Retirement planning as a small business owner can be a daunting task, especially for business owners living in a foreign country like Japan. In spite of these hurdles, failing to plan properly for your retirement can lead to disaster, even if your business was financially successful. So how do you successfully navigate retirement planning when faced with cultural and language barriers, unique legal and financial systems, and high living costs?
Why Business Owners Can’t Rely On Japan’s Pension System
Many people are tempted to rely on Japan’s national pension system for their retirement. Unfortunately, this is a dangerous plan. The aging population in Japan has put immense pressure on the country’s pension system. Meanwhile, a shrinking workforce means fewer and fewer people to feed the national pension system. The strain on Japan’s pension system caused by Japan’s aging population demographics means that relying on it for your financial security in old age is a high-risk strategy.
Why is Retirement Planning More Complicated For Business Owners?
Japan’s failing pension system makes private retirement planning a necessity for everyone. Business owners, however, have additional factors to account for when establishing a retirement plan. Some of these factors include:
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- –Private pension contributions: Business owners are not required to contribute to a company pension plan. Although this gives you more freedom as to how to invest your funds, it also means a higher risk of not building an adequate nest egg for your retirement.
- -Exit strategy planning: As a business owner, you have to decide what happens to your company upon your retirement. Will you hand it over to a successor? Will you take the company public? Or will you sell the company altogether? Each exit strategy will impact the amount of wealth you can expect to have going into your retirement and how it is received (e.g lump sum vs. earn-out).
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- -Retirement plan options: As with pensions, you may not have a retirement account connected to your business. If not, you will need to set up a private retirement plan. But what are your options in Japan, and how do you decide between them?
Business owners also often have to deal with more fluctuation in their cash-flows given to market and industry changes. Dealing with these fluctuations can make it even more difficult to create and commit to a retirement plan, but you shouldn’t allow it to stop you from investing in a retirement plan.
Why Are Private Retirement Plans Essential For Business Owners In Japan?
Business owners who fail to plan for retirement are putting their entire financial future – and in many cases their family’s future – at risk. If your business fails for any reason, you could lose all of your income with nothing to replace it. Furthermore, there are many hidden risks to your financial security that business owners in Japan often overlook. These include:
- -Sole proprietorship prevalence: Many small and medium-sized enterprises in Japan are run as sole proprietorships. This means that the owner’s personal finances are often closely tied to the business, making it essential to plan for retirement to protect both personal and business assets.
- -Social Security system limitations: Beyond the unreliability of Japan’s pension system, the social security payouts often prove inadequate income for retirees. Business owners need to plan for their retirement to maintain their desired lifestyle and financial independence as government support will be limited at best.
On the other hand, there are many benefits to taking a proactive approach to your retirement planning. A private retirement plan can offer: 
- -Stability through diversification: Relying solely on the success of your business for retirement can be risky. Diversifying investments through retirement planning can provide a more stable financial future and reduce the risks associated with economic downturns or industry-specific challenges.
- -Tax benefits: By strategically planning for retirement, you can take advantage of tax-saving opportunities, such as utilizing tax-deferred accounts and managing capital gains taxes on the sale of a business.
- -Customizable investment options: By planning for retirement in Japan, you can choose from various customizable investment options that align with your financial goals and risk tolerance. These investment options include stocks, bonds, mutual funds, and other retirement-oriented financial instruments.
- -Personal well-being: Having a retirement plan in place can give you peace of mind, knowing you have a secure financial future. This can lead to better decision-making in both your personal and professional life, as well as reduced stress and anxiety.
What Private Retirement Accounts Are Available To Business Owners In Japan?
Business owners in Japan benefit from a variety of private retirement plan options. These include Japanese retirement accounts as well as international accounts. Japanese retirement accounts offer many benefits, but they are not always the best option for foreign residents.
Japan has two primary individual retirement savings account options: NISA (comprising regular NISA and Tsumitate NISA) and iDeco. These accounts resemble American IRAs or British ISAs and are designed to encourage Japanese workers to invest privately in assets to secure their retirement funds. In general, they work as follows:
- -Regular NISA (Nippon Individual Savings Account) – A standard NISA account permits investors to contribute up to 1.2 million yen annually for a maximum of 5 years. After this period, investors can reinvest their capital gains without incurring taxes.
(Note: Beginning in 2024, the NISA program will change, becoming a permanent investment option.) - -Tsumitate NISA – With a Tsumitate NISA, investors can contribute up to 400,000 yen each year for up to 20 years. The tax advantages of this account remain in effect throughout the entire 20-year period.
(Note: Beginning in 2024, the NISA program will change, and the two types will be combined into a single, permanent system with even greater benefits. Until then, however, the system will continue to work as above. Learn More… - -iDeco (Individual Defined Contribution Pension) – iDeco is a self-managed pension account resembling traditional US-style pensions. The account reaches maturity when the contributor turns 60, regardless of the age at which they started making contributions.
Japanese retirement accounts can be a part of your well-structured retirement plan, but they also come with some drawbacks. These include:
- -Language barriers: Setting up and maintaining a NISA or iDeco account in Japanese can be challenging for foreign individuals who do not speak the language, leading many to opt for international investment accounts.
- -International tax issues: Foreign residents in Japan may face complications with their home country’s tax treatment of NISA and iDeco accounts, potentially resulting in legal issues, insufficient retirement funds, and other problems.
- -Importance of financial advice: Due to unique international tax situations, consulting a financial advisor before making long-term investment decisions is highly recommended.
- -Contribution limits: NISA and iDeco’s contribution limits may require investors to open multiple accounts and strategically allocate investments to maximize gains.
- -Example of investment allocation: Coca-Cola shares should be placed in a tax-privileged account due to their dividends, while Amazon shares, which do not pay dividends, can be held in non-tax-privileged accounts.
- -Withdrawal restrictions: Unlike NISA, iDeco funds are generally inaccessible until the age of 60, making it crucial to maintain a short-term account for financial emergencies.
It is important to keep these drawbacks in mind when considering NISA and iDeco. You may find it more beneficial to invest in an international retirement account. Fortunately, English-speaking people in Japan have plenty of options.
As a foreign person residing in Japan, you have numerous options for investing in foreign stocks and funds, many of which can be conveniently managed in English. Determining which account is best for you, however, will depend on your individual circumstance.
How To Choose The Right Private Retirement Account
Your professional financial adviser can help you sort through your options and find the appropriate account to fit your needs. Together, you can consider the different factors that determine your optimal retirement plan. This process will include:
- 1. Assessing your financial goals: Before selecting a retirement account, evaluating your financial goals for retirement is essential. Consider factors such as your desired retirement lifestyle, income needs, and the timeline for retirement to determine the best retirement account for your needs.
- 2. Evaluating investment risk tolerance: Retirement accounts come with different investment options with varying risk levels. Evaluate your investment risk tolerance to determine the best investment options for your retirement account.
- 3. Considering tax implications: Tax implications can significantly impact the growth and distribution of retirement savings. Consider the tax benefits and implications of different retirement accounts to determine the most tax-efficient option for your retirement savings.
The earlier you start saving for retirement, the more time your money has to grow, and the sooner you can secure your family’s future. Whatever may happen to your business, you can make sure that you and your loved ones are provided for. Don’t leave your finances up to chance – and don’t wait to meet with your financial adviser.
