This would be a new poll/post. An interesting one too
Retirement Nest Egg Target
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RetireJapan
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Re: Retirement Nest Egg Target
English teacher and writer. RetireJapan founder. Avid reader.
eMaxis Slim Shady
eMaxis Slim Shady
Re: Retirement Nest Egg Target
Edited...
There are several ways to calculate this, but it really depends on how much you need to cover your monthly expenses for the rest of your life, how long you expect to live, and the yield return you could reasonably expect on your investment. You really need to understand your budget requirements depending on your standard of living, and make an allowance for healthcare, taxes, unexpected expenses, and so on. If you own your own home, and have paid off the mortgage, so that you have no monthly rent payment, your requirement will be less than if you have to continue paying rent for the rest of your life. However, there are three levels that you may consider to be ‘sufficient’, depending on your expectations:
Level 1 – You can calculate using the Annuity formula
PV = P x {1 - (1 + r/12)^{-n}} / {r}
PV = Nest Egg Size
P = value of each payment
r = Annual interest rate (5% = 0.05)
n = number of months
If you expect to live for 30 years (360 months), and your nest egg is reasonably expected to yield 5% per year (5% /12 in the formula), then you can calculate the monthly payment you would receive, comprised of the 5% yield and some draw down of the principal.
If you withdraw this amount every month, your nest egg will decline over the years, like the outstanding balance on a mortgage loan, until the last day in 30 years time when you withdraw the last yen… If you shorten the duration, you can withdraw more each month, or if you have supplemental income such as a pension, you can increase your monthly income, or reduce your withdrawals to extend the life of the fund. You could also extend the life of the fund if the yield turns out to be higher than expected, but the fund would run out sooner if the yield turns out to be lower than expected over the years. Better to plan on the more conservative side.
Lets say total taxes run at 30%… (Capital Gains, Resident’s, Property, and Healthcare Taxes)
If you had a fund of $500k and it grew at 5% per year and you wanted it to last 30 years, you would probably be able to withdraw $2,600 per month, or about $31k per year before taxes… Probably about $22k per year, or about $1,800 per month after taxes…
If $1M, then probably around $5,300 per month, or just under $64k per year before taxes… Probably around $44k per year, or around $3,700 per month after taxes…
But the money will eventually run out!
This will be separate than income from National Pension(s), employment, etc..
Level 2 – If your nest egg is a little larger, you may be able to get to the point where you can cover your expenses from the Yield (say 5%). In this case the Value of the fund would not go down, but would stay constant, continuing to deliver that 5% every year for the rest of your life, and leaving the balance (after estate taxes) to your heirs. This does not keep pace with inflation, so in real terms the value of your fund and the income derived from it are declining at the rate of inflation. You may also have to take some draw-downs in the future.
You would need your Monthly Expenses x 12 Months x 1.3 for Taxes / 0.05 Interest = Lump Sum required…
If you needed $2k per month or $24k per year, you would need to withdraw $34,300 per year before taxes, so in order for this to be delivered by the 5% yield on your investment, the fund would have to be worth $686k…
If you needed $4k per month or $48k per year, you would need to withdraw $62,400 per year before taxes, so in order for this to be delivered by the 5% yield on your investment, the fund would have to be worth $1.25M…
This will be separate than income from National Pension(s), employment, etc..
Level 3 – If your nest egg is larger still, you may be able to cover your expenses from a portion of the Yield (say 3% out of the 5%) with the remainder reinvested. In this case the Value of the fund would go up by 2% per year, continuing to deliver a growing 5% every year, from which you continue to withdraw a growing 3%, the fund value grows in line with inflation, and the value of the fund in real terms will be the same or greater in the future then it is in real terms today. I would call this having achieved critical mass. The fund will continue to fund itself for the rest of your life.
Lump sum x 0.03 Interest annual withdrawal and Lump sum x 0.02 Interest annual reinvestment, so the fund would grow by (1.02)^n over n years…
If you needed $2k per month or $24k from the fund for the first year, you would need to withdraw $31,200 per year before taxes, so in order for this to be 3%, the fund would have to be worth 31,200 / 0.03 = just over $1M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year for the rest of your life, and leaving the index linked value of the fund (after estate taxes) to your heirs…
If you needed $4k per month or $48k from the fund for the first year, you would need to withdraw $62,400 per year before taxes, so in order for this to be 3%, the fund would have to be worth 62,400 / 0.03 = just over $2M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year, and leaving the index linked value of the fund (after estate taxes) to your heirs…
This will be separate than income from National Pension(s), employment, etc..
