[0:00]So, how much money do you need to retire in Japan? Everyone wants like a number or
[0:21]think ahead and maybe considering what kind of income you're going to have in retirement, what kind of savings and investments you might need, and what kind of lifestyle you want to live. And if you aren't, it might be a good idea to start. Because even if it all seems a little bit scary and a little bit intimidating, just thinking about it is going to make it easier for you to reach your goals and not get stuck somewhere that you don't want to be. So, a few years ago, the government released a report that said that the average married couple in retirement is going to need 20 million yen in savings to supplement their Nankin pension. And everyone went nuts. There was a huge backlash against this in that most people didn't have 20 million yen and didn't see a way to get 20 million yen in cash savings. And a few days later, the government withdrew the report and said that actually it had been misunderstood. And it hadn't been misunderstood. You just need to know how the report was made and the kind of assumptions they were going off. So for starters, the couple in the example had one spouse who was working normally and another spouse who was a dependent, kind of stay-at-home spouse. So they were getting normal Nankin and Kokumin Nankin. And on top of that, they would need 20 million yen to have an average level of spending in retirement. And that average was based on a survey that was sent out to retired couples asking, you know, what's your income, how much do you spend, and that kind of thing. So, based on the answers to those questions, the 20 million yen was an average. So, it's not a very useful number. It's certainly not going to be a good fit for you or anyone really. It's just an average based on survey data. And trying to come up with any kind of number or even any kind of formula, so you'll often see articles online that say something like, oh, you need 70% of your income in retirement. And of course, this is far too simplistic and it's not going to apply to to anyone really. I mean, just take the income example. Say you have an income of 5 million yen and you spend all of it. Uh, if you retire and then you've only got 3 million yen, you're not likely to be very happy with that. On the other hand, if you've got an income of 10 million yen, but you only spend 3 million yen now, then you don't need 6 million yen in retirement, you could be perfectly happy with the 3 million yen. So, it doesn't fit everyone, just to have some kind of number or percentage that we're going to work off. Instead, figuring out how much money you're going to need in retirement is quite easy. You just need to work out three things. The first thing is what kind of expenses you're going to have. And this is based on, you know, what kind of lifestyle you want to have, how much money you want to spend on different things. The second thing is to work out how much fixed income you're going to have. Now fixed income is normally things like pensions that you receive from the government, they're going to continue until you die and they're not based on investing or or anything else like that. If you're very lucky, your fixed income will cover your expenses in retirement, and you don't need to worry about much at that point. But for most people, that's not going to be the case. Nankin is not particularly generous, and most people would struggle to maintain their current lifestyle just off Nankin alone. And that's where savings and investments come in, so cash savings, as well as investments, which will hopefully grow, and using those to supplement your fixed income so that you can pay your expenses in retirement. And that's it, very simple formula. How much do you need? How much are you going to get from the government or from pensions? How much do you need to set aside to supplement that? If you can figure out those three things, you know how much you need in retirement. Now, let's look at them one by one. Your living costs in retirement might be similar to your living costs now, if you keep the same kind of lifestyle. They might be less if you end up spending less by, say, spending more time at home, cooking more at home, uh, doing things like going for walks and so on, you might end up spending a lot less. You might end up spending more if you choose to spend your time traveling abroad and so on. Doing things that you've always wanted to do like go on a safari and and that kind of thing. That was very quickly going to add up in retirement. There's also a few things you should be aware of, such as the fact that health insurance and taxes are based on your taxable income. But if you're receiving money from pensions, there's a pension deduction for that, so that your taxable income might be smaller. And if you're taking money from your investments, then, you know, if they were in a NISA account, there would be no tax on that anyway. And even in a taxable account, you'd pay capital gains tax and that wouldn't be considered income tax. So for a lot of people in retirement, their health insurance costs going to be lower, their taxes are going to be lower, and