An excellent question
How much do you need to retire comfortably in Japan? Will nenkin be enough? Will you need to save and invest further? What happens if you don't have enough money in old age?
Last week someone asked an excellent question in the RetireJapan Forum about how much money they would need to retire. The poster was asking for a rough rule of thumb, like one for the US that says you should have 10x your final salary saved by retirement.
The bad news is that I don't think this kind of rule of thumb makes much sense. Anything based on salary is going to miss the mark -I save 60% of my salary, but my colleague saves nothing: clearly a prediction based on salary is not going to work for one or both of us. There are so many variables for the lifestyle an individual has or will want to have that I fear there are no easy answers.
The good news is that it is possible to estimate how much you will need. But it won't be a simple number or multiple.
For something this important I think it is worth taking a bit of time to really understand your situation.
First, you need to figure out how much money you are going to need per year or per month. This may be similar to what you spend now, it may be more, or it may be less. Many people will find themselves spending less after they stop working -after all, they no longer need to buy lunch, pay to commute, buy and clean work clothes, or buy themselves treats to deal with stress. On the other hand, they may find themselves wanting to travel more, or take up new hobbies.
Personally, I like to work with a range of numbers. I think my wife and I could live a basic but perfectly fine life if we had 3 million yen a year (we will have paid off our home by that point so won't need to pay rent or a mortgage). We could live pretty well with 4 million a year, and very well with five million or more in income.
Once you have your number, or range of numbers, you need to think about how you are going to generate income.
Hopefully you are paying into the Japanese national pension (kosei or kokumin nenkin). If so, you will be able to receive a pension once you have paid at least 120 months. After you reach that number, you will be able to see a projection of your eventual pension, either by logging into Nenkin Net or by looking at your annual pension statement postcard, sent out around your birthday.
Of course, the further away that pension is, the less reliable the estimate is. I believe claims that the pension system will collapse are overblown, but it seems likely that we will receive a bit less than the current numbers, a bit later in life. I'm working off around 200,000 yen a month for my wife and I. This includes kosei nenkin for me (including my bonus for being a public servant) and a combination of kosei nenkin and kokumin nenkin for my wife. If possible, it might make sense for you to delay taking your pension.
Perhaps you are paying into another pension, either through work or some other way? I'm paying into the UK state pension on a voluntary basis, so am also expecting to receive that in the future.
You might also be able to find some part-time or freelance work that you enjoy that would contribute to your monthly budget. I enjoy writing and teaching, so could easily pick up a few hours work a week doing that. I could also imagine working in a cafe, driving for people, or working as a guide.
Finally, hopefully you will build up passive income streams or investments that will supplement your pension and allow you to live the life you want in retirement. A common one in Japan would be buying rental properties, mainly to help you reduce your income taxes and receive cash (properties in Japan tend not to appreciate the way they do in many countries). You could also write something (like the RetireJapan Guides) or create a website or business that provides passive or semi-passive income.
But the easiest is probably to invest. By saving and investing some of your income every month, you can build up an investment portfolio to support yourself in retirement.
There are two main strategies for living off your investments. The first is to live off dividends and interest without spending the capital. It can be difficult to build up enough capital as dividend yields are around 2% (so you would need about 50 times your annual spending), and could result in you dying with a huge pile of money that you might have been better off spending.
The other strategy is to spend some of your capital, but trust that your portfolio will grow enough to make up for it. A common number for this safe withdrawal rate (the amount you can take out without depleting your investments too soon) is 4%, although some people recommend 3.5% or 3% for additional safety. This means you would need 25 times your desired annual income in investments (or 28 times, or 33 times for the lower withdrawal rates).
So to think about your retirement finances, all you need to do is fill in the following table:
If the number in (H) is positive, you should be okay. If it is negative, you need to make some changes, either by reducing your future spending or by increasing your future income. You can do his by doing more part-time work or saving and investing more now.
The thing to keep in mind is that this is a dynamic process. Once you have started thinking about this in practical terms you will naturally make adjustments as your situation becomes clearer. If your investments do badly you will probably try to spend less. If they do well you may feel like treating yourself.
The key is to be conscious of where you are and where you are going with your finances.
How about you? Do you have a financial plan for retirement? Are you on track? If you have already retired, was there anything that surprised you about the process?