Spending a Retirement Bonus

Or annual bonus, inheritance, proceeds from selling a company, or any windfall

Well, my (curiously inflated) retirement bonus just hit my bank account. So far so good.

Now I just need to figure out what to do with it.

Spend It

This is the default for many people, and me from 15 years ago would also have gone for this option. Until I had my financial epiphany, and even for a few years afterwards, I spent far too much money on stuff.

Computers, cameras, snowboards, even cars.

None of it made me any happier for more than a few days/weeks, and it all ended up being thrown away or recycled.

Now I hardly spend anything day to day (other than on food and books) and certainly don’t have a list of things I want to buy in the future. If I want/need something I will buy it now, but mostly I neither want nor need anything.

Pay Off the Mortgage

This is a very common thing for people to do with their retirement bonus in Japan. Finish working, pay off the house, simplify your finances going forward.

And it is attractive, from a psychological point of view. I don’t like being in debt, and I don’t like having monthly payments. And this bonus would (just about) pay off my mortgage, leaving me with under two years of payments remaining.

But I’m not sure it makes much sense. My mortgage is 30-year floating rate at 0.5%. We have 25 years to go, the monthly payment is under 30,000 yen (25,000 principal, just under 5,000 interest), and the loan would be paid off in full by insurance if I die or get cancer.

Investing the money instead of using it to pay the mortgage should easily generate enough profit to cover the interest on the loan, if not most of the monthly payments. We would also have access to the money if we needed it, unlike if we just used it to pay the mortgage.

So tempting though it is to be debt-free, I won’t be paying the mortgage off early unless we want to sell or rent the place out, or unless interest rates go up enough to make it painful to keep it.

Invest It

For me this is always a good option. Today it seems the stock markets are wobbling, which is something that investors should always be happy about (as long as they are buying and not selling).

However, we probably already have enough invested and plan to continue our regular investments in NISA and iDeCo (33,000 tsumitate NISA and 67,000 iDeCo a month for each of us). There probably isn’t quite as much need for us to continue investing beyond that as aggressively as we have in the past.

Unless we see a proper stock market crash I’m not in a hurry to invest this bonus.

Keep It For a Rainy Day

For now I am planning to go with this option. We can live off seven million yen for 2-3 years easily, especially if I continue to make a small income from books, this site, and coaching. Having cash gives you a lot of flexibility and security.

It also serves as ‘dry powder’: if there is a market crash you can use it to invest when stocks are cheap.

And of course if I change my mind it will be easy to go and buy a sports car, pay off the mortgage, or buy some Bitcoin 😉

How about you? What would you do with a windfall right now?

6 Responses

  1. I would definitely pay off your mortgage, that is a weight around your neck, I payed mine off a few years ago ………….. a great feeling and we all need to live somewhere. Apart from that its all about balance ………. its ok to buy a few things you really want but only you know all the details

  2. Another vote for paying off the mortgage. Who wants to be retired with debt, even if it is just ¥30,000 a month? (Ben, you are not really retired…) When I retired I paid off the home loan immediately. It was a great, great feeling even though there were only 5 years of repayments remaining.
    About half of the retirement bonus remained and since I didn’t need it, it all went into ETFs including NISA. That’s grown 30% in the past few years, despite my investment naivety, so I am really pleased with how I ’spent’ my bonus. I have no debt and more money to spend on better hotels and restaurants when traveling.

    1. Ha, ha, definitely not retired. Dammit.

      I completely understand the desire to pay off the mortgage (it’s tempting), but the way I calculate it, the expected return of *not* paying it off early is about 30m yen, and that’s if the insurance doesn’t end up paying it off for one reason or another.

      I suspect there may be some credit-related benefit to having an active mortgage that is being paid off regularly too.

      But at the end of the day this (like many financial decisions) is going to depend on what makes you happier 🙂

      1. I agree that it would have been far more rational to invest rather than to repay my loan. But retirement is not like normal life. It’s time to minimize worries and maximize pleasure since time is the commodity you have least of. Pay off the loan and the money in the bank account is mine, all mine to spend. (And unlike you young ‘uns I remember the 1980s when a 13% home loan interest rate was considered not so bad. Uh, no thanks.) I worked and saved hard to get to retirement. It’s now time to spend. Happiness wins!

  4. I took out a 30 year mortgage for a second hand house in Japan just before turning 50 , it will run till I am 80
    I Have no intension of paying it off early , due to the low interest rate.
    They way I see it, its like paying rent except I am the Landlord and have control over the property. Besides with Inflation its to my advantage.. Also if I die its paid off by the insurance and goes to my wife anyway. Mind you I did have an investment property with a 5% interest rate back in the UK and have paid that one off