A difference of tens of millions of yen in retirement funds! 3 key points of Corporate Defined Contribution (DC) plans
“My income has gone down, so maybe I should stop my DC (Corporate Defined Contribution) plan…”
My salary dropped to 60% after being rehired.
Living expenses are tight, too.
In that case, I might as well stop contributing…
I think it is very natural to feel that way.
However, I would continue contributing even 5,000 yen a month.
A DC plan is a system that only makes sense when you think not just about the time you are contributing, but also about the taxes you will pay when you receive it.
This time, I will talk about three important points regarding DC plans.
Your choice of investment products in a Corporate Defined Contribution (DC) plan can change your retirement funds by tens of millions of yen
Can you answer what you are currently investing in with your DC plan?
I used to work at a securities company.
Even so, I didn’t understand the explanation of the DC plan at all when I joined the company.
It’s something the company pays for, so I just checked it and finished.
I think there are a lot of people like that.
But you know,
just by choosing the right DC product, your future assets can change by tens of millions of yen.
If it were me, I would choose a global stock index fund.
The products handled vary depending on the financial institution, but if it says index, the fees are kept quite low, with trust fees around 0.5%.
It is higher than the 0.05% of eMAXIS Slim All Country, but it is sufficiently excellent as an option you can choose within a DC plan.
Conversely, those who were contributing through products with names like “savings” or insurance…
have missed out entirely on the strong market of the last decade or so.
My DC is now worth about 20 million yen.
Of that, 10 million yen is the amount that grew through investment.
Even if you contribute the same amount, a single product choice can make a 10 million yen difference.
First, why not check the contents of your DC plan along with your family’s?
The reason why stopping DC contributions is a loss lies in the retirement income deduction
Once you have organized the contents, the next step is “not to stop.”
What you can use when receiving your DC as a lump sum is the retirement income deduction.
This is a tax-free allowance.
And this limit expands the longer you contribute.
In other words, even if the monthly amount is small, the very fact that you continue to contribute has value. If you stop contributing, the deduction limit will no longer increase.
And one more thing. This is something many people don’t know, but…
the biggest advantage of a DC is that the contributed amount is deducted from your income.
Because you are making contributions, your income tax and resident tax are reduced. Therefore, the moment you stop contributing, that benefit disappears.
What remains is just an account where you continue to manage the money you’ve set aside. Yet, you still have to pay account management fees, and the restriction that you cannot withdraw it until age 60 remains.
If you can continue to contribute to a DC through re-employment or similar, it is better to continue even with the minimum amount.
If you absolutely cannot continue, I want you to receive it as a lump sum and move it to an NISA. Leaving it half-abandoned is the biggest waste.
Which is more profitable: receiving DC as a lump sum or as a pension?
Once you have confirmed the system, the next topic is the “exit.”
There are two ways to receive a DC: “receive as a pension” or “receive as a lump sum.” I believe
it is better to receive it as a lump sum.
The reason is simple.
If you receive it in pension form, your income increases by that amount.
When your income increases, the taxes you have to pay also go up.
That’s not all. In retirement,
there are several systems where the burden changes depending on your income.
✓ The upper limit for out-of-pocket expenses under the High-Cost Medical Expense Benefit system
✓ Out-of-pocket expenses when using nursing care services
✓ Social insurance premiums
Therefore, if the pension you receive increases, your out-of-pocket expenses will also increase.
Hospitalization and nursing care are things that become necessary precisely in retirement. If your income is high at that time, only your burden will become heavier.
In retirement, it is important to keep your taxable income as low as possible. Whether you have this perspective or not makes a huge difference in the money you have left.
I often hear people say, “I’m afraid of the taxes on a lump sum.”
However, because you can use the retirement income deduction, in most cases, the burden is not as high as you might think.
If you work backward from the exit, you can properly reduce your anxiety about retirement funds.
Even with the same DC plan, the right answer differs from person to person.
Depending on the number of years you have worked and the amount of retirement money you receive, the taxes on a lump-sum withdrawal can become heavy.
That is why I calculate and explain to my students when and in what form they will receive it as well.
Are there any plans that require a large amount of cash, such as home renovations or buying a car? Only when you think that far ahead does the right answer become clear.
These three things are important for DC plans.
Check your investment products. Do not stop contributions. Be conscious of the exit and work backward.
If you know how to use a system like a DC plan, it will be your ally for life. Conversely, if you remain ignorant of it, you will just end up missing out.
Your retirement is built upon the accumulation of small decisions made today. Let’s build a prosperous retirement together♡