Capital Tax – Japan pension refund, Part II

I was working with some of the numbers last night.

For the example, I assumed you worked in Japan for 25 months. That’s one month more than 2 years, and I used the number because I think the Lump Sum Pension Withdrawal program has bands at each 6 months, and I’m not sure what the cutoff is.

I put the wage at a flat 600,000 yen a month, which, as a base wage, is near the max for the kousei nenkin.

(CLICK TO ENLARGE.)

The estimated refund amount according to Capital Tax is 1,105,200 yen. The government is going to hold back 221,040 yen of that (20%), and Capital Tax wants 7% (77,364 yen).

I don’t know how much of that 221,040 yen that the government withholds will come back to you. Kousei nenkin contributions are tax-deductible, so it’s not clear that you just get a tax-free distribution. The sense I have is NO.

The 1,105,200 yen number sounds like it’s in the ballpark. This would be about 44,000 yen a month in contributions, over 25 months. Again, you got a tax deduction to do that, so it didn’t really cost you 44,000 yen a month.

The annuity you would give up is calculated roughly as follows:

600,000 yen times 25 = 15 million yen

times 5.79/1000 = 86850 yen

PLUS

25 months times 1650 yen = 41250 yen

EQUALS

128,100 yen a year at retirement (age 65).

This is $1,525 at 84 yen to the US Dollar, and I average it to $130 per month.

Now, if you want a private company to give you that same income stream, how do you find out what it would cost?

There is no easy way, because it’s a deferred annuity But AIG (yes, AIG is still in business), has an annuity calculator that can tell me what an annuity of that amount starting in a month or two would cost me, if I were a 65 year old:

It cost $21,000. That’s 1,764,000 yen.

AIG markets through Vanguard Group in Valley Forge, Pennsylvania. So despite all the press about AIG since the financial crisis, we are going to trust its tie-up to Vanguard.

Now remember, this is not a deferred annuity. It’s one that starts in 2011. So it may be that getting 1,100,000 yen handed to me now is better than 1,764,000 yen in twenty years. (I am of course assuming that if I show up at the door in 19 or 20 years, I can get the same price quote. Big if, but I need a number.)

The AIG product is a variable annuity, and invested in specific Vanguard funds. It doesn’t look like it has an inflation adjustment, but that it does have some sort of variable factor that is meant to try and cover for inflation. (So not as good as an outright guarantee on inflation.)

In short, I think I’d be giving up more guarantees for less if I went with the variable annuity, but I need a figure to compare to.

I also want to wash out inflation. The Japanese pension is going to cover me for inflation. I am not sure if a $130 a month annuity will match whatever inflation does in the meantime.

So in short: I need an investment that will take 1.1 million yen, if I get all of it, and generate at least 1.7 million yen in 20 years’ time, when I am 65. So 60% growth or 2.3% a year, in a yen investment, after inflation. Backed by a government guarantee.

Impossible. (Damn near.)

Any one older than 45, the math is even worse. Anyone younger, it might be better. But still you are giving up something valuable with the guarantee of a government, in exchange for some money now.

If you were in the unfortunate situation of knowing you wouldn’t make it to 65, then, yes, there is something to consider. If you expect never to be a citizen of a country with a totalization treaty with Japan, then, yes.

If we are talking about small beans money, like, I dunno, $1,000 refund, then it might be worth doing.

Unlike a few of the internet-marketed businesses around Japan, Capital Tax looks like an OK paperwork filing business. I would just worry about cashing out an annuity that’s really valuable, because once you do it, you cannot undo it. (There are people around who wish they hadn’t, believe it or not.)