I've only picked the low-hanging fruit that is fuka nenkin so far (report now posted as promised:
viewtopic.php?f=9&t=587) and am still investigating iDeCo (and investment in general) from the outside at the moment. But from my inexperienced perspective, could one annual payment optimise the iDeCo in multiple ways, as below, if people have the funds to hand for such a lump sum? Apologies if this is well trodden ground in either the blog or the forum, and for any errors.
Points 1, 2 and 4 are only valid for kokumin nenkin people who are
also fuka nenkin subscribers
and able to max out their iDeCo, but points 3 and 5 are valid for all iDeCo subscribers albeit with different numbers. For fuka nenkin subscribers who wish to max out their iDeCo, the annual payment would be 811,000 (as 816,000 is the allowance, fuka nenkin contributions are 4,800 and only increments of 1,000 yen are allowable as far as I can tell).
(1) You'd fund your iDeCo by an extra 7,000 yen a year (811,000 compared to 804,000). The difference in contributions equates to just 583 yen per month, but multiply by a decade and this extra investment becomes non-trivial, especially if growth is achieved. If you went for the monthly deal, would you manage to siphon this 583 yen into an alternative investment, or would it just get squandered in the grand scheme of your accounts? If the latter, then the money is effectively 'free' to you in one school of thought... if you choose to use it. Since you are already a fuka nenkin subscriber, then I think I know how you'd feel about this...
(2) You'd use all but 200 yen of your annual 816,000 iDeCo / additional pension allowance (811,000 on iDeCo and 4,800 on fuka nenkin), thus realising 99.98% of your available tax breaks (this % dips a teensy bit lower if you use the early payment discount for fuka nenkin). The 67,000 per month method would leave 7,200 of the allowance unused, which still represents a successful usage rate of 99.12%, but since you are a fuka nenkin devotee, you are a fan of small gains and want to maximise the efficiency. In the monthly model, you 'lose' 7,000 yen of tax breaks compared to the annual model, and if this 7,000 yen were taxed at 20% (to pluck a number from the sky), that 1,400 yen equates to almost 30% of your fuka nenkin contributions.
(3) If you invested one lump sum in January, 100% of your investment would be invested for ~100% of the year (I don't know how you actually make the payments, but imagine it would be difficult / impossible to fully optimise to 1st Jan!). In a model where the investment
x grew steadily by
y% over the year and incurred no fees (which is, of course, not how the real world operates), your investment would be worth (100 +
y)
x/100, eg if you invested 800,000 and achieved 5% growth, you'd realise gains of 40,000 for a total of 840,000. In the monthly model, on average, approximately half of your annual total is invested for the full 12 months (say your Jan investment is made on 15th Jan it will be in the system for 11.5 months; you can pair this off with your 15th Dec investment -- in for only 0.5 months -- and see that the pair are held for a total of 12 months; and you can easily see how this applies to other pairs). Thus, on your 800,000, you effectively only receive the 5% growth on 400,000, leading to gains of 20,000 and a new total of 820,000. The annual model has outperformed by 20,000 yen, and this 20,000 yen represents 2.4% of the 820,000 total you would have got from the monthly model -- a very significant percentage in the context of the investment's growth percentage. (This isn't quite a fair comparison as I've assumed the annual payments are optimised to 1st Jan whereas the monthly payments are middle-of-the-month; I don't know how much choice one has in this in reality, so this is just a back of the envelope comparison.) Did I read somewhere on the blog / forum / in literature that the pros of this get-it-in-as-soon-as-possible strategy will statistically be likely to outweigh the cons of potentially mistiming the market and buying at a high price? And since you are repeating this strategy annually, you are mitigating the risk of one wild outlying point in time...?
(4) Combining (1) and (3), in the optimised scenario, you'd invest 811,000 as early as possible in Jan and realise 40,550 of growth leading to a total of 851,550, whereas in the 67,000 per month scenario, on average you'd invest approx half of your (sub-optimal) 804,000 for 12 months, thus realising 20,100 of gains and giving a total of 824,100. The gap in invested funds has now widened to 27,450, though monthly contributors would have 5,600 more yen in their pockets -- their investment was 7,000 lower at the start but they paid 1,400 more in tax -- if it hasn't been squandered).
(5) Also, my (limited) understanding of the monthly fee structure is that at SBI you pay 167 yen in a month with contributions and 64 yen in a month with no contributions. Thus, with one annual payment you'd pay 167 + (11 x 64) = 871 yen in a year compared to 167 x 12 = 2,004 yen in the monthly scenario for a raw saving of 1,133 yen (but percentagewise you've slashed monthly fees by 56.5%). I don't know whether these fees are paid from inside the investment or externally; if internally, then clearly the higher fees create more drag on the investment's growth in the monthly model.
Maybe not such a minor point after all!
Do the above assumptions hold, or are some built on shaky foundations? Do existing iDeCo subscribers advocate the annual method, or do you prefer monthly contributions, and what's your thought process when deciding?
