Saving for the Future

Jon is back

Prolific contributor Jon is back with his second guest post in as many months. You may remember his post about deciding to buy a house from last month.

Today he writes about his financial plan. I always find it really interesting to hear or read about other people’s situations -it’s a great chance to learn and consider things from a different angle. Take it away Jon!

My name is Jon. I’m 34, I live in Tokyo with my wife and two children, and I’m pretty sure I’m here for the long haul. I thought I would write down how I save and plan for the future, both because it might help other readers and because it will make me think properly about what I’m doing. After all, if it doesn’t sound logical when I write it down, it’s probably not such a good idea.

Financial situation

Monthly income (after tax):

Monthly outgoings:

Monthly remainder:

(JPY 368,000 total, assuming JPY 150 to the pound)

Saving and investment (all figures monthly)

Defined contribution pension scheme: JPY 27,500
My work have a defined contribution pension scheme (確定拠出年金). I contribute the maximum to it each month as it is taken from my salary before tax, so beats almost any other investment hands down. I only wish they would let you invest more!

Tsumitate NISA: JPY 62,000 per month
(half in my account, half in my wife’s account).

I must admit that I still don’t quite understand NISAs, beyond being tax-free investment vehicles. I just felt that I wouldn’t be able to save significantly more than the JPY 400,000 tsumitate NISA limit per year for two people (me and my wife), so taking advantage of the 20 years of tax-free savings seemed like the best option. The reason for the odd amount is that I understand the limit of JPY 400,000 is inclusive of any dividends you receive (though I am more than willing to be corrected on this) so I invest an amount a little below the full amount.

Quick correction here: NISA has a contribution limit, and it is not affected by dividends or price changes of assets in the account. For tsumitate NISA you can always invest up to 33,333 yen a month.

My very basic strategy is to invest in the lowest cost index tracker funds, two-thirds in a broad developed market fund and one third in a broad emerging market fund. I almost never check on performance, as I intend to invest for the long term. I use Rakuten as my provider. Their interface is so bad I need a stiff drink to work up the courage to login and try and do anything (how they are the biggest e-commerce company in Japan still astounds me), but I think laziness will keep me with them.

Junior NISA: 40,000 JPY per month (JPY 20,000 per child)
I also invest for my children using the Junior NISA; the idea being that when they are 18, they will both have a reasonable sum of money to make their way in the world. I think this is far preferable to the various gakushi hoken options available. Just need to teach them about responsible spending and saving before then so they don’t go and blow it on whatever it is the young people will be into in 15 years’ time!

One thing I need to look into is what happens if I go abroad (as may happen with work). It would be annoying to have to give up the tax advantages due to a couple of years secondment or similar.

Mortgage overpayment (UK): GBP 500 (this year)
I own a house in the UK, which I bought in 2014 when living in London. I bought it with the intention of living there long-term, but life got in the way and we moved to Japan in 2016. I kept the house and have rented it out since then. One major benefit of owning a house abroad is that, currently, if you are tax resident in Japan you can deduct depreciation on overseas property from your income, which gives you both a decent refund from the tax authorities after filing a tax return, and also reduces the amount on which your payments of resident tax etc. are based. However this system is
being abolished from 2021 (and not grandfathered for houses purchased before that date). While the rental income is reasonable, my intention is to make extra repayments to the allowed limit (10% of outstanding amount per year, around GBP 6,000 in 2020) until I pay off the mortgage, and then sell the house. It feels like having too many eggs in one basket and requires a fair bit of admin (dealing with repairs, tenant changes, insurance etc.). So as soon as the mortgage is paid off in around 6 years, I’ll look to sell, and instead invest the money in an index tracker, which should be much lower maintenance. I know intellectually that it’s probably more sensible to pay off the minimum amount, and invest this money in an index tracker directly, where the return should be higher than the mortgage rate. But I think “stress factor” should also be considered when investing –owning a house in another country is sometimes a hassle, and I’m happy to reduce my returns to remove that hassle.

You might have noticed that the amount I overpay is more than the GBP remainder I have from rental income. I usually send money back from Japan around New Year to make up the difference. I use TransferWise, which I would thoroughly recommend; good rates and very easy to use. I particularly don’t mind sending money back to the UK now when GBPJPY rates are so favourable. I’m no foreign exchange expert, but the current rates of about 140-150 JPY to the pound are much lower than, say, the average over the last 10 years, so it seems a good time to send money to the UK rather than vice versa. If, in ten years’ time, the rate swings back to nearer JPY 200 to the pound, that might be a good time to send over money
from selling the house in the UK!

Mortgage overpayment (Japan) – JPY 83,000
I took out a mortgage for the whole amount of my house in Japan, with only a small downpayment. One downside to this is that the Flat 35 loan can only cover 90% of a property’s value; the other 10% has to be covered by a separate loan (which my bank wincingly calls a “Smile Loan”). The Flat 35 loan is a very low rate, and as the tax advantages of a mortgage are maximized by the balance being over 40 million yen, I have no intention of making overpayments on the Flat 35 loan yet. However the Smile loan has an interest rate of 2.65%, so I want to pay that off as fast as possible. I’m aiming to pay off 1 million per year, which should result in paying off the whole of the smaller loan by 2023. Again, it’s probably more sensible to pay
the minimum and put the money in an index tracker as well, but I do want to get rid of this debt.

Peer to peer lending: GBP 167
This is my “high-risk” investment – I’ve invested through PeerBerry, which does peer to peer lending in Eastern Europe. So far, after about a year and a half, everything seems to be going ok, returns are good, and the firms seem reputable. The platform is also very easy to use with automated investing strategies. However, I make these investments understanding that they may not come back.

