When you assume…
I think about money and investing a lot. Maybe too much. I’ve written about our pension projections in the past, and thought I had a good idea of what we needed and where we were heading financially.
It seems I was wrong.
I had been working off a range of 200,000-400,000 a month for us in retirement, with the lower end representing a very basic but perfectly fine lifestyle, and the upper end representing a more flexible/luxurious one. This is assuming a paid-off home, etc.
We need how much in retirement?
However, while talking to my wife the other week she said something like we might just be able to get by on 500,000 a month after we stop working.
Eh?
Her reasoning is that while our day to day spending is fairly frugal, we do tend to spend a lot on travel and on family members. And, after thinking it through, I think she is right, at least at the moment. Hopefully our children will become a bit more financially secure in the next few decades so that they are buying us stuff instead of the other way round.
But still, that is a big change to my assumptions, especially for the intermediary step of my wife retiring while I am still working and before she claims her pension.
Life planning
I was talking to a coaching client the other day about life planning, and it might be useful to do a bit of that here to give an example.
Life planning is a process where you sketch out what your life might look like, try to think of major expenses and how much they will cost you, and make a plan so that you can cover them and get through life without running out of money or becoming a burden on others.
It’s relatively straightforward, which may be why financial planners in Japan love to bust out the life planning software with new clients. To be fair, it can be very useful to run through a quick life plan with an FP, just remember that their numbers are likely to be averages and hence may not apply to you, and most importantly keep in mind their ulterior motive (probably to sell you insurance).
My wife and I have cleared a lot of the expense hurdles of life already, so what might our life plan look like?
RetireJapan life plan
Well, let’s start with the things we don’t have to worry about:
- Our children have all moved out and are (for now) independent.
- We bought our manshon (have 8.6m yen left on the loan) and paid for 2/3 of my in-laws’ house renovation (the plan is that we will get that house eventually and sell the manshon).
- I don’t have any family members I am directly responsible for (my parents and brother already passed away).
So what might our life plan look like? These are the expenses I expect we’ll have to deal with in the future:
- Day to day spending.
- Travel.
- Gifts/support to family (our children/grandchildren/my wife’s parents).
- Medical costs (but as long as we remain in Japan I am not too worried about this).
If my wife stopped working
Right now we are lucky in that we both work and can save quite a lot of our income.
In the future we will no longer be saving, and if we cut back on working our tax/pension/health insurance payments should go down.
If my wife stops working she could become my dependent again, which means free pension and health care from my shakai hoken, as well as more of a tax break for me and also a small stipend from my employer.
This, along with some dividend income, would take my income over 6m.
If we both stopped working
This is a much scarier prospect. I am hoping we’ll be able to delay taking our pensions as much as allowed, so depending on when this happens we could be facing 2-3 decades before receiving pension income.
Right now the bulk of our investing is in low-cost, diversified index funds. I believe this is the easiest and best way to invest for most people.
However, we also have some dividend income (about 500,000 yen this year), and I personally like the idea of dividend growth investing.
We’re still a ways off, but I like the idea of having dividend income as well as index investments in the future. Ideally the dividends (and eventually the pension income) would cover daily necessities and the bulk of investments could be sold as needed to pay for extraordinary expenses.
This would eliminate the need for a 6m yen income in retirement. Instead we’d need 200,000-250,000 a month in income plus a pot of investments for emergencies/other spending. Seems much more achievable.
The key takeaway
I’ve written about this before, but I really think the key takeaway here is the importance of talking to your spouse/family about this stuff.
You could make the bestest, most cunning financial plan in the whole world, but if your partner or family doesn’t buy into it you’re not going to get very far.
It’s much better to have a working compromise that everyone is committed to than an excellent plan on paper that has no chance of succeeding.
How about you? How is your life planning going?
Owning a mansion and owning a house are two different ballgames.
Yearly taxes are higher, and you also have to bear 100% of the cost of maintenance. A roof or structural rot can cost you. As well as pipes for water etc.
You are also subject to 360 degrees of weather so costs for utilities definitely higher. If you inherit the inlaws house, rent it out after a simple reform. If it is close to an American base, rent to Americans through the base. You can double the rent.
If your mansion is paid off, the minimum amount you really need is about ¥200,000 a month. I broke everything down to the numbers and calculated. Since health insurance is based on the year before salary, my costs will be higher for the first year and a half due to that.
I got a surprise hit though with a Kaigo bill for the following year and it was about ¥15,000 a month. Did not realize I would have to pay that much per month.
It is highly recommended by financial advisors that you do not keep giving to your kids unless you got cash and need to dispense with giving gifts to offset financial inheritance burdens later on. I am not in that position anyway.
