How much should you save for retirement?
I believe everyone should be saving at least 20-30% of their income. By saving, I mean putting it away or investing it for retirement. If you are saving for a holiday, or a car, that is not saving. Neither is saving for a house deposit or similar.
Saving for this post is saving money for emergencies (your emergancy fund should be enough to pay for emergencies or pay your living expenses if you are out of work or sick) or saving and investing for retirement.
We wrote about some strategies for saving in an earlier post and about my situation in another one.
I used to find it very difficult to save. A lot of months I would spend more than I earned, resulting in credit card debt, spending down savings, or borrowing from friends and family.
Now we save 50%+ effortlessly.
So what changed? Well, my income went up, but I don’t think that is a major factor. My expenses went down as my stepkids are now all independent, but I don’t think that is a major factor either. I could easily have blown the extra money the way I did back then.
In my opinion the three huge factors that helped me take my regular saving rate from 0 to 50%+ were changing my mindset, cutting my big regular expenses, and automating saving.
The mindset was the key. Thinking of saving as ‘buying investments’ meant that I tried to find money to invest, and ended up preferring to buy shares rather than gadgets or clothes.
We bought our car for cash fifteen years ago and have been driving it ever since. We bought our manshon cheaply so the monthly mortgage payment is under 30,000 yen. I switched from Softbank to Aeon mobile so now I pay 6,000-7,000 yen less every month. We cancelled a few insurance policies we no longer needed.
Automation is a killer app because it takes the decisionmaking out of saving. At the beginning of the month set amounts go into my investments. This happens every month on payday. I don’t even notice it any more.
Many people will react to this post by coming up with reasons why they can’t save. That is fine. Whether you save or not is up to you. No one can do it for you. But there is a good chance you are defaulting to the loser response.
Life is much better when you have your finances sorted out. I was talking to my wife the other day and we talked about how we hadn’t worried (or even thought much) about lack of money for a couple of years now. We still have problems but money isn’t one of them.
All you need to do to get to that stage is earn more, spend less, and invest the difference.
Setting up both ideco and tsumitate nisa has made saving a lot easier, I just wish the tsumitate withdrawals could go higher. In the future I plan to save more, but with a honeymoon coming up, money is going that way. Still, with the money coming out automatically, it just takes a lot of thought out of it.
20-30% is pretty high.
1. Get out of debt
2. 6 months emergency savings
3. 15% minimum towards retirement
4-5. Kids college or save for a deposit for a home(deposit is separate from emergency savings(home mortgage and taxes may be no more than 25% of take home pay)
5. Pay off home
I agree holidays and cars are things that need to be budgeted for, but are not part of any real savings.
I can understand and fully agree with saving as much as possible for retirement. My issue is with investing it. By this I mean, invest in what? The options are bleak. Just leaving it in the bank at essentially zero or even negative interest and watch inflation eat away at the principle at 5 to 8 percent a year is not an option. I suppose most people would agree with this but let’s look at the options.
The stock market. Well yes many people do you invest in stocks some for long term but picking the right stock seems more like a guessing game. Maybe it will do well but chances are just as good or wont. 50 50 chance at best. It seems only the insiders with privileged information do well and everybody else gets screwed or worse! I.e. Martha Stewart. The whole market is so over leveraged at this time how could anybody know when it what to buy or sell. It seems like a giant casino game to me and the house always wins.
Real estate
Ok many people get rich in real estate in fact it produces the most millionaires. Having owned and still own real estate in my home country and the U.S. O can tell you it isn’t easy to manage properties from 5000 miles away. I had a house in the U.S. I invested in. I rented it out and had a local agent manage it. They rented it to a drug dealer who never paid rent and I had to have him evicted. What a disaster. I let it sit empty for a few years hoping the real estate market would improve after 2008. I finally got it sold at a loss after having to make two or three international trips a year to fix broken roof tiles, or a garage door that blew off the rails. Never again.
I still believe in saving but what to do with it leaves me shaking my head.
Hi David
We tend to recommend investing in low-cost, diversified index funds. This allows people to benefit from stock market growth without having to worry about choosing stocks.
Andrew Hallam’s book Millionaire Teacher is pretty good on this, as is JL Collins’ stock series: http://jlcollinsnh.com/stock-series/
As long as whatever index you choose grows you are fine. Can anybody know what index is going to grow over the long term? I assume just as many people are shorting those indexes as putting on them which can cancel out any actual gains. Still a big guessing game in my humble opinion with all do respect.
With that attitude you are indeed restricted to cash. Good luck!
Now I get where you are coming from. It’s the ole ‘stock market game, is the only game in town ‘ game.
Not really 🙂
I know people that are into investing in property. They can do very well. I know people that invest in businesses. They can also do very well.
Personally I am lazy so I like the passive income / growth of shares.
But I think there are lots of options. It’s a matter of pursuing the ones that interest you.
I am on your page. Responsible spending and 25% of income saved for retirement. Other savings (downpayment, travel, kids uni) add up to saving 50% of my income. However, I do feel like on of the lucky ones as I have an income that allows me to do this. Can people bringing in 250,000 yen/month after taxes save 20-30% for retirement? (I seem to know plenty of families with this general budget). It just wouldn’t seem possible, unless one were single perhaps.
I think this is going to depend on the individuals. If they want to they probably can. After all there are plenty of families that get by on much less in Japan.
Alternatively they could try to increase their income: http://www.retirejapan.info/blog/the-three-elements-earning
Finally, I think for many people it makes sense to save more when they can (before or after having dependent children, for example) to make up for the times when they can’t. Ideally everyone would save consistently, but clearly that is not possible for everyone. I used to save nothing, now we save 60% which makes up for it 🙂