Inflation and retirement planning in Japan

[anroy]

This question might be too much even for the "for Dummies" section, but here goes.

All articles or advice about retirement planning seem to assume inflation is a thing. Phrases like "$1,000 today is not $1,000 ten years from now" abound. The quest seems to be to find investments with inflation-beating rates of return.

For those of us who are probably in Japan for life, this seems like something we don't need to concern ourselves with.

Or is it?
Do you?

[captainspoke]

I've read various comments here and there, and "shrinkflation" is a thing--the price remains the same but the amount/volume goes down.

Oil prices are up now, but I view that as more cyclical than straight up inflation--they are a little higher now than 2011-2013 or so, but the price has generally been lower since then, and there are (always) some geopolitical factors to consider.

I was just reading something on exploding rent prices--which doesn't seem to be the case here. Some comments on that were that housing can be affordable, or an investment, but it can't be both. I think it's inadvertent (not a result of planning, and perhaps a little surprising), but the fact that housing in japan remains affordable is a good thing.

As a retiree, I think it would be unwise to ignore inflation, or that possibility. The fact that japan has not had to worry about inflation for so long, makes me wonder if, when it does happen, it may come as a surprise, to bureaucrats and a system that will be too comfy with the status quo--and any policy reactions to it may not happen as they could or should.

[RetireJapan]

So far in my 22 years here I have seen limited inflation in Japan, and prices double, triple, quadruple in the UK.

So far so good. But it would be foolish not to plan for inflation, and one of the best ways to offset for the individual is to invest in stocks or inflation-linked bonds.

It's also important to be aware of personal inflation. The government-determined inflation rate (based on a basket of goods) doesn't affect me if I don't buy those goods. So my personal rate of inflation will be different from official figures.

Based on your lifestyle, you may face greater or lesser inflation, depending on exactly what you spend money on. People that drive gas-guzzling cars will be facing more inflation right now than people that don't own cars, for example.

[vapid]

I think it is also important to note that being a foreigner in Japan (even in retirement) usually means you have some connections overseas. Whether that is parents, siblings, or children. One thing I discovered during the pandemic last year was how much prices had increased when I had to purchase tickets to fly back and then shopping or eating out.

Japan may continue to have low to little inflation, so your standard of living on a Japanese salary may feel the same - but going abroad changes that outlook.

Anyway - I agree with Ben that you should always prepare for inflation or the worse case financial scenario. Then reap the benefits when it doesn't happen.

[Tokyo]

Yes, inflation should be an important consideration for retirement, for a number of reasons. But it’s truly a double edged sword.

Some lucky foreigners will have the good fortune to get foreign pensions. Since most pensions are adjusted in line with inflation, they tend to increase every 6 months. In contrast, Japanese pensions generally remain flat which is understandable given the lack of price increases..

Some may wish to return home from Japan but if their income is based primarily on Japanese pensions, then this will probably prove problematic in time. I remember many Japanese retiring to the Australian Gold Coast during the bubble years. They loved the beaches and the cheap golf. But their unchanging pension income soon proved insufficient to enjoy the lifestyle they sought. Without protection against the steady local inflation, they found cost increases a burden - particularly the rent increases which ate up most of their pensions. By the late 90s, almost all of those retired Japanese left Australia for cheaper options in Japan, Malaysia, Thailand, etc.

For me, it’s great to have inflation working in my favor - for now. But who knows what the future has in store for us with regards to inflation, currency movements, etc. Which is exactly why you need to factor in these possibilities. They really matter - as those Japanese who moved to Australia found out.

[Butterball]

One thing to bear in mind is those standard rules of thumb like the "4% safe withdrawal rate" and the "average 7-8% annual stock market return" already account for inflation. And if you're investing in global markets, inflation is also baked into the stock price. That's not to say that inflation is meaningless, but simply that if you're already following those standard guidelines, you probably don't need to do anything extra in anticipation of future inflation. Predicting inflation is no more reliable than predicting the market.

[Haystack]

One thing to bear in mind is those standard rules of thumb like the "4% safe withdrawal rate" and the "average 7-8% annual stock market return" already account for inflation. And if you're investing in global markets, inflation is also baked into the stock price.

The 4% rule assumes a 60% stocks and 40% bonds portfolio. Bonds yields over the past few decades has put this rule of thumb into debt. Advisors are suggesting (a) 3-3.5% and (b) higher stock allocations to compensate.

7-8% The average does not do much to help a retiree in a downturn. A bear market + high inflation can be disastrous for retirees.

We should not plan for rosy retirement scenarios, quite the opposite.

[Tkydon]

Just because Inflation didn't happen in Japan in living memory (last 20 years), doesn't mean it won't happen in the next 20...

[Butterball]

One thing to bear in mind is those standard rules of thumb like the "4% safe withdrawal rate" and the "average 7-8% annual stock market return" already account for inflation. And if you're investing in global markets, inflation is also baked into the stock price.

The 4% rule assumes a 60% stocks and 40% bonds portfolio. Bonds yields over the past few decades has put this rule of thumb into debt. Advisors are suggesting (a) 3-3.5% and (b) higher stock allocations to compensate.

7-8% The average does not do much to help a retiree in a downturn. A bear market + high inflation can be disastrous for retirees.

We should not plan for rosy retirement scenarios, quite the opposite.

The 4% rule is not based on a rosy scenario at all; 4% is the safe figure under all historical worst-possible-case scenarios, such as retiring on the eve of the Great Depression, 70s oil shock/stagflation or 2000s dot-com bust & Leeman shock. Will you have the misfortune of retiring into an economy that's worse than any of those? Maybe. Is the economy just going to be different going forward, with permanently high inflation/low bonds? Maybe.

I'm not saying the 4% rule is infallible, but it's based on nearly a century of historical data and chances are it will prove to be more reliable than predictions that are based on the past few years.

Basically, with regard to the original question about inflation: I would say, don't assume we're entering a new high-inflation era, and don't assume Japan will continue to have zero(ish) inflation going forward. If you're going by well-known standard guidelines like the 4% rule / 25x spending rule / 8% AAR rule, etc., you're already planning for inflation whether you realize it or not, and you'll likely be better off in the long run without trying to outsmart the economy. Sure, a less-than-4% withdrawal rate is obviously safer than a 4% withdrawal rate. Nothing wrong with planning for 3%.