I recommend that you have about ¥20,000,000 in the bank as money you can tap and try to get yourself generated about ¥30 man a month from other income sources such as an annuity, the Japanese pension, and American social security. Be careful of WEP though as I mentioned before. My American SS will drop from $1200 to $800 due to that evil system.
If you ever want to talk privately about future finances ask me.
Thanks Thomas. Indeed lots to think about. Fortunately we have a couple of decades to refine plans 🙂
I have not heard of WEP before and just looked it up. I am not sure I understand fully. Social Security amount is reduced because I am working in Japan and paying into the Japanese system? Could you clarify?
The Social Security Administration does not want you to double dip as they put it. If you have enough credits in the US SS system, you qualify, but each year has the minimum you should have made and there are charts for that. WEP has hurt many Americans stateside especially teachers, cops, and firemen.
If you do not have enough credits in the Japanese system nor American SS you can combine them. It is a world agreement. A friend of mine combined his Japanese with the American SS and because of that, he can work in Japan after retirement and have no issues with the Japanese half of his pension. I can have my Japanese pension reduced or stopped if I work after retirement.
If you work for a Japanese company as I did, I had two pension schemes going on. Rorei for old age which in Kokuminnenkin Hoken and Kyousai nenkin which was Shigakukyousai. Due to divorce, the later was halved, unlike American social security, you are penalized here for divorce. The old age standard though does not get halved.
Age 60 affects one set of rules and age 65 affects another. I have a stack of papers over 3cm thick with this silly redundant game of bureaucratic games. Might be ending soon, took a year and a half so far.
It is a challenge. Believe me.
“WEP has hurt many Americans stateside especially teachers, cops, and firemen.”
Some teachers have been screwed, but others have not. My older sister’s Illinois state pension is about $100k/year! She started as a teacher, but then did an MPA and worked quite a while as a principal–and quit early but then opted to buy her remaining years up to the max. There’s no way someone like this should get a dime of social security. (She doesn’t.) If you base that $100k on the 4% rule, the state has effectively set aside $2.5M to fund her retirement.
Police and fire remained untouched in Wisconsin, when gov. Walker was still in charge (teachers got hit bad). But police and firemen have some of the cushiest pensions/benefits available. Not just WEP, they should basically be ineligible for social security.
Sorry for the rant…! 😉
Great place to retire Ben. I got my beach and surf, studying, and a good spouse and kids close by. Have a party…19th on Friday is my last mortgage payment….for life.
It seems to me like this post mixes aspects of (1) the run-up to retirement, and (2) retirement itself (and if you are prepped for it). Sure, they’re related, but separating those lists may help to see how they fit together.
I remember you once wrote that your ‘number’ was 200 million yen. Seems a bit high to me, and I live in Tokyo. Have you revised your estimate now?
I don’t really have a number, but my conservative spreadsheet tells me we should end up with almost twice that.
I don’t have much faith in my conservative spreadsheet.
20 million. About $200,000 dollars or so as buffer and to keep you free.
Confusion!!
The first “John” above on July 14th is me. The second, on July 15th, is someone else. (e.g., I don’t live in Tokyo.) Too common a name, I guess.
I’ll stick to my longer user name from now on–as I’ve used for this post.
I always wanted to ask… What is the overall dividend yield of your portfolio?
I’m embarassed to say that I don’t track that. Most of my portfolio is in accumulation (non-dividend paying) ETFs and mutual funds.
However, a very rough calculation (net dividends received compared to total value of portfolio) tells me that I had a yield of about 0.6% last year 🙂
My principal guaranteed annuity was paying me a conservative 7% a year and now I started a few months ago removing the maximum of about 4% a year broken down into 12 months. The portfolio is based on a group of stocks in various areas and have done well. And as the stock market goes up, as it always will through time with dips etc. my principle can change and pay out more for me on the anniversary of it in March.
The key to living in Japan, and I assume that is where you are is to finish off the mortgage. Then you only need a conservative ¥200,000 a month to live a neutral ife. If you want to live more fancy, ¥300,000 a month. If you want to live even better, have about ¥20,000,000 in the bank that you can tap on for like trips out of the country for a few days around Asia which is cheap to do. Hopefully you got the urge to travel extravagantly out of your system by the time you are 65 like me.
And you can’t beat the health system here as far as quality and costs, even though insurance will be quite high the first year and a half as it is based on the salary the year before. My health insurance carried over is allowing me to pay the same premium I was paying, although the place I worked will not be paying the 50% any more. That is a great deal.
Good article:
https://catforehead.com/2019/07/19/yen-for-living-houses-as-non-assets/