iDeCo Allocation (is my major investment account)

[ap21]

Hi all,

I'm 41 and am assuming I'm going to be working until my late 60s at least.

I work part-time at a few universities and so am free to max out my SBI iDeCo account (minus ￥1,000 due to paying fuka nenkin) at ￥67,000 a month. Other than that, I also max out 積立NISA, pay into the UK state pension scheme and of course also Kokumin Nenkin. I have nothing spare to to invest after that.

The result is that my iDeCo contributions make up by far the majority of my investment portfolio and also of my monthly contributions. Originally I only bought stock index funds in the iDeCo. Then, though, I could see stocks as a proportion of my total investments heading towards 90% and higher. Reading posts such as some of Andrew Hallam's warning people against allowing their stock allocation to get too high, I mini-panicked and started buying bond index funds in the iDeCo to get the overall balance of my portfolio down to something like 70% stocks - 30% bonds. This makes me calmer at one level, but at another I realise I'm probably too young to be doing this yet and it's maybe not a great use of an iDeCo.

Could I ask what other people in a similar situation (Type-1 Pension Contributor around my age whose iDeCo contributions are larger than any other investing) are doing about this?

Many thanks for any info and advice anyone can provide.

Adam

[TokyoWart]

It sounds like the UK pension scheme and Japan's nenkin system make up a relatively large fraction of your retirement portfolio. I would think of those guaranteed, annuity-like pensions to lower the need for a large fixed income (bond) portion of your overall portfolio. At your age I am not sure that bonds would be of much use in your NISA or iDeCo accounts given the claim you have on those two pensions. You overall asset allocation is much more conservative than suggested by the 70:30 equity:bond split of your non-pension portfolio.

[RetireJapan]

Generally speaking you want to take advantage of tax-free accounts by putting things that are likely to grow the most (equities) in them.

Also completely agree with TokyoWart's excellent point about your pensions

But at the end of the day it's about what you are comfortable with. You'll have to experiment to see what that looks like.

[ap21]

It sounds like the UK pension scheme and Japan's nenkin system make up a relatively large fraction of your retirement portfolio. I would think of those guaranteed, annuity-like pensions to lower the need for a large fixed income (bond) portion of your overall portfolio. At your age I am not sure that bonds would be of much use in your NISA or iDeCo accounts given the claim you have on those two pensions. You overall asset allocation is much more conservative than suggested by the 70:30 equity:bond split of your non-pension portfolio.

Many thanks for the thoughtful and helpful response, TokyoWart.

Partly because I won't be getting the full kokumin nenkin (didn't start paying in until 31), partly because how much the UK state pension is worth is subject to the exchange rate and inflation (expats' pension doesn't increase with inflation), I never factored the state pensions into my overall allocation balance, but looking at your comments I think I really should

Again, thank you. This has given me some clarity.

[ap21]

Absolutely; in a way I know all of this is like asking you "What's my risk tolerance?", but it is really helpful in deciding that to get others' perspectives. Thanks very much

[beanhead]

At 41, you have at least 20 years more to work. I think keeping the bonds out of your tax-advantaged accounts makes sense, at least for another 10 or 15 years.
Keeping them in will constrain your growth in iDeCO and NISA.

Later, balancing to keep more cash or bonds is smart, but not in those retirement/tax-free accounts.
That is my strategy, anyway...

[Moneymatters]

ideco is not tax free.

I only mention this as you'll potentially be investing double the tax allowance amount each year for 20 years.
Assuming 5% compounded growth, the lump sum, (less the 400K per participating year allowance and then halved) could/would have significant income tax payable against it.
However, I think you can mitigate against this by taking it gradually.
Still recommend you make a project of the lump sum and strategy how to cash out.

[RetireJapan]

ideco is not tax free.

This is a very good point, especially for people who can pay in 68,000 yen a month.

Assuming you are able to claim the 'retirement bonus' allowance (退職金控除), the tax treatment is as follows:

Up to 15m yen is tax free (you build this allowance up 400,000 yen per year for the first 20 years, and then 700,000 yen a year for the next ten, for a maximum of 15m tax free)

For any amount above the allowance, half is tax free and the rest is taxed as income.

Because you can decide when to cash out iDeCo, doing so in a year when you don't have much income otherwise would also help soften the blow of this tax.

[ap21]

At 41, you have at least 20 years more to work. I think keeping the bonds out of your tax-advantaged accounts makes sense, at least for another 10 or 15 years.
Keeping them in will constrain your growth in iDeCO and NISA.

Later, balancing to keep more cash or bonds is smart, but not in those retirement/tax-free accounts.
That is my strategy, anyway...

I think it's a very sensible strategy Thank you! I have to be a bit more conservative with the NISA (that's likely to be used before retirement for - ideally - a down payment on a mortgage or on part of a child's education, but may be needed before even those) but have already changed my iDeCo back to stocks

[ap21]

ideco is not tax free.

I only mention this as you'll potentially be investing double the tax allowance amount each year for 20 years.
Assuming 5% compounded growth, the lump sum, (less the 400K per participating year allowance and then halved) could/would have significant income tax payable against it.
However, I think you can mitigate against this by taking it gradually.
Still recommend you make a project of the lump sum and strategy how to cash out.

Thank you, this is a really good point. I'm vaguely intending to take the cash in "pension" form but haven't decided yet. I'm still halfway through the Dec 2021 edition of the Takekawa book (https://www.amazon.co.jp/%E6%94%B9%E8%A ... 192&sr=8-2) and haven't got to the withdrawal chapter. If I find anything useful to share from that I'll put it on here!