Level 3 is the stated goal of the Moustachians and FIRE… Withdraw no more than 3% of the fund per year, so even if yield rates rise or fall, the fund will not decline too much and will continue to support you throughout your life.
If the monthly amount calculated for Level 1 along with any pension, income from employment or other amounts is not enough to cover your monthly living expenses at your desired standard of living, you have some options; either reduce your monthly outgoings and your standard of living, and/or continue to work to supplement your income and reduce the drain rate on your fund, find investments with a better rate of return, or shorten your expectation for the number of years you expect to support yourself…
You could downsize, or move to a cheaper location or country, especially if you no longer need to commute to work, either reducing your monthly rent or taking equity out of your home, and making the same or less monthly allowance stretch further.
As an assumption for Inflation, you could take any assumptions for your budget in today's money, and multiply it by 1.02^n
(2% to the power n years to retirement)
The Rule of 72 says it takes 72 / interest Rate years to double your money. If Inflation is 2%, then you can assume prices in 72/2 = 36 years will be double today's prices.
Having decided the amount you think you need from the calculations above, you can then work backwards to work out how much you would need to invest on a monthly basis to achieve the Nest Egg
If you have say 15 years (180 months) to retirement when you need the Nest Egg, and your contributions are reasonably expected to yield 5% per year, then you can calculate the monthly payment you would have to make to achieve your stated goal.
Some of your contributions will be into Tax advantaged Investment Accounts, so you can divide that portion by 1.3 to calculate the Gross Amount.
The rest will be invested Net of tax from net income.
If you lengthen the number of months to retirement, you can reduce the monthly amount for the same Nest Egg, or increase the end value of the Nest Egg for the same contributions.
If you wanted to have a fund of $200k and contributions grew at a reasonable 5% per year and you want to retire in 15 years, you would have to contribute around $750 per month.
If you wanted to have a fund of $500k and contributions grew at a reasonable 5% per year but you started earlier and want to retire in 25 years then you would have to contribute around $1,900 per month.
In any case, a reasonable amount over your working career would probably be 15% to 25% or more of Gross Salary with the maximum permissible in to Tax-Advantaged accounts (iDECO, NISA, Tsumitate NISA) and the rest into non-tax-advantaged accounts; mutual funds, equities, etc.. to achieve the numbers you derive above. Pay Yourself First, and get used to living below your means.
I'm afraid if people just choose a sum they can 'afford' 'comfortably', it may not be enough, and don't over-estimate the potential return over time. Also, don't underestimate the possibility for inflation over your working life, so there is a possibility that the purchasing power of your Nest Egg may not be the same as that amount today.
An anecdote; When I was young in the UK, many Financial Advisors recommended home buyers to select Endowment Mortgages instead of the traditional Repayment Mortgage, where the homeowner would pay the Interest Only on the Mortgage and invest the Repayment part in an investment account that would grow at an assumed rate over the life of the Mortgage, so the Mortgage could either be paid off early when the Investment account reached the value of the Mortgage, or could be paid off at the end of the Mortgage, leaving the borrower with extra funds towards their retirement. However, the Growth Rate assumed by the 'Advisers' was much higher than the actual rate achieved over the period, and when the Mortgages came due, the borrowers did not have enough in their Investment Accounts to pay back the principle on their Mortgages...
The moral of the anecdote is don't 'plan' on too high a return... If you plan on 5% and achieve 7% - Happy Retirement. If you plan on 7% and only make 5% - Delayed Retirement...
There are several ways to calculate this, but it really depends on how much you need to cover your monthly expenses for the rest of your life, how long you expect to live, and the yield return you could reasonably expect on your investment. You really need to understand your budget requirements depending on your standard of living, and make an allowance for healthcare, taxes, unexpected expenses, and so on. If you own your own home, and have paid off the mortgage, so that you have no monthly rent payment, your requirement will be less than if you have to continue paying rent for the rest of your life. However, there are three levels that you may consider to be ‘sufficient’, depending on your expectations:
Level 1 – You can calculate using the Annuity formula
PV = P x {1 - (1 + r/12)^{-n}} / {r}
PV = Nest Egg Size
P = value of each payment
r = Annual interest rate (5% = 0.05)
n = number of months
If you expect to live for 30 years (360 months), and your nest egg is reasonably expected to yield 5% per year (5% /12 in the formula), then you can calculate the monthly payment you would receive, comprised of the 5% yield and some draw down of the principal.
If you withdraw this amount every month, your nest egg will decline over the years, like the outstanding balance on a mortgage loan, until the last day in 30 years time when you withdraw the last yen… If you shorten the duration, you can withdraw more each month, or if you have supplemental income such as a pension, you can increase your monthly income, or reduce your withdrawals to extend the life of the fund. You could also extend the life of the fund if the yield turns out to be higher than expected, but the fund would run out sooner if the yield turns out to be lower than expected over the years. Better to plan on the more conservative side.