UK pension: GBP 12
Maintaining contributions to a UK pension is about the best investment going if you are a UK citizen – many thanks to this site for first introducing me to the possibility!

Total monthly investments

(Total JPY 286,850, assuming JPY 150 to the pound)

Spending

I’m probably not as disciplined here as I should be. You can tell by the fact that while I know my spending each month is about JPY 100,000, I can’t provide a breakdown below of where it goes.

Also, I do quite a few of the things every personal finance blog or book tells you not to – I buy a couple of coffees every day from the work café, and fairly often have an onigiri or go to a bakery for breakfast. I could cut these out, but they do make the work day much more enjoyable, and it’s also an opportunity for a chat with colleagues. Still, it’s something to consider – maybe I could take in a coffee maker and make my own coffee instead. There’s room for improvement.

At the same time, I don’t have an expensive lifestyle. I hate shopping, and buy all my clothes for the year in one go in Shimamura’s January sales (if you ever saw me, this fact would be immediately apparent). My biggest expense is probably books at about JPY 3,000 per month. My main hobby is table tennis, which costs about 300 yen per time at various local sports centres. I also use my work phone, so don’t have mobile phone expenses. I live in Tokyo, so have no need for a car.

One place I am mildly extravagant is onsen – we usually go 3-4 times a year for a night at an onsen outside of Tokyo. Still, we don’t have long holidays (too much trouble with two small children), so this is a nice substitute, and we all really enjoy it (to the extent that my three-year-old daughter, when presented with a choice between Disneyland and Kinugawa Onsen
for her birthday, chose the onsen).

I also know that expenses for the children are going to increase significantly in the coming years. So far, at ages three and one respectively, they’ve probably saved us money by ensuring I go out far less than I used to. We’ve never spent much on toys or clothes because our ward has a great recycling system – almost every week there are events where you can get old children’s clothes and toys for free. When the kids grow out of anything we give it back to the same events. It’s a great system and I highly recommend looking in your own areas if you have children!

But, the older one will go to kindergarten this year, so various expenses will increase (entry fees to the kindergarten were 90,000 yen, and I assume this is just a taste of things to come!). I need to work this in to our plan somehow, but as I don’t really know what the costs will be, I suppose it will have to be something we deal with as it happens.

Emergency fund

I keep a minimum of JPY 1,000,000 in Japan and GBP 5,000 in the UK as emergency money. Possibly it’s not quite enough for a family of four, but it should keep us above water for a short time if anything terrible happens.

Plan for the future

My basic aim is that when I retire (which I would like to be in around 22 years, when both kids should have finished university and be on their own two feet), I’ll own a house and have about GBP 1 million/JPY 150 million in savings, which can be drawn down at about 4% per year for my wife and I to live on.

I think that the various investments above should get me there, based on continuing the investments for 22 years at a 6% return (8% based on historic returns, less 2% for inflation), and selling the house in 6 years and investing the proceeds for 16 further years. Of course, things might all turn out differently (climate change might make all this planning redundant,
for one), but hopefully I’ve a reasonable change of meeting these goals.

In addition to this lump sum, I’ll also have regular income from the UK pension and Japanese kosei nenkin.

Improvements

Will
I really should get round to doing a proper will. Every time I look into it, the complexity of sorting out a will which covers assets in both England and Japan stops me from going any further. I don’t have any odd requirements, but I do know it’s easier all round (at an otherwise difficult time) to have one. Maybe it should be this year’s New Year’s Resolution…

Life insurance
I’m torn on this; through work I’m in some kind of Japanese Chartered Accountants Insurance Program, which pays out some amount in the event of my death. The mortgage would also be automatically paid off, and in the long term I think my wife would be able to get by. However, life insurance seems like it would be very helpful in that it would give my wife a sum of money to live on while she realized other assets (those in the UK, for
example). In case of serious illness, the mortgage wouldn’t be paid off, so this might be a more difficult scenario, However, the accountant’s insurance does provide support payments in the event of serious illness, and Japan’s limits on medical fees should also help in this case. But
possibly this is another area where we are exposed to risk which could be mitigated.

Health
Often overlooked, but all of the above will be for nothing if my cake-filled frame can’t make it to an age to enjoy retirement! In a good week, I’ll eat healthily, walk 8km to work 3 or 4 times, and play sport. But, as soon as work gets busy (which is often), these tend to go out of the window. Making exercise and a healthy diet the first priority rather than the last is something I should work on this year.

Conclusion

I hope the above helped – it certainly helped me to write it all down! I think the moral is always the same though; save what you can, and start as early as you can. And keep visiting this site!

Phew! Thanks Jon! I think your plan looks fine and personally as long as I am saving and investing every month I don’t really worry too much about spending -personal finance is all about setting things up so you can save as much as possible while still enjoying life.

I always love running guest posts. If anyone else has something they want to write about, please do get in touch 🙂

7 Responses

  1. Ineresting reading. I have two properties in Australia and still not sure how I should be taxed after two years in Japan. Note about depreciation being taken into account here in Japan noted, would like to know more.

    1. Great post.
      Would also like to know more about the overseas property depreciation change.
      I heard you will not be able to offset against JP income, but I wonder can you offset it against the income you receive overseas from the property.

    2. I believe, as long as you don’t bring the money to Japan, you do not have to declare or pay taxes until you become permanently resident for tax purposes (after five years in the country).

      1. That is true, and you will still be able to offset the depreciation against income from the property even after 2020; you just won’t be able to offset any excess depreciation against your income.

  2. I agree with Ben, you seem to have everything covered. That said, since you have a family of 4, I would recommend you have more in the emergency fund. You should also verify the amount of coverage provided by your work life insurance.