difference between fuka nenkin’s 400 yen a month and iDeCo’s 1,000 yen a month, either in NISA or in a taxable account.

That would give me a lump sum of 269,641 yen, and an annual 4% withdrawal would be 10,785.

The result

Well, paying into fuka nenkin instead of an extra 1,000 yen a month into iDeCo seems like a complete no brainer. I got the right answer by subconsiously guesstimating it.

Final score:

• extra 1,000 yen a month to iDeCo: 16,178 yen a year
• fuka nenkin + investing 600 yen a month: 53,385 (42,600+10,785) yen a year

To be completely fair, this changes if you die early. Fuka nenkin would just stop when you die, whereas the lump sums in iDeCo or in your accounts after cashing out would go to your family or heirs. This is less likely though, and there is only a 135,000 yen difference in the lump sums.

If you want to keep things simple there is no problem with just paying as much as you can into iDeCo, but it might be worth considering fuka nenkin if you are not doing it already.

How about you? Are you paying into fuka nenkin?