Lets say total taxes run at 30%… (Capital Gains, Resident’s, Property, and Healthcare Taxes)
If you had a fund of $500k and it grew at 5% per year and you wanted it to last 30 years, you would probably be able to withdraw $2,600 per month, or about $31k per year before taxes… Probably about $22k per year, or about $1,800 per month after taxes…
If $1M, then probably around $5,300 per month, or just under $64k per year before taxes… Probably around $44k per year, or around $3,700 per month after taxes…
But the money will eventually run out!
This will be separate than income from National Pension(s), employment, etc..
Level 2 – If your nest egg is a little larger, you may be able to get to the point where you can cover your expenses from the Yield (say 5%). In this case the Value of the fund would not go down, but would stay constant, continuing to deliver that 5% every year for the rest of your life, and leaving the balance (after estate taxes) to your heirs. This does not keep pace with inflation, so in real terms the value of your fund and the income derived from it are declining at the rate of inflation. You may also have to take some draw-downs in the future.
You would need your Monthly Expenses x 12 Months x 1.3 for Taxes / 0.05 Interest = Lump Sum required…
If you needed $2k per month or $24k per year, you would need to withdraw $34,300 per year before taxes, so in order for this to be delivered by the 5% yield on your investment, the fund would have to be worth $686k…
If you needed $4k per month or $48k per year, you would need to withdraw $62,400 per year before taxes, so in order for this to be delivered by the 5% yield on your investment, the fund would have to be worth $1.25M…
This will be separate than income from National Pension(s), employment, etc..
Level 3 – If your nest egg is larger still, you may be able to cover your expenses from a portion of the Yield (say 3% out of the 5%) with the remainder reinvested. In this case the Value of the fund would go up by 2% per year, continuing to deliver a growing 5% every year, from which you continue to withdraw a growing 3%, the fund value grows in line with inflation, and the value of the fund in real terms will be the same or greater in the future then it is in real terms today. I would call this having achieved critical mass. The fund will continue to fund itself for the rest of your life.
Lump sum x 0.03 Interest annual withdrawal and Lump sum x 0.02 Interest annual reinvestment, so the fund would grow by (1.02)^n over n years…
If you needed $2k per month or $24k from the fund for the first year, you would need to withdraw $31,200 per year before taxes, so in order for this to be 3%, the fund would have to be worth 31,200 / 0.03 = just over $1M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year for the rest of your life, and leaving the index linked value of the fund (after estate taxes) to your heirs…
If you needed $4k per month or $48k from the fund for the first year, you would need to withdraw $62,400 per year before taxes, so in order for this to be 3%, the fund would have to be worth 62,400 / 0.03 = just over $2M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year, and leaving the index linked value of the fund (after estate taxes) to your heirs…
This will be separate than income from National Pension(s), employment, etc..
Level 3 is the stated goal of the Moustachians and FIRE… Withdraw no more than 3% of the fund per year, so even if yield rates rise or fall, the fund will not decline too much and will continue to support you throughout your life.
If the monthly amount calculated for Level 1 along with any pension, income from employment or other amounts is not enough to cover your monthly living expenses at your desired standard of living, you have some options; either reduce your monthly outgoings and your standard of living, and/or continue to work to supplement your income and reduce the drain rate on your fund, find investments with a better rate of return, or shorten your expectation for the number of years you expect to support yourself…
You could downsize, or move to a cheaper location or country, especially if you no longer need to commute to work, either reducing your monthly rent or taking equity out of your home, and making the same or less monthly allowance stretch further.
As an assumption for Inflation, you could take any assumptions for your budget in today's money, and multiply it by 1.02^n
(2% to the power n years to retirement)
The Rule of 72 says it takes 72 / interest Rate years to double your money. If Inflation is 2%, then you can assume prices in 72/2 = 36 years will be double today's prices.
Having decided the amount you think you need from the calculations above, you can then work backwards to work out how much you would need to invest on a monthly basis to achieve the Nest Egg
If you have say 15 years (180 months) to retirement when you need the Nest Egg, and your contributions are reasonably expected to yield 5% per year, then you can calculate the monthly payment you would have to make to achieve your stated goal.
Some of your contributions will be into Tax advantaged Investment Accounts, so you can divide that portion by 1.3 to calculate the Gross Amount.
The rest will be invested Net of tax from net income.
