pension questions..

[RetireJapan]

This is because when you delay your pension, you’re betting that you’ll stick around long enough to receive more money than you would have had you started taking the pension at an earlier age.

Personally I don't think this is the best way to think about pensions. My reasoning is that pension income (stable, reliable, bimonthly payments) is better than other investments as you get older. Wrote about it more here: https://www.retirejapan.com/blog/pensio ... vestments/

Of course this is not the only way to think about this, or necessarily the correct way to do so

[ClearAsMud]

Personally I don't think this is the best way to think about pensions. My reasoning is that pension income (stable, reliable, bimonthly payments) is better than other investments as you get older. Wrote about it more here: https://www.retirejapan.com/blog/pensio ... vestments/

Of course this is not the only way to think about this, or necessarily the correct way to do so

No argument with your basic point, with which I agree. But a 70-year-old will have already reached a certain level of security, and the question becomes how much more is necessary. My own uni has just finished transitioning from offering a lifetime pension to offering a fixed-term (20-year) pension. During the transition period, retiring teachers were allowed to choose between the two systems (a fixed period makes planning easier, but the administration convinced the union that there would be no financial windfall for the university). The main difference between the two plans other than the direct risk of outliving the term: the lifetime pension reduced payments to survivors to half the pension amount, while the fixed-term pension pays the full amount of the pension to survivors for the remaining part of the term.

I have eligible colleagues who went both ways: one retiring early and giving up a fairly handsome income to take advantage of the lifetime benefits and some extra freedom, another staying to continue teaching and maintain current income for a while even though the odds are that coverage will end a little early for the survivors (this is separate from the national pension). I'm not prepared to say that either decision was mistaken; advantages and disadvantages coexist, and my colleagues were aware of them. My own decision (I was also eligible) was based on personal circumstances and a certain amount of educated guesswork.

Great material on this site, and I admire your judiciousness -- and energy!

[captainspoke]

... My own uni has just finished transitioning from offering a lifetime pension to offering a fixed-term (20-year) pension. ...

This is the first time I've heard of a uni offering something other than a single, lump-sum payment--and lo and behold, there are two such options.

I'd wonder what the impact of taxes would be. Severance payouts, given the right conditions, receive an extremely favorable tax treatment. 退職金 was the one and only choice for me. I asked if I could take it over several years, and while that might have been possible, it no longer would have qualified for that tax rate--no longer a lump sum payout.

Or I've misunderstood, and it's not actually a uni that's offering this pension choice, but 私学共済, or it's public school equivalent?

Interesting.

[ClearAsMud]

This is the first time I've heard of a uni offering something other than a single, lump-sum payment--and lo and behold, there are two such options.

It's a big private university that doesn't belong to 私学共済, maintaining its own pension and even its own health insurance. The pension is considered a corporate (third-tier) pension, meaning (as I understand it) that at tax time it receives the same treatment as the national pension. In sort of an embarrassment of riches, we get 退職金 as well, subject -- as you note -- to its own favorable treatment. When I was younger, I didn't fully appreciate how exceptional this was.

[RetireJapan]

Great material on this site, and I admire your judiciousness -- and energy!

Thank you, that is very kind!

I think for those who have made good provision for retirement it probably doesn't matter what they do with nenkin. I personally am expecting to have far more money than we need with our modest lifestyle so an extra 40-80% of nenkin income would just be a nice boost to our disposable income.

But for someone not in that position, working a few more years in order to delay taking nenkin as long as possible could make a big difference to their quality of life in retirement -which is why I perhaps overemphasise the option.

Many people tend to instinctively go for the 'maximise lifetime income from pension' rather than 'minimize chance of poverty in retirement' end of the scale

[ClearAsMud]

...maintaining its own pension...

One further wrinkle that doesn't apply to me personally: the uni has also switched from a DB to a DC pension scheme, with recent employees (those entering from April 2017) required to join that scheme instead of the one I described. So just to be clear, those under the former scheme (the vast majority right now) pay for both kosei nenkin and the uni DB pension, with concomitant benefits at retirement. The new DC employees have to choose upon retirement whether to withdraw their accumulated pension fund as a lump-sum payment (subject to the same tax treatment as 退職金) or convert it to a fixed-term annuity. If taken as an annuity, the income receives favorable tax treatment.

[TBS]

Rough example: Let’s suppose that next April, a 65-year old man decides to delay receiving his pension until the new age of 75. The break-even point for this person would come when he is over 86 years old (a convenient table of various break-even points for an annual pension of 1,920,000 yen can be found on the following rather garish site: https://diamond.jp/articles/-/264470). The current remaining life expectancy for an average 75-year-old Japanese man is 12.41 years (15.97 years for women; 2019 figures), so death can be expected to come for him at about the age of 87-and-a-half. In other words -- and of course this ignores all the various qualifications involved -- the pensioner would be on the positive side of the ledger with respect to the total amount of pension benefits received only for about the last year and a half of his life, having delayed gratification for 10 years past his full retirement age.

Our prospective pensioner now starts wondering whether a mere year and a half of higher benefits is really worth the wait, no matter what the increase. What about the “old” pension limit of 70? For a 70-year-old, the break-even point for the same pension arrives at slightly below the age of 82. Since a 70-year-old man can currently expect to live another 15.96 years (20.21 years for women), the pensioner can expect to enjoy a relative pension surplus for four or more years after reaching the break-even point, and he will have only delayed gratification for five years. Doesn't that sound just a little bit tempting?

Granted that individual circumstances can complicate things, the choice doesn’t seem all that clear-cut to me (the difference between 60 and 65 or 70 is significantly greater). Of course, our 65-year-old prospective pensioner can put off making a final decision until later (he can always opt for the pension at 70 anyway), and even those on the borderline can take it year by year. But it is something to think about and possibly to plan for.

One thing that the table does not consider is that you could be investing the pension that you take earlier. This is possible because anyone who is able to defer the pension must have another income source or investments they can sell to tide them over until the deferred pension starts.

Taking the pension early then investing it will push back the break-even points from the table even further into the future. This makes the option of deferring even less attractive. This is also the conclusion I reached when I looked at this topic before.

p.s. fantastic posts ClearAsMud, great to have you on board!