Lessons from the Future
Another real treat for you today: the experiences of someone who went through the system in Japan and then successfully retired. Take it away, Parker!
Early Retirement: Lessons from an Unsophisticated Investor
by Parker Dupont
I retired at 61, just shy of the 62nd birthday required to start my pension. I could have continued working for another 8 years at my university but gave up an excellent salary for the prospect of becoming free from classes, meetings, and deadlines.
In hindsight it was a wonderful decision. I was able to retire early due to both luck and discipline. The following piece explains how I was able to reach this happy situation and is illustrated with actual figures for amounts received/being received to give you a concrete idea of what you may be getting one day.
My secret weapon
I am undoubtedly lucky as I found the right partner. When I met my wife about 35 years ago, she was already determined to have a full-time career and also to save for a comfortable retirement. We consulted with a financial advisor soon after marrying and have since adhered to the basics he recommended. That is, making and sticking to saving goals (we have long set ours at least 20% of each income), and maintaining diversified and balanced portfolios in mostly separate his and her accounts.
With both of us working fulltime and raising a family as dotingly as possible, neither had time to play the role of hands-on investor. We generally avoided buying stocks directly, and invested in mutual funds which we never toyed with.
We spread any saving/investing all over – in offshore instruments (through those deservedly infamous advisors present at JALT conferences), Citibank Japan (before they were kicked out), Nomura, real estate, and even in the日本私立学校振興・共済事業団 or the Private School Mutual Aid Corporation (hereafter PMAC) savings plan, giving us a mixture of savings/investment in yen, Australian and US dollars.
Ultimately, we saved a lot but there was disappointingly little capital gain except in foreign real estate which continues to appreciate as well as provide income. Although there were periods when money was really tight because one of us was between full-time jobs or because we were paying for our children's education, we still continued to put aside money each month, as each of us had done since the 1980s. We set a highly ambitious savings target but ended up handily clearing it.
Lessons from my experience
I wholeheartedly recommend the standard advice to always save a certain percentage of your income, no matter how modest your total pay might be, and from your very first payday. Try to make that percentage at least 20%. Spread the risk by diversifying into index funds and real estate, both domestic & foreign. That way, you’ll never have worry too much about currency changes.
The bulk of my saving was achieved through automatic deductions from my salary and credit card (a pleasant result of the latter being the accumulation of many FF miles which I will use to fly business class). Using the same method, my wife and I have long supported our favorite local & international charities as monthly supporters.
Saving certainly became easier for us as we grew more deliberate about our expenditure. For the past 25 years we were always able to afford the latest Apple gizmo/Italian suit/German coupe but very rarely were we tempted.
Saving, rather than spending, became fun. Just as importantly, we both agreed that we needed to enjoy any money left-over after saving, figuring that we deserved to reward ourselves for saving success. The family vacations that resulted will be hard to forget.
Doubling your household income helps greatly. Even math-allergic language teachers recognize that two salaries must be better than one if you are married/partnered. If possible, also be a little ambitious and climb the career ladder. Saving 20% of the tenured 10million+ yen annual salary I was on got me retired far quicker than saving 20% of the 3-4million yen eikaiwa gig I started out on. I am always surprised to learn that even now highly-paid tenured jobs attract few qualified applicants.
Just as it is for a good portfolio, a good CV does not come into fruition overnight. Work on your employment credentials as steadily as you save, and both will build up over time.
You need to be ready for the unplanned. Things change - and enormously. On my first trip to Japan in 1980 one US dollar got you ￥220 and one Aussie dollar which currently trades for ￥90 was worth even more at￥290. Australian bank account holders in 1987 with more than $20,000 deposited got a return of 11.75% interest. The small Sydney apartment (one room manshon-style) we bought for investment in 1985 received just $300 a month in rent at first but that has now increased to over $1,000. That same manshon has appreciated 7-8 times its original cost - a far better outcome than if we had mistakenly bought into Japan's mid-bubble property market of the time.