If you lengthen the number of months to retirement, you can reduce the monthly amount for the same Nest Egg, or increase the end value of the Nest Egg for the same contributions.
If you wanted to have a fund of $200k and contributions grew at a reasonable 5% per year and you want to retire in 15 years, you would have to contribute around $750 per month.
If you wanted to have a fund of $500k and contributions grew at a reasonable 5% per year but you started earlier and want to retire in 25 years then you would have to contribute around $1,900 per month.
In any case, a reasonable amount over your working career would probably be 15% to 25% or more of Gross Salary with the maximum permissible in to Tax-Advantaged accounts (iDECO, NISA, Tsumitate NISA) and the rest into non-tax-advantaged accounts; mutual funds, equities, etc.. to achieve the numbers you derive above. Pay Yourself First, and get used to living below your means.
I'm afraid if people just choose a sum they can 'afford' 'comfortably', it may not be enough, and don't over-estimate the potential return over time. Also, don't underestimate the possibility for inflation over your working life, so there is a possibility that the purchasing power of your Nest Egg may not be the same as that amount today.
An anecdote; When I was young in the UK, many Financial Advisors recommended home buyers to select Endowment Mortgages instead of the traditional Repayment Mortgage, where the homeowner would pay the Interest Only on the Mortgage and invest the Repayment part in an investment account that would grow at an assumed rate over the life of the Mortgage, so the Mortgage could either be paid off early when the Investment account reached the value of the Mortgage, or could be paid off at the end of the Mortgage, leaving the borrower with extra funds towards their retirement. However, the Growth Rate assumed by the 'Advisers' was much higher than the actual rate achieved over the period, and when the Mortgages came due, the borrowers did not have enough in their Investment Accounts to pay back the principle on their Mortgages...
The moral of the anecdote is don't 'plan' on too high a return... If you plan on 5% and achieve 7% - Happy Retirement. If you plan on 7% and only make 5% - Delayed Retirement...
Last edited by Tkydon on Fri Jun 24, 2022 3:28 am, edited 3 times in total.
:
:
This Guide to Japanese Taxes, English and Japanese Tai-Yaku 対訳, is now a little dated:
https://zaik.jp/books/472-4
The Publisher is not planning to publish an update for '23 Tax Season.
:
This Guide to Japanese Taxes, English and Japanese Tai-Yaku 対訳, is now a little dated:
https://zaik.jp/books/472-4
The Publisher is not planning to publish an update for '23 Tax Season.
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Moneymatters
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- Joined: Wed Mar 04, 2020 7:20 am
- Location: Tokyo
Re: Retirement Nest Egg Target
Just wanted to say many thanks for that!Tkydon wrote: ↑Mon May 31, 2021 3:50 am
Level 1 –
Lets say total taxes run at 30%… (Capital Gains, Resident’s, Property, and Healthcare Taxes)
If you had a fund of $500k and it grew at 5% per year and you wanted it to last 20 years, you would be able to withdraw $2k per month, or just under $25k per year before taxes… Probably $19k per year, or $1,600 per month after taxes…
If $1M, then $4,145 per month, or just under $50k per year before taxes… Probably $38k per year, or $3,180 per month after taxes…
...
An anecdote; When I was young in the UK, many Financial Advisors recommended home buyers to select Endowment Mortgages instead of the traditional Repayment Mortgage, where the homeowner would pay the Interest Only on the Mortgage and invest the Repayment part in an investment account that would grow at an assumed rate over the life of the Mortgage, so the Mortgage could either be paid off early when the Investment account reached the value of the Mortgage, or could be paid off at the end of the Mortgage, leaving the borrower with extra funds towards their retirement. However, the Growth Rate assumed by the 'Advisers' was much higher than the actual rate achieved over the period, and when the Mortgages came due, the borrowers did not have enough in their Investment Accounts to pay back the principle on their Mortgages...
...
Incidentally, I found a nice calculator app - PowerOne on iOS and Android
...
I used it when it was called Parenz on Palm Pilot...
It's actually hard to find stuff about level 1 online. Much more focus on level 2 and 3.. Personally, if I want to retire early then I will need to rely on Level 1 until various Pensions become available.
I refer to this as the "Unsafe Withdrawal rate".
Clearly I can limit how unsafe with partime work once retired. The goal is to hit level 2 once the pensions kick-in and dare to dream level 3 if/when I become (even more) sedentary.
Taking this approach means I can retire, or at least semi-retire several years early than I'd envisaged.
I had one of those endowment mortgages. What you didn't mention was performance was so bad, companies were actually forced to pay more back! Mine had about a 40% shortfall. The additional payment meant it was about a 20% shortfall.
