Might be less than you think
One way to guarantee that you will be unhappy is to be unsatisfied with what you have.
Needing a bit more money, a ‘better’ car, more free time, to live somewhere else, to be thinner, have a new partner, a new bag, or the bigger house.
Buddhism teaches that suffering comes from a desire that things be different, and that acceptance brings peace and contentment.
Personally I think some degree of discontent, of desire, of ambition is useful, but it’s a tricky tightrope to navigate.
What’s your number?
An important concept in personal finance is your ‘number’, the amount of money you need to reach your financial goals.
Not many people really think about this, but they should!
If you don’t know your number, you have no idea whether you will reach it or not. You won’t know if you’ll be able to retire comfortably. You won’t know how much you should be saving or investing now.
In short, you’ll be stumbling about in the dark, and that’s no good.
Fortunately it is quite easy to work it out.
Working out how much money you will need in retirement
is a three step process:
First, decide how much money you want to be able to spend in retirement. This can be monthly or annual.
(of course, it is basically impossible to do this accurately, but we don’t need to be completely accurate, just to have a rough idea)
You can use your current spending as a starting point, then add more spending if you plan to spend more money once you are no longer working (on travel, for example), or reduce the spending if you think you’ll spend more time at home, etc.
Second, figure out what kind of income you’ll have in retirement. For most people this will be nenkin and any other pensions you will be entitled to.
Third, subtract your retirement income from your desired spending. If the answer is negative, congratulations, you can have a comfortable retirement with no further preparation.
But if it is positive, that number is the gap you will need to make up.
If you have a gap between your retirement income and desired spending, you’ll need to save and invest enough money before you retire in order to generate enough money to cover the gap, or you will need to continue working after you retire, or you will need to cut your spending.
We can use the 4% rule to work out how much you need to save and invest.
An example of working out your number
Let’s look at a fictional person, John. John is married and plans to stop working at age 65 in Japan.
John and his wife currently spend around 4 million yen a year. They would like to travel a bit in retirement, so John estimates they would like to spend 5 million a year once he retires.
John checked the nenkin projections for him and his wife (they are not entitled to any other pensions). Their estimates were about 2.5 million yen for both of them combined.
This means that John and his wife will need to find an extra 2.5 million yen a year if they are to spend as much as they want to.
Using the 4% rule we can multiply the annual amount we need by 25 to get how much money John and his wife will need.
2.5 million x 25 = 62.5 million yen
What options do you have?
John and his wife were pretty shocked when they saw that 62.5 million yen number. It seemed a bit large, and possibly impossible for them to save.
But they have a few options.
First, they could choose to spend a bit less. Reducing their retirement spending to 4 million yen would mean that their spending shortfall would only be 1.5 million. Applying the 4% rule to that would mean they would only need to save and invest their way to 37.5 million yen.
Or, one or both of them could work part-time in retirement. If they could earn 1.5 million between them, they wouldn’t have a spending shortfall at all, or they could go ahead and spend their desired 5 million, with just a 1 million yen shortfall (which would require 25 million to cover).
Also, just because they need 62.5 million yen in retirement does not mean they need to save 62.5 million.
Assuming John and his wife are 40, they have 25 years to save and invest.
Using a compound interest calculator, we can see that they would only have to invest 71,245 yen a month in order to reach 62.5 million by age 65 (assuming annual growth of 8%). If they did this in their NISA accounts their investments would be completely tax free.
John and his wife would only invest 21,373,500 yen, the rest would come from the investments growing over time.
One final option
John and his wife should also be aware that their retirement spending is likely to change over the years. Most people spend the most just after they retire, and then gradually over time their spending drops off.
When you are 65 you might want to travel, you might eat out, go out with friends, buy clothes, own a car.
By the time you are 95 you are likely to be doing less of those things, and spending a lot less money.
Your health expenses might go up later in life, but not necessarily (as long as you are living in Japan).
Make a rough plan
Do you have a financial plan? If not, it might be a good idea to make one now.
Making a plan does not have to be complicated, nor does it need to be perfect.
You just need to have a rough idea of what you need to do.
Then, as you take action, you can revisit your plan from time to time and adjust it.
Failing to plan is planning to fail, as my army instructors delighted in telling us.
If you need any help with planning, or with any aspect of personal finance in Japan, we do have a coaching service.
Sign up to our Substack if you want to get all our posts by email, or fill in the box below:
Share this post on social media: