Retirement planning

[northSaver]

After reading a couple of good articles about retirement planning on one of Ben's recent Monday Reads, I've been thinking a bit more about this.

One article suggested that we should have a cash bucket of up to five years living expenses. Or, more accurately, living expenses minus income (since we'll hopefully all get some kind of pension income in retirement). This sounds like overkill, but the idea is that we only top up the cash bucket in a year when our stock/bond portfolio has risen. It's unlikely to fall five years in a row, so we should be able to hold on without ever selling after a drop.

I like this idea, but can imagine it would get a bit nerve-racking if the portfolio drops more often than rises and the cash bucket becomes dangerously low. However, any retirement plan that relies on a stock/bond portfolio would be pretty nerve-racking in this event!

The problem/challenge we have is that most of our income will be in GBP. Two full UK state pensions (hopefully) and a few small private pensions from the time we worked there. So our pension income will be at the mercy of the GBP.JPY rate. My wife suggested that we keep the UK pensions in GBP if the rate is low, and transfer it when it's high, but what is "low" and what is "high"? Also, how can we fund our retirement when the rate stays "low" for a number of years? A compromise might be to have a rate boundary of, say, 150, and transfer it monthly (or when received) if the rate is anything above this, otherwise leave it accumulating in the UK until the rate is above 150 again.

Any thoughts on all this? I wonder if currently retired expats have large cash buckets and/or only transfer non-JPY pension income when the rate is good?

Of course another approach is to just forget about it until the time comes, then play it by ear. Maybe this is what the majority of retirees do? We won't know our exact circumstances until we get there (e.g. extra income from part-time work, the size of our portfolio, etc.), so why overplan it until then?

[RetireJapan]

My take is that thinking about this stuff is useful, but there is no need to make a decision unless you are a year or two out.

[Tsumitate Wrestler]

Any thoughts on all this? I wonder if currently retired expats have large cash buckets and/or only transfer non-JPY pension income when the rate is good?

Of course another approach is to just forget about it until the time comes, then play it by ear. Maybe this is what the majority of retirees do? We won't know our exact circumstances until we get there (e.g. extra income from part-time work, the size of our portfolio, etc.), so why overplan it until then?

Yes, many Japanese retirees have much larger cash buckets.

Decades of low-interest rates, mean low-risk free yield with JGBs. Foreign bonds offer a lot of unwanted currency risk.

Many investors are simply in Global Equities, pensions, + cash holdings, ignoring bond investments.

[northSaver]

My take is that thinking about this stuff is useful, but there is no need to make a decision unless you are a year or two out.

I'm 57 now and will probably start drawing a couple of small pensions at 65. Then the main UK pensions at 67. So yeah, a few years to go still. Although we're starting to wind down our school, we should have enough income to live on and save a bit more between now and then. I just like thinking about these things I guess

Yes, many Japanese retirees have much larger cash buckets.

Decades of low-interest rates, mean low-risk free yield with JGBs. Foreign bonds offer a lot of unwanted currency risk.

Many investors are simply in Global Equities, pensions, + cash holdings, ignoring bond investments.

Yeah, the Japanese retirees I know personally have large proportions of cash. Some have a few Japanese stocks and investment property too. I guess the 1990s bubble crash is still a bit too fresh in their memories to go big on stocks. So their exposure to exchange rates is pretty low compared to expat retirees.

Expats could face a double whammy in a strengthening yen cycle: they'll lose on their global funds AND on their foreign pension income. I can imagine things will look pretty grim after a few years of that. The opposite is true when the yen becomes weak. So maybe that's the plan? Make hay when the sun shines and spend it when the rain comes? Assuming you don't try to live like a king in the good times!

Other ideas: increase your exposure to Japanese stocks (may work or may not), and invest in Japanese rental property. I'm doing both of these to some extent. It's tempting to sell the rental property and stick it all in the stock market - much less hassle that way - but as a hedge towards varying foreign income I think it's worth keeping it for as long as possible.

Good point about foreign bonds. I hold and will probably continue to hold a few of those, but I hear you about the risk. I also hold some gold for diversification purposes.

[Tkydon]

After reading a couple of good articles about retirement planning on one of Ben's recent Monday Reads, I've been thinking a bit more about this.

One article suggested that we should have a cash bucket of up to five years living expenses. Or, more accurately, living expenses minus income (since we'll hopefully all get some kind of pension income in retirement). This sounds like overkill, but the idea is that we only top up the cash bucket in a year when our stock/bond portfolio has risen. It's unlikely to fall five years in a row, so we should be able to hold on without ever selling after a drop.

Many may find that they are 'retired off' early, before they are entitled to any Pension.
You probably don't want to start receiving Japanese Pension from age 60 based on Contributions to that date, unless you can help it, with the Reduced Payout (100%-% shown)
https://www.nenkin.go.jp/service/jukyu/ ... 21-01.html
and probably want to continue contributing to age 65 to get both your contributions up, and your payout to 100%

Other overseas Pensions may not kick in until age 65 or 67.

You need to plan for 18 months of high Residents' Taxes and Health Insurance Premiums based on your last 12 to 18 months of employment income, as they are calculated 18 months in arrears; Payments from June/July 2024 to May/June 2025 are actually calculated on 2023 Full Year Taxable Income, and payments from June/July 2025 to May/June 2026 are calculated on 2024 Full Year Taxable Income, etc., (depending on which month you leave employment). This could put a big dent in immediate post-retirement income. Budget around 40-45% of last full year's Gross Income (Not Net Income) to cover these outlays. Any ongoing Pension Contributions may also double after leaving employment, as your employer would be paying half.

I like this idea, but can imagine it would get a bit nerve-racking if the portfolio drops more often than rises and the cash bucket becomes dangerously low. However, any retirement plan that relies on a stock/bond portfolio would be pretty nerve-racking in this event!

Many recommend gradually switching from Equities to Bonds when nearing retirement to remove the volatility, but bond prices can be pretty volatile when interest rates change widely, and as we need to plan to live longer, is it good to de-risk at 55-65 when we may have to plan to live to 90-100... ???

The problem/challenge we have is that most of our income will be in GBP. Two full UK state pensions (hopefully) and a few small private pensions from the time we worked there. So our pension income will be at the mercy of the GBP.JPY rate. My wife suggested that we keep the UK pensions in GBP if the rate is low, and transfer it when it's high, but what is "low" and what is "high"? Also, how can we fund our retirement when the rate stays "low" for a number of years? A compromise might be to have a rate boundary of, say, 150, and transfer it monthly (or when received) if the rate is anything above this, otherwise leave it accumulating in the UK until the rate is above 150 again.

Any thoughts on all this? I wonder if currently retired expats have large cash buckets and/or only transfer non-JPY pension income when the rate is good?

The Historical Range of the GBPJPY over the last 30 years is from 117.55 to 286.21, and is currently right in the middle of that range at 195

If you are resident in Japan, UK State Pension is only taxable in Japan, and qualifies (combined with any Japanese National Pension or other National Pension) for the Public Pension Tax Deduction
See Page 8 (page 12 of the PDF) here -
Calculating the Public Pension Plan Deduction (Calculation Table)
https://www.tax.metro.tokyo.lg.jp/book/ ... k2024e.pdf

So you get the additional deduction of around Y1.1M (depending on pension and other income amounts) in addition to your other deductions and allowances, significantly reducing the taxable income and tax bands.

Of course another approach is to just forget about it until the time comes, then play it by ear. Maybe this is what the majority of retirees do? We won't know our exact circumstances until we get there (e.g. extra income from part-time work, the size of our portfolio, etc.), so why overplan it until then?

Better to plan ahead. Your situation will be unique to you.
The best thing is to understand your spending (may be seasonal; heating in winter, airconn in summer, seasonal water consumption, etc.) and how much you would need to spend in retirement (if you were to retire next year) and when certain Pensions will kick in, to understand your income requirement and potential shortfall, and adjust accordingly, especially the big ticket items:
Rent (mortgage payments ongoing) or if you own outright, Property Taxes?
Residents' Taxes and Health Insurance, as noted above
Necessary monthly expenditures; National Taxes, Utilities, Food, Transport, etc.
and
Discretionary expenditures that could be reduced or cut out completely.