that might be a pleasant surprise for some people. So inflation is a bit of a concern at the moment, and if it continues, that's going to make a huge difference to lots of people's retirements. And you might find that even if you can pay the bills now, if inflation continues, then you might have difficulty paying the bills in five years time, in 10 years time, in 20 years time. And so it's useful to have a margin of safety built in for that. There's also the idea that as we get older, our spending will naturally fall because we are less able and less inclined to do things as we get older. For example, if you're 65, you might want to travel abroad, you might want to go hiking, you might want to go scuba diving. Once you're 85, you're less likely to want to travel, you're less likely to want to do active things, and you're more likely to just spend time at home, maybe with family, maybe just watching TV and so on. My in-laws have certainly seen their level of activity shrink drastically as they've gone on, and the less active you are, the less money you need. And the final thing is housing. So housing, whether you rent or own your home, you should be really conscious of housing, potential housing costs in the future, and also the difficulty of renting when you're older. Fantastic article published today that I'll link to in the description, talking about how most landlords refuse to consider any senior renters, regardless of how much money they have. So, that's certainly something we should keep in mind if we're going to retire in Japan. Now, in terms of your fixed income in retirement, which is normally going to be a pension, you might have Nankin if you've paid in at least 120 months into the Japanese pension system. Uh, and you might have other pensions from abroad, for example. Um, if you are from the UK, uh, you currently have the option to pay into the UK pension on a voluntary basis, and this is very, very cheap. I'll have some links in the description to resources about that, but it's, if you're from the UK and you're eligible, you should definitely consider doing that. You can estimate your future Nankin by looking at your Nankin Tekibin, which is a postcard or a letter that arrives once a year around your birthday. Uh, and once you've paid in 120 months, they'll start giving you an estimate of what your Nankin might be in the future. Once you reach the age of 55, that estimate then becomes uh, the estimate of your final Nankin based on continuing to pay in at the current rate. So, there's two different ways this is calculated, if you're under 55, you get a number that's based on what you've contributed so far. And if you're over 55, you get an an estimate of what your Nankin is likely to be. And for most people, that's not going to be particularly generous. Hopefully, now you've got your basic estimate of living expenses, you've got your basic estimate of your fixed income. The younger you are, the more I would discount the fixed income estimates, because we don't know what's going to happen in the future, but it's unlikely that pensions are going to get more generous. So, if you're five years from getting your Nankin, I think that Nankin estimate is pretty reliable. But if you're 30 years from getting your Nankin, I would maybe reduce the, the kind of estimate of what you're likely to get by maybe 10, 20, 30%. I don't think there's much chance of Nankin disappearing entirely, but it's likely to get later and less generous as the system gets under more and more pressure from the growing population. So, now that you've got your expenses and your income, you can see if there's a shortfall there. So, if you haven't got enough fixed income to cover your expenses, you're going to have to cover that somehow, or you're going to have to reduce your cost of living by doing less, spending less money, and so on. And those are both decent options. And then there's also a a third option, which is that you could work beyond retirement age, and that's something that's becoming much more common all over the world. If you want to use savings and investments to bridge the gap, you can either save up an enormous amount of cash, which is the way that the Japanese government report assumed people would do it, or you can invest in assets that grow over time, and then you can spend them down, but the remainder of them continue growing. This idea of spending a portion of your investments while the rest of them continue growing, gives us something called a safe withdrawal rate. And that's basically a percentage normally of your assets that you can take out and spend without depleting the portfolio so much that you run out of investments too soon. And often we use rules of thumb for this. The most famous one is the 4% rule. And this 4% comes from a some research that was done in the US based on a portfolio that's 60% stocks, 40% bonds, looking at the historical data. And it said that you should be able to take out 4% of that portfolio every year and not run out of money for 30 years. That's where that number comes from, uh, and you can look it up online easily and see what it is and and how it's applied and so on. But of course, this is not