Thanks for the app recommendation. I'll give it a go!
I had built an excel calculator that showed the impact of unsafe withdrawal then the additional pensions (starting at different ages.). And allowing me to alter my planned expenses/lifestyle per year.
Palmpilots, I remember them well.
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goodandbadjapan
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Re: Retirement Nest Egg Target
I like to play with the 'Retirement Savings' template in Apple's Numbers. Plug in a few numbers and it tells you your monthly saving goal. If this is negative, you are basically on Coast FIRE, and if that negative number reaches an amount you could live off, then I guess you are full FIRE. It's a very simple way to get a rough idea of where you are but it's fun to play about with.
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AreTheyTheLemmings?
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Re: Retirement Nest Egg Target
I don't suppose one of you could recommend a comparable Windows-based app or template, could you?goodandbadjapan wrote: ↑Mon May 31, 2021 4:54 amthe 'Retirement Savings' template in Apple's Numbers.
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RetireJapan
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Re: Retirement Nest Egg Target
I just use a normal spreadsheet (well, two actually). One to track my investments (I update monthly but this is not necessary, you could do once or twice a year) and one for projections. For projections I just make a formula that multiplies the current investment by my estimate of future growth (I use 4% as a conservative number) and adds the amount I am planning to save each year. I can project this into the future and get an idea of how things might go if they continue as they are now. It's pretty easy to change factors too.
There is also some stuff here: https://www.madfientist.com/ but I don't need that level of complexity
There is also some stuff here: https://www.madfientist.com/ but I don't need that level of complexity
English teacher and writer. RetireJapan founder. Avid reader.
eMaxis Slim Shady
eMaxis Slim Shady
Re: Retirement Nest Egg Target
This explains how to set up a simple Mortgage Calculator in Excel
https://www.wikihow.com/Create-a-Mortga ... soft-Excel
https://www.wikihow.com/Create-a-Mortga ... soft-Excel
:
:
This Guide to Japanese Taxes, English and Japanese Tai-Yaku 対訳, is now a little dated:
https://zaik.jp/books/472-4
The Publisher is not planning to publish an update for '23 Tax Season.
:
This Guide to Japanese Taxes, English and Japanese Tai-Yaku 対訳, is now a little dated:
https://zaik.jp/books/472-4
The Publisher is not planning to publish an update for '23 Tax Season.
Re: Retirement Nest Egg Target
Expected returns and inflation are real wild cards, so playing it ultra-conservative is my approach.
In Japan, many of us are probably numb to the idea prices rise significantly, but a trip to Australia, Europe or North America will likely result in sticker shock, especially if the yen is weak. One good reason for saving in multiple currencies.
And even when inflation is low, housing prices may skyrocket, which means buying or even just renting may be much more than expected.
A couple examples: I was in NZ when the NZD peaked and ¥2,000 breakfasts were the norm in small restaurants. In Oz rent was triple what we paid in Japan for the same size place, 80sqm. Modest homes in that area were at least AUD$500,000.
In Japan, many of us are probably numb to the idea prices rise significantly, but a trip to Australia, Europe or North America will likely result in sticker shock, especially if the yen is weak. One good reason for saving in multiple currencies.
And even when inflation is low, housing prices may skyrocket, which means buying or even just renting may be much more than expected.
A couple examples: I was in NZ when the NZD peaked and ¥2,000 breakfasts were the norm in small restaurants. In Oz rent was triple what we paid in Japan for the same size place, 80sqm. Modest homes in that area were at least AUD$500,000.
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AreTheyTheLemmings?
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Re: Retirement Nest Egg Target
Thanks for those responses. Very helpful.
As an aside, I started making up my own spreadsheet yesterday and fell at the first hurdle: I haven't really thought about how much we'll need to maintain our basic lifestyle after retirement
I guess I'll start there, and then move on to the spreadsheet.
As an aside, I started making up my own spreadsheet yesterday and fell at the first hurdle: I haven't really thought about how much we'll need to maintain our basic lifestyle after retirement
I guess I'll start there, and then move on to the spreadsheet.
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RetireJapan
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Re: Retirement Nest Egg Target
The fun thing is that this keeps changing (at least it does for us) so retirement planning is really a moving target. You can put together some useful models to help you think about it, but will need to remain flexible as circumstances and goals change over time.AreTheyTheLemmings? wrote: ↑Thu Jun 03, 2021 1:47 am I haven't really thought about how much we'll need to maintain our basic lifestyle after retirement
I find it fairly enjoyable myself
English teacher and writer. RetireJapan founder. Avid reader.
eMaxis Slim Shady
eMaxis Slim Shady