Additionally, we had no idea that one of our kids was going to get a Masters in the US. That was super expensive to pay for but because of our double incomes and built-up savings, we did it without incurring any debt and I still retired 5 years earlier than the 67 I had loosely aimed for many years earlier. Whatever the amount you think you need to support your retired life may not be enough so having an extra 20-30% cushion is good for covering the unforeseen. But how much is enough?
PMAC which pays my pension here estimates that a couple requires a monthly minimum of ￥220,000 to support a very basic retirement, and further suggests￥354,000 is needed for them to enjoy a slightly affluent lifestyle (assuming home ownership and no mortgage remaining).
Unfortunately, depending on your age you also should assume that future Japanese nenkin, both kokumin and employer-based, will provide 10%-30% less than they do at the moment, and also that future generations are not likely to get a pension until age 70.
After 18 years of paying into PMAC, I now get a partial pension of ￥84,000 a month. People born after 1961, however, cannot get their PMAC pension until they turn 65. Currently.
From 65, I will also receive kokumin nenkin but only around ￥43,000 a month since I have only paid in for 27 years. So together they total ￥127,000 monthly, which would necessitate a large monthly drain on my savings if I did not have other non-Japanese income sources to supplement my income (PMAC members, are you aware that you can get an estimate of your future pension over the phone from your local office? You just need to provide your membership information and give them a couple of minutes to crunch numbers).
Given the demographic future of Japan, its relatively poor public and private pension systems, and the unfortunate likelihood of future natural disasters, those young enough to be still uncommitted might want to seriously rethink their future in this country. I love Japan and have greatly enjoyed living here but there are few advanced countries with as bleak a future for the aged.
This is not just my subjective opinion. The recently released 2017 NATIXIS Global Retirement Index rated Japan at #22 of the 43 countries surveyed. The UK came in at #18, the USA at #17, leaving only Australia 6th and New Zealand 5th to battle with the usual suspects from Europe for a top 10 placing. For details see this report.
Those without the choice of moving to Norway or some similarly promising pasture should think long and hard about how you are going to generate sufficient monthly income to support your retirement. Unlike the good old 1980s when even Japanese banks offered 8% interest rates, having 100 million yen saved in a Japanese bank now is not going generate much for you, if anything at all.
There is, however, some good news about jobs in Japan and that is the forced savings built into the system. 'Proper' jobs come with 2-3 bonuses a year and those lump sums can really boost saving efforts.
Additionally, the retirement bonus system in place here gives workers a huge chunk of cash right at the end when it really helps. I received a lump sum totaling over 1 million yen for each year that I worked, but readers should note that payment amounts vary greatly according to your employment conditions, salary level, type/size of school, your age at retirement, and length of service.
Retiring after age 50 with more than 15 years of employment at my university meant I got a far greater total payout than a younger professor would have received for the same length of time.
For university teachers, I am told that staying within one pension system for a long period, either the private or public university system, is apparently much more financially advantageous than splitting your career between two. Finally, unlike for many retirees living in America, because we plan to continue to be based in Japan, we do not worry about how to cover our future medical costs. And that is a big, big deal.
In hindsight our efforts to save can be viewed as a form of delayed gratification. We worked and saved hard over a long term in order to put ourselves into a position of having more options later in life, only later has become now.
Retirement for me so far has meant an instantly happier and healthier life without any decline in living standards. I am thrilled to be retired and look forward to spreading my wings to travel more and also to find ways to give back to my local community.
Life could hardly be better. I hope readers can get themselves into a similar situation one day too. In our case all it required was adhering to very basic investment principles, a ton of luck along the way and decades of effort.
And on that cheerful note, I retire. Literally.
Thank you so much for taking the time to write that, Parker. I'm sure it will be of interest to anyone planning to stay in Japan until retirement.
I'm not quite as gloomy as Parker about Japan's future prospects (I think automation is going to transform the economy again) but I completely agree that the safest thing is to make sure you can take care of yourself. Expecting the government to do so seems risky to say the least!
How about you? Would you like to share your experiences in a Reader Profile? How is your retirement going/looking?