something that is fixed or guaranteed, it's just a rule of thumb. It's a, it's an estimate. And so, I think it's, it's a fairly decent estimate to use. If you have an investment portfolio, you can maybe think about taking 4% a year out of that. Or if you're very conservative and you want to have more of a margin of safety, you could use a 3% withdrawal rate. Or you could use a 5% withdrawal rate if you have a decent amount of pension income and you're mainly using your investments for luxuries or or kind of aspirational spending. The more you need the money, the more conservative you should be. So if you're going to be living off this money, if this is going to pay your rent, your utilities, your food, I would be more conservative with those numbers. If your basic needs are met and you're going to be spending this on holidays and and maybe books or, you know, seeing family or going out with friends and so on, then you can afford to be a bit more generous with that. And of course, all of these are estimates. We can think about the future, we can plan the future, but we cannot guarantee the future. There's a famous quote that sometimes attributed to Patton, I think, that says, plans are useless and planning is invaluable. So the act of planning, of thinking about things, is really, really helpful, but the plan itself is likely not to happen because of unexpected developments and so on. I mean, just look at the pandemic, for example. No one saw that coming, it was hugely disruptive, and it's quite likely that we're going to see similar events in the future. If you're enjoying the video and you like this kind of content, if you want to learn about personal finance, about investing, about retirement in Japan, please do subscribe to the channel. It really helps us continue to make these videos. So, what's our situation? So, my wife and I, we have Nankin, so we're both currently paying Kokumin Nankin, which is a lot less generous than Kose Nankin, which is what people who work as employees are normally enrolled in. So, Kokumin Nankin is based entirely on how many contributions you've made. It's a fixed rate, there's a fixed contribution rate, which is 16,000 yen a month. And the maximum you can receive is just over 700,000 yen a year. Kose Nankin is based on how much you pay in because your Kose Nankin contributions are based on your income. And they're also matched by your employer. So Kose Nankin is much more generous in retirement. For me, I've paid into Kose Nankin for 22 years and Kokumin Nankin for one year. My wife has paid into Kose Nankin for just a couple of years and Kokumin Nankin for a few years, and she's also dependent spouse for a few years. And the thing about dependent spouses is that they get free Kokumin Nankin. So, if you're a dependent spouse and your spouse is paying into Kose Nankin, you are deemed to have made Kokumin Nankin contributions. So, I think roughly we're likely to get about 2 million yen from our Nankin in retirement. So, if we took it at age 65, uh, between the two of us. I've also been paying into the UK State Pension, which currently is worth just over 10,000 pounds a year, which at the current exchange rate is just over 1.5 million yen, I believe. So, we're looking at maybe 3 to 3.5 million yen in pension income in retirement. When thinking about living costs, I like to think about bands. So, like what's the minimum we could live on? What would be a reasonable amount to live on? And what would be a really great income to have in retirement? And for us, based on our lifestyle and what we like to do, we could live on 3 million yen or so. We own our home, we like to cook, we like to walk, I like to read, I like to make things on the internet. Uh, we really could live on very little if we didn't travel and we didn't give money to family and and things like that. So, our basic living expenses are very low. So with 3 million yen, we would be okay. So I think our pensions will cover our basic living expenses. Now, if we had 4 million yen, we could have a slightly more extravagant lifestyle, maybe some international travel, more restaurant visits, uh, giving money to the grandkids and that kind of thing. And I think if we had 5 million yen, we could pretty much do whatever we wanted to. So, for us, an aspirational income in retirement would be 5 million yen or more. I'm pretty sure our investments will give us more than 5 million yen a year in retirement, at a safe withdrawal rate. So, for us, I think we're on track. I think we're going to be okay in retirement. I still plan every year. I have these these spreadsheets, and I think about this stuff. But I think we're in a good place. Pensions should cover our basic needs, our investments will certainly cover our discretionary spending, and I can imagine that we'll be able to deal with most financial problems. How about you? Have you run your numbers? Do you have a rough idea of how much money you're going to need in retirement? How much you're going to have in pension income? How much you might need to save up and invest to cover any gap there? If you've got any questions, please stick them in the comments below and I'll see you in the next video.
