Retirement Nest Egg Target

[Yokohama]

Apps like Moneyforward or Moneytree can be very helpful to get these insights in spending with very little hassle. There are many benefits such as ability to do comparisons by month or year, all kinds of nice graphs of seeing you net worth growing or your allocations between different asset classes, alarms if you don't have enough money in your bank to pay upcoming credit card bills or points are about to expire. Highly recommend.

[captainspoke]

... How do you track the transfers of money into those bank accounts from your investments/pensions?

I don't--I've yet to pull anything from 'investments' since I've been living on pension and cash on hand here. So nothing repatriated yet. (and that seems to be some years off)

I mean, if you have the same balance in your bank each January 1st that has a different meaning depend on whether or not you're accelerating the drawdowns from dividends or sales of investments or otherwise varying the amount you "harvest" each year.

For me, the same balance each January (for #1, below) would mean that I'm living entirely within the bounds of my pension. Include #2 and that's how much over the pension that I've needed.

Bank acct #1: used for 98% of everything--cash as needed, any/all bills auto deducted, and pension rec'd (after deductions). Here, pension is the only thing inbound (every other month), the rest is outbound--weekly cash, utilities, health ins, local tax, car insurance (yearly, but still automatic), credit card, etc and so on.

Bank acct #2: large balance (=severance). Maybe only 10-12 outbound transfers/year, three types. One is an irregular kerosene bill (heat and hot water, so more often in the winter, maybe once more between now and October). Type two might be a one-off home improvement/maintenance bill (we got a new toilet in April). Three is when my wife and I settle up our budget. We usually go 2-4 months before we total everything and work it out, then one of us pays the other to make it even. No repatriation transfers inbound into this now, but eventually. EDIT: I forgot--I've made a transfer to #1 yearly to keep it at a reasonable balance. Once or twice a larger amount, this past March was ¥360,000.

Looking at these two, jan-jan, it's the best/easiest arms-length (top down) picture of my burn. (And since some assessments change in the summer, I've wondered if looking at that would be better, or at least an alternative--e.g., July 1st to July 1st.)

*

I've been retired for just over four years now, but I don't think I've had a typical year yet. The first year, and even the second, since I still had a few months of salary, those included higher local taxes and health insurance/kaigo hoken since those are based on the previous year's income. Those things hadn't "leveled out" yet. Also, nothing excessive, but I travel a little then. That was followed the next year by some health issues--probably less expensive than if I had traveled, but that also kept me locked down and otherwise spending less. Tax year 2019 I sold a lot of investments, so 2020 thru now, income-based assessments (health, local tax, kaigo) have all been on the (really!) high side (not unexpected, but still not normal/typical). Then also in 2020, pandemic lockdown. Which meant cheap living, in spite of those higher taxes/premiums. And maybe that's almost over, and this coming year will finally be typical?

Besides not yet having a typical year (making it hard to generalize by building upwards from specifics), another factor is my/our personal situation. My wife always worked--we were two full incomes, not one (she just retired). For stuff we share, I could tell you exactly what we spent on things like groceries, electricity/gas, or pet care going back monthly for years, but we don't really know what each other spends on our cars, hobbies, haircuts/clothes, etc.

[RetireJapan]

Tax year 2019 I sold a lot of investments, so 2020 thru now, income-based assessments (health, local tax, kaigo) have all been on the (really!) high side (not unexpected, but still not normal/typical).

Why did investment returns count towards income-based assessments? I was under the impression they could be handled separately? Or is that only for tax-withholding domestic broker accounts?

[captainspoke]

Yeah, I've been relying too heavily on the tax office. I need to pay for some outside eyes to make sure.

[TokyoWart]

I don't--I've yet to pull anything from 'investments' since I've been living on pension and cash on hand here. So nothing repatriated yet. (and that seems to be some years off)...

captainspoke

Thank you for the detailed reply. Seems like you have this under good control and are likely to see the investment balances continue to grow during retirement. It helped me to see how those first few years of retirement are unlikely to be "typical" from a tax/health insurance premium standpoint.

[TJKansai]

I think 95% of my expenditures can be calculated by looking at our credit card statements and bank books.

We probably go through about ¥30,000 in cash a month, if that, and we can remember most of it.

