Rules are made to be broken
Your retirement income needs to be 70% of your working income.
I don’t agree with this. I think retirement income needs to meet your living expenses. These don’t necessarily have anything to do with your working income. The higher your saving rate, the less this is true.
Keep an emergency fund equal to six months’ income.
Not sure about this. It’s important to have access to cash or credit to cover emergencies, but I don’t think it needs to be six months. If your savings rate is higher than normal (30-50%+) you can usually cover expenses out of pocket by not saving that month. Of course, this also depends on how stable/reliable your job is.
Don’t pay more than 3.5 times your gross annual income for your house.
I am somewhat anti-house ownership, so I can’t really answer this one. Doing the math for myself, 3.5 times my gross annual income would be just over 20 million yen, about half of what my friends are spending on houses. We could probably buy something for this kind of money, but we’d have to do it up afterwards and it wouldn’t be particularly aspirational.
I’d have to run the numbers for tax breaks, etc. here.
On the other hand, maybe this rule is telling us that we need to make more money before thinking about buying houses 🙂
Don’t invest more than 5% of your savings in any one stock or bond.
This makes sense from a diversification point of view.
Accumulate 20 times your gross annual income, then retire.
20 times? My rule of thumb is a 3% yield on the portfolio as a whole, so it would be more like 33 times our ideal retirement income (which I am not sure of yet). I think this undershoots the necessary amount by quite a bit, except if you have a high savings rate, in which case it may overshoot it.
Gross annual income is not a very useful metric, in my opinion.
Never touch your retirement savings, except for retirement.
Personally I am planning not to ever touch the principal in my portfolio, and just live off the income (dividends and interest). I’m hoping that we’ll also be able to reinvest some of the income. Basically total overkill.
In retirement, you can sustainably live off of 4% of your next egg.
I am not convinced of this, and am not counting on it. Our current projections see us living comfortably off income only.
If your employer matches your contributions to a workplace savings plan, go for it.
Conditionally agree. However, if you look at some of the examples provided by Andrew Hallam on his website, some plans have up to 10% annual fees. You’d end up losing money even with an employer match.
Read the fine print and understand what you are signing up to.
The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.
I think this depends on your financial situation, your personal psychology, and your goals. One number probably doesn’t fit everyone. I’m working off 20-30% in bonds at the moment, as I have a 30-50 year investing horizon and don’t plan to need the money at any point.
I could see a case for fewer, more, or even mostly bonds too.
Total home ownership costs shouldn’t exceed 30% of your gross income.
This makes sense. If anything, that seems a little high.
Your total debt servicing costs shouldn’t exceed 40% of your income.
Yes. 40% of income on debt, even including mortgage, seems insane. I don’t see how you would be able to save much more than 10-20% on top of that, which is probably not enough to secure your financial future.
Don’t plan to retire with debt.
I would take this further and say that you shouldn’t have any debt at all, but I guess if you do then by all means get rid of it before you retire.
You need to have x times your annual income in life insurance.
Again, this probably depends on your personal situation. If you have a lot of savings and investments you probably don’t need as much life insurance. I have been reducing my cover as our investments grow, and plan to phase it out completely.
After all, the purpose of life insurance is to take care of your family if you are not around to do it, so if you have enough savings and investments you don’t need to pay for this.
What do you think? Disagree with anything?
I realise there are only 13 of these!!! I guess the fourteenth rule might be the ability to do basic arithmetic…
I actually went back and looked at the post that inspired this -it also has only 13. Weird.
How do you think the house rule applies in Japan? Having lived in Tokyo, I can’t picture a house cheaper than 40 million yen. The condo we bought back then was about 50 million, and it was only 700 Square feet (70 square meters).
I think everything related to housing in these 15 rules doesn’t necessarily apply in Japan. I’d love to see a Japan-centric take on this.
First of all, I get the feeling the Tokyo real estate market is different from that in other areas of Japan.
To give you an example, we’re thinking about buying a condo in Sendai slightly bigger than that for about 10 million yen 🙂
I’m probably not the best person to ask about real estate though, as I don’t have much desire to own it. If it weren’t for my wife I would be perfectly happy renting forever…
Two things I will say though: interest rates here are very low, but are not guaranteed to stay there, and there are 8 million empty houses in Japan now (that number is rising quickly). Both of those could be real game-changers (the latter mainly for people who have the option to move).