Making plans to retire in Japan tends to become more and more of a priority, or at the very least a reality, for those who end up spending a portion of their lives here. The safety, cleanliness and convenience of just about all facets of day to day life make retiring in Japan an attractive option. What does it take to retire here though? That would be, for lack of a better expression, the “million-dollar question”. It certainly depends on which part of Japan, if you are living alone or with a partner, and of course your lifestyle or hobbies.
Retirement being itself the million-dollar question, let’s examine what it would take to actually retire on a million dollars in Japan. Ever since the term “millionaire” first came into popular parlance in the 18th century, being a millionaire has lost much of its flair. At one point in history, one million dollars guaranteed a life of comfort and extravagance for not only you, but your children, grandchildren, and perhaps further down the line as well. For instance, since the year 1850 the US dollar has experienced approximately 2,814% of inflation; or in other words, one million at that time would be worth roughly the same as $28 million now.
That said, being or becoming a millionaire is certainly still an accomplishment; especially during a time in which over 90% of couples have insufficient savings to fund their retirement. However, a nest egg of one million dollars would find itself quickly eroded away if you were to spend your retirement jet-setting around the globe from five-star hotel to private beach. Likewise, if you are one of those eager to retire early, for example while in your 30’s or even 40’s, you could find your retirement savings stretched thin, especially as inflation continues drumming on for the next four or five decades of your life. If you are settling down at an appropriate age, and with your savings and investments properly cultivated, they can provide sufficient residual income to comfortably support you and your loved ones for a substantial period of time. Here are two popular options for utilizing a million dollars from today for a sustainable retirement:
Annuities are by far the most simple and straightforward way to turn a cash savings nest egg into regular income.
For those with strong family genes that may be worrying about the possibility of their money running out before their health does, the retirement annuity is a strong option. The way they typically function (though annuities come in all shapes and sizes, with different add-ons or unique terms) is that they guarantee a fixed income for you to live on for the rest of your life (whether that be until the week after purchasing the annuity, or if you make it to be as old as the Kin-san Gin-san twins).
Such annuities can be purchased from life insurance companies, and interestingly they can be thought of as inverse-insurance policies; as you are essentially from a financial standpoint “betting” that you live forever (whereas a life insurance policy is the opposite). Technically they are not investments, but contracts. From a legal standpoint, the insurance company is promising to, rain or shine, pay out the stated income amount each month or year after you have paid them the lump sum at the onset of the contract. Afterwards, handling the investments in order to grow and pay the fixed income is entirely the insurance company’s responsibility. You can just kick back, relax, and spend your allowance when it comes in.
Retirement annuities traditionally have two primary disadvantages: they are illiquid and can have less than ideal tax treatment. For instance, if you instead maintained an investment portfolio with your retirement funds, you could be utilizing tax-free bonds or lower tax qualifying dividends, or at the very least the long term capital gains tax rate (which is typically around 20%). However, regular distributions from a life insurance annuity is taxed as regular income, which can be as high as 40%.
The larger nuisance with annuities, however, is the illiquidity. Once the funds are tied up in the contract, they are for the most part gone. You are stuck with a fixed budget, aside from any other savings or investments you happen to be maintaining. If some emergency comes up, or if you want to spend extra on a nice holiday, it could be costly or impossible to access extra cash. Which is why if you are planning to utilize annuities, it is always a good idea to keep sufficient savings in liquid assets.
In addition, the amount of income an insurance company is going to be willing to pay you is largely driving by present day interest rates. We are going through a period of historic lows with regards to interest rates. As such, annuities are not overly attractive.
Lastly, is the credit risk position of the annuity. It seems nice that your retirement income is guaranteed by the insurance company, and that at first glance this may seem like you are immune to market ups and downs effecting your retirement in Japan. This is not the case. The annuity income is only “guaranteed” so long as the insurance company is still around to guarantee it. While it is certainly not an everyday occurrence, and many insurance companies around the world are hundreds of years old, there have been instances of even large insurance companies going under. In short, as ever, it is good to instead have your eggs in more than one basket.
Investment Retirement Portfolio
Another option is to stick with a retirement portfolio utilizing traditional capital market investments. One million dollars is more than sufficient capital to put together a portfolio of stable income generating assets from diverse sources such as bonds, dividends from blue chip companies, REITs (real estate investment trusts), ETFs (exchange traded funds), and other funds.
Along with your lower risk fixed income portfolio, to fund your retirement spending needs would necessitate withdrawing cash on a regular basis. A popular methodology for this is what is referred to as “the 4% rule“. Starting in the first year, withdraw 4% of your retirement fund for your spending needs. In this example, that would be $40,000 (1,000,000 * 0.04 = 40,000). Throughout the year, your portfolio should replenish that to some degree, or even more, if it is a good year. The following year, withdraw the same amount, adjusted for inflation. If inflation happened to be 3%, that means in year two you would withdraw $41,200. This continues each year, and eventually inflation will start to overshadow your portfolio’s annual returns, thus eroding away at your retirement capital base. However, even so, at a 4% withdrawal rate, your portfolio should be able to comfortably provide 30 years’ worth of income.
A traditional portfolio is also more liquid than an insurance annuity. While it may be invested in the market, accessing extra funds for an emergency or a nice holiday is simply a matter of selling off some select positions. With a sufficiently diverse portfolio, at any given time there will typically be some investments that can happily be sold off to pay for ad-hoc luxuries.
With a traditional portfolio you are able to put your eggs in a very wide range of baskets. This helps protect you from the scenario of the annuity’s insurance company disappearing. However, even with a diverse portfolio, there is no 100% guarantee that you will receive adequate returns on your retirement investments.
Similarly, the liquidity of a traditional portfolio, while liberating, can also be a drawback. For some people, locking the money away in an annuity type structure is the best (or sometimes the only) way to prevent extravagant or out of control spending; especially if they are managing the portfolio and retirement withdrawal rate decisions themselves. Without a financial advisor at the helm to provide professional guidance, sometimes one million dollars in savings can disappear must faster than one would think. In financial terms, “faster” is a very relative expression. Even if it takes you a full 15 years to spend that much money, that is a serious problem if you in fact needed it to last 30.
[ Sources ]
– Stout, R., and John B. Mitchell. “Dynamic retirement withdrawal planning.” (2006).
– Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. “Sustainable withdrawal rates from your retirement portfolio.” Journal of Financial Counseling and Planning 10.1 (1999): 40.
– Bauer, Daniel, and Frederik Weber. “Assessing investment and longevity risks within immediate annuities.” Asia-Pacific Journal of Risk and Insurance 3.1 (2008).