That said, I probably only calculate things out twice a year.

[Tkydon]

CaptainSpoke, So you are actually retired?

My comments were aimed at people in the accumulation phase (pre-retirement) to guestimate how much they might need to accumulate in order to be able to retire (comfortably).

It sounds like you are in the very enviable position of being Retired in Stage 2 - Breaking Even every year so that your nest egg is not diminishing, or Stage 3 - Still accumulating (post-retirement) so that, even after all your expenses, you are still able to invest back to further grow your nest egg and protect it against inflation.

[captainspoke]

CaptainSpoke, So you are actually retired? ...

...
I've been retired for just over four years now, ...

[Tkydon]

Bounce this back to the top as this was again brought up in the Monday Blog, but the comments are already closed.

See my previous posts above in this thread.

The Math.

You need to know roughly what your Annual Expenses will be, which means you need to know what you are spending now as a guide.
You can assess whether the items are discretionary or not, but things will change a lot if you are quite a long way from retirement, so go with current expenses as a starting point. They are seasonal, so you need the annual figure to cover all seasons.

Allow for 30% Taxes (Capital Gains, Dividend, Income, Property and Residential Taxes)

Annual Expenses / 0.7 = Annual Gross Income Needed

Allow for inflation at 3%

Annual Gross Income Needed * (1.03) ^ years to retirement = Future Annual Gross Income Needed

Future Annual Gross Income Needed - Expected Pension Income = Future Top-Up Income Needed
(Pensions paid in Japan will be paid Net of Withholding. Foreign Pensions will not)

How to calculate the Nest Egg needed

Option 1 - Draw down to Zero
Annuity Formula

Nest Egg Needed = Future Annual Top-Up Income Needed x (1/Expected Rate of Interest - 1/(Rate of Interest x (1 + Rate of Interest)^Expected Number of Years after Retirement ) )

Say we use 5% as a conservative Annual Rate of Return and 20 years for Expected Number of Years after Retirement

Nest Egg = Future Annual Top-Up Income Needed x (1/0.05 - 1/ (0.05 x(1.05)^20) )
Nest Egg = Future Annual Top-Up Income Needed x (20 - 7.5) )
Nest Egg = Future Annual Top-Up Income Needed x 12.5


If the Funds were in the Post Office with 0% Interest, then for 20 years

Nest Egg = Future Annual Top-Up Income Needed x 20


Option 2 - Live on the Interest, but without Inflation Protection, so you may end up digging in to the Nest Egg later in your Retirement
Perpetuity Formula

Nest Egg Needed = Future Annual Top-Up Income Needed / Expected Rate of Interest

Say we use 5% as a conservative annual rate of return and Draw Down Rate

Nest Egg Needed = Future Annual Top-Up Income Needed / 0.05

Nest Egg Needed = Future Annual Top-Up Income Needed x 20

Nest Egg = Income x (1/r - 1/ r(1+r)^n )

(This is the same as above, but with the investment return the money will last much longer)


Option 3 - Live on part of the Return, and invest part of the return to reinvest and increase the Nest Egg in line with Inflation, so you won't need to dig in to the Nest Egg later in your Retirement (FIRE)
Growth Perpetuity Formula

Nest Egg Needed = Future Annual Top-Up Income Needed / (Expected Rate of Interest - Expected Rate of Inflation)

Say we use 3% as a conservative rate of inflation and 5% as a Rate of Draw Down,

Nest Egg Needed = Future Annual Top-Up Income Needed / (0.05 - 0.03)
Nest Egg Needed = Future Annual Top-Up Income Needed / 0.02

You would have to live on the remaining 2%

Nest Egg Needed = Future Annual Top-Up Income Needed x 50

Nest Egg = Income x 1/(r-g)

The excess 3% earned and reinvested means that the Nest Egg will grow and produce an increasing Future Annual Top-Up Income for ever.

FIRE says you would have to draw down a Future Annual Top-Up Income less than the amount of the Annual Investment Rate of Return every year (or most years).


How to get the Nest Egg? That's the hard part... Save + Invest + Save + Invest + Save + Invest...


The First Law of Investing:
If you Save Nothing and you Invest Nothing, you Make Nothing!