List those budgetary monthly outflows against expected monthly inflows and notice any shortfalls, especially in the transition period that will have to be made up out of savings.

[Tsumitate Wrestler]

Yeah, the Japanese retirees I know personally have large proportions of cash. Some have a few Japanese stocks and investment property too. I guess the 1990s bubble crash is still a bit too fresh in their memories to go big on stocks. So their exposure to exchange rates is pretty low compared to expat retirees.

Expats could face a double whammy in a strengthening yen cycle: they'll lose on their global funds AND on their foreign pension income. I can imagine things will look pretty grim after a few years of that. The opposite is true when the yen becomes weak. So maybe that's the plan? Make hay when the sun shines and spend it when the rain comes? Assuming you don't try to live like a king in the good times!

Other ideas: increase your exposure to Japanese stocks (may work or may not), and invest in Japanese rental property. I'm doing both of these to some extent. It's tempting to sell the rental property and stick it all in the stock market - much less hassle that way - but as a hedge towards varying foreign income I think it's worth keeping it for as long as possible.

Good point about foreign bonds. I hold and will probably continue to hold a few of those, but I hear you about the risk. I also hold some gold for diversification purposes.

I personally like to keep things as simple as possible, so if I were to pass anyone could grasp the plan.

Emaxis Slim All Country, Japanese pensions, and cash is essentially our plan.

I do not believe in commodities or crypto.

I would not rent, as I support strong tenant rights, but do not wish to be on the other side of the equation for a relatively low yield in Japan (on-average).

REITs and Bonds are a "maybe", but I am still skeptical . Equities and cash at around 90%/10% is our way forward for the next two decades. My wife likes a healthy cushion.

[northSaver]

...
You probably don't want to start receiving Japanese Pension from age 60 based on Contributions to that date, unless you can help it, with the Reduced Payout (100%-% shown)
https://www.nenkin.go.jp/service/jukyu/ ... 21-01.html
and probably want to continue contributing to age 65 to get both your contributions up, and your payout to 100%
...

Thanks for your long reply Tkydon. Yes, I'm planning to continue contributing to the Japanese state pension until I'm 65. Even so, the payout will be meager (only 15 years of kokumin nenkin). And yes, I'll be ready for the large tax and health insurance bill in the first year of retirement. Thanks for the heads up!

About the GBP.JPY rate, most of those 30 years it was below 200 and above 150. I wonder what the median rate was, not the average? 150 looks about right for the last 15 years.

That's interesting about the Public Pension Tax Deduction. It looks like company pensions might qualify too, though it doesn't specifically mention defined-benefit ones.

Yep, I'm always planning, and have a very good handle on how much we'll need vs how much we'll get. The big unknown is the exchange rate, hence the need for a system that can handle large fluctuations.

[northSaver]

I personally like to keep things as simple as possible, so if I were to pass anyone could grasp the plan.
...

Yeah, KISS is good. I know we'll have to sell that property someday, before we get too old. In the meantime I keep a very detailed "death document" that will be useful if my wife and I suddenly die. It will still be a lot of hassle for the inheritors though.

[captainspoke]

To some extent, I think buying and relying on a rental property (even more than one) is like buying a single stock (or a few).

Broad market indexing is a powerful advantage, and IMO there's no chance of buying enough rental property that you could approximately the overall real estate or rental market. And that's not even considering liquidity--your gem may become someone else's albatross.

You could find that angle or location or building that, like picking a great stock, will do well for you, and make your heirs feel blessed. Good luck.

(and the KISS factor, as mentioned)

[Tsumitate Wrestler]

To some extent, I think buying and relying on a rental property (even more than one) is like buying a single stock (or a few).

Broad market indexing is a powerful advantage, and IMO there's no chance of buying enough rental property that you could approximately the overall real estate or rental market. And that's not even considering liquidity--your gem may become someone else's albatross.

You could find that angle or location or building that, like picking a great stock, will do well for you, and make your heirs feel blessed. Good luck.

(and the KISS factor, as mentioned)

I agree, but REITs are basically the answer to that problem. (Not that I recommend them).