Across many developed countries, including Japan, the statutory retirement age is set at 65. However, due to increasing average life expectancy, coupled with projected funding shortfalls in pension schemes in both the public and private sectors, these retirement ages are being revised upward. As a result, you can anticipate working late into your sixties, and maybe into your seventies before being legally eligible for financial support from the government. To lessen your dependency on government support, you are strongly encouraged to make your own financial plans now, and save and invest for the long-term. Your accumulated wealth can then be used to supplement your government provided income, or as a pension outright. Failure to consider your own financial security and make your own retirement provisions will mean that your future lifestyle will be determined by the elected politicians that hold office in the future, that you have never met and possibly not voted for. The money that you will receive will be contingent upon what is available at that time, and not what you yourself have paid in during your working life. After all, your pension contributions being made now are paid out immediately in the form of retirement benefits to present-day retirees. The ‘pay it forward’ system of social security created in the early 1900’s is flawed, and your future financial security is not guaranteed.
How Do I Retire Early?
Many people look to take things a step further, and instead of waiting around for decades, working jobs that they no longer enjoy, will look to accumulate enough assets to pay for their desired lifestyle, long before their 65th birthday. This has traditionally be referred to as ‘early retirement’. There are two groups of people that are able to successfully check-out of the rat race early. The first are those that have been lucky enough to come into a large sum of money; be it via inheritance, the sale of a business, or any other ‘liquidity event’. This influx of capital will instantaneously remove their reliance upon their monthly paycheck, and could calculably pay for their monthly expenses for the rest of their days- thus removing the need to work altogether. These people are few and far between, and it is perhaps for this reason that they barrier for early retirement may appear higher than it really is. The second group are the people that decided a long time ago that they wanted to retire early. They made calculations based on conservative assumptions as to how much they would need to accumulate. They created a plan. They saved and invested systematically and did not deviate from their plan, and they celebrate the conclusion of the plan by (often) quitting their jobs and pursuing their genuine interests. To be part of the first group you need to be lucky. To be part of the second group, you just need to be smart.
Calculate Your Retirement Budget
Many people will be wondering “how much money do I need to retire?“, when perhaps the question should really be “how much money to I need to live happily?“. If you enjoy travel and the odd shopping trip, your monetary requirements will be different to the person whose sole leisure pursuit is reading books, and growing and tending to plants. Once you have worked out how much you would like to have available to spend on a monthly basis you are then able to calculate the total sum required. There are many variables to this calculation and your math can be as simple or as sophisticated as you wish. For example, you could work on the perpetuity model whereby you will only ever spend the interest from your wealth, meaning that the value of your wealth will never go down, and will remain in full when you die (presumably to be transferred to family members or to be utilised for philanthropy). If you have no wish to leave money behind after death then you are forced to make a conservative assumption about your life-span, and then proceed using the draw-down model, whereby you will draw down both interest, and principal, each month in retirement until the end of your income schedule, whereby your wealth depletes to zero. There will be contention about the “best retirement funding calculation“, but there really isn’t a correct answer, as each will be based on assumptions around market growth, tax, life expectancy and inflation. To err on the side of caution, you could just withdraw 4% of your account every year, but it would probably be wise to spend an hour with your financial adviser to calculate your retirement budget comprehensively.
Saving For Retirement In Japan
Recently, changes have been made regarding pensions for foreign residents in japan, and overall the situation is improving. There are however a few issues with NISA accounts for foreign residents, especially if you are aiming to save aggressively and want to access your funds before the statutory retirement age of 65 (i.e the definition of ‘early retirement’). Most expats will look to establish an international savings account that they can put money into on a regular basis that they treat as a SIP (self invested pension) alongside their Japanese retirement accounts or as a total replacement.
In answer to the question, “How much should I save for retirement?“, it is suggested that if you save 25%-30% of your annual income for 25 years you will become financially independent. This is working on the basis that your lifestyle in retirement will be relative to the lifestyle (i.e. your salary) that you have receiving during your working life. This metric will be unsuitable for those looking to double their current disposable income at the time of calculation, and similarly unsuitable for those very close to retirement, who have very high salaries, but only a meager disposable income requirement for their retirement years. Most people will look to save monthly, using money which would otherwise sit in a zero interest Japanese bank account, but there may be occasions where bonus payments account for the majority of a calendar year’s disposable income. Again, everybody’s situation is unique, so be sure to ask your financial planner to run a quick multi-factor calculation to work out what a meaningful savings rate is.
How Do I Invest For Retirement?
When seriously planning for retirement the biggest risk is not price risk (i.e a temporary down-turn in the value of an asset in a calendar year), but shortfall risk (when you do not have enough money at your due date to fund your planned retirement).
If your retirement date comes around and you do not have enough money, you only have two options available. Option 1- keep working. Option 2- receive less money. Neither of these options have a celebratory feel to them, so it’s best to do everything you can to ensure that your wealth grows as much as possible, within acceptable parameters of risk. How much the money will, or won’t grow is attributable to the asset class that you are investing in, and the amount of money allocated to each individual asset. Historically, equity investments have provided by far the greatest inflation adjusted returns. This said, equity investments also exhibit large changes in price, and as such, are not suitable for short-term investors. Fixed interest investments can offer stable, often pre-determined returns with little volatility. If you were aiming to retire in 20 years time, would you be more concerned about having a negative year in 10 years time, or not having enough money to live on in 20 years time? The answer to this question should inform the planning process and help you understand your investment objectives which are often simplified to the categories of Growth/Income/Capital Protection. Pre-retirement phase, everybody is a growth investor.
Each asset class has its own performance profile which is a historical-performance based assessment of that asset’s performance over a given period of time (e.g. 1 year, 3 year, 5 year). Using this information, we are able to make educated assumptions about the two components of the assets performance; returns and volatility (/risk). Robust portfolio’s will contain groupings of assets which have agreeable return profiles, in amounts that are complementary to each other. This means calculating the relationship between all of the assets in the portfolio to ensure that their correlation is managed, i.e that not all of the investments move in the same direction at the same time. Optimally, when one of our assets moves down, another one moves up, thus enabling us to avoid ‘all or nothing‘ portfolios where we are making huge gains or suffering huge losses.
Most pension systems in developed countries operate on a “pay as you earn” basis. This means that every time you receive a pay-cheque, a portion is automatically deducted and saved into your pension account. This tried-and-tested method of accumulating wealth can be replicated easily using a monthly investment plan. Many people will save and invest small amounts monthly to take advantage of dollar cost averaging, whilst saving for a long-term objective- e.g an education fund for their children, or a self-administered private pension. Whatever the modality of your savings and investments, it is important to make sure that you have a clear idea of (1) when your deadline is, (2) how much you need, and (3) what is an appropriate choice of assets, given the answers to (1) and (2).
[ Sources ]
– National Pension System｜Japan Pension Service – 日本年金機構
– Guide to Retirement – JP Morgan Asset Management
– Early retirement and post retirement health – IFAU