Hi I'm Adam, a software engineer from the UK now living in in Japan for the past 12 years. I've finally started thinking of investing for my retirement and boy do I wish I did this sooner.
Did you know if you started investing $250 a month on your 21st birthday until retirement at 67 and got the average stock market return of 7%, you'd have a $1,000,000 dollars in the bank? You'd have $2,000,000 if you got 9%.
Don't believe me? Use the calculator below and plug in some figures to get estimations of how much you can potentially earn. I'll then introduce you to ways to invest your money whilst in Japan and how to protect yourself from tax.
Heads up! Whilst I've made every effort to make all the content on this site accurate I can't guarantee there are no mistakes nor can I, or anyone for that matter, predict the future growth of any investment. Please treat this site as a simple introduction only and do your own research before making any financial decision.
After playing with the calculator above you probably noticed:
1. Time is your friend. It's better to invest less money sooner than it is to invest more money later. With plenty of time, you can still make plenty of money with low rates of return.
2. The biggest returns are made in the later years. Procrastinate by only one year and our earlier $1,000,000 investment above would shrink by $70,000! By $140,000 if you wait two years!
3. Small increases in interest rate amplify the return. Despite the difference between 7% and 9% being only 2%, the effect it has on your final investment is huge. Again our earlier example of $1,000,000 at 7% would double to $2,000,000 at 9%.
Since you can't live forever the amount of time you have is out of your control. You can, however, have some say in how much you can save and the return you can expect. You can save more money by cutting down on unnecessary expenses and you can invest your money wisely in things which yield higher returns than your average bank account. Let's take a look at where you can find such investments.
First I'm not going to discuss "get rich quick" schemes or finding the "next big thing". Nor am I going to implore you to "get in before its too late" in some new Bitcoin craze. These strategies are way too risky and unnecessary for long-term investors. Let's instead look at some more sensible routes.
The first option is to invest all your money into a Japanese savings account. You'd be lucky to find anything above 2% here. However, it's unlikely the bank will disappear with all your money making it a very safe option.
The second option is to invest your money into government bonds. When you buy a bond you are essentially lending the government money and in return, the government promises to pay you it back plus interest. The interest essentially becomes your rate of return. Provided you buy bonds from reputable governments the risk of them defaulting is very small and you can usually expect returns of 3% ~ 6%.
Another option are stocks (otherwise known as shares) and their risk varies between extremely risky to not so risky. Investing all your savings into a stock because the man in the elevator told you "it will double up overnight" is extremely risky. Let's not do that.
A less risky option is to invest in well-established market leading companies with proven records of growth. The top 100 companies in the UK, America, Japan and many more developed countries match this definition. For example, if you invested your savings in the top 500 companies in America between 1950 and 2009 you would have seen a 7% average rate of return. Certainly, along the way, there have been highs and lows but on average they grew by 7% and if you are investing for the long run you will ride out these fluctuations.
7% might not sound much but remember with time on your side this can make you a millionaire. By investing in multiple companies across multiple industries you also reduce your risk. Will one company go bust? Sure it happens from time to time. Will all 500? Unlikely. Now actually investing in 500 companies sounds like hard work but these days you can do it one click and set it and forget it. I'll show you how later.
Beyond stocks you also have other investment options include buying property, gold or even just starting a business and investing in yourself however, I will leave those for you to research.
So what should you invest in? In general, when investing for the long term you want to invest in a mixture of all of the above in order to diffuse risk. So you'd keep some money in the bank, some in bonds and some in stocks.
If you want to learn how to do all this in an easy to understand format then I strongly recommend you buy this book The Global Expatriate's Guide to Investing. It explains all these investment options, how to decide how much to invest in each and how to do it as a foreigner living in another country. It' written for the complete beginner in in easy to understand english and can easily be read over a weekend.
In the meantime, however, I briefly discuss how to get started with stocks and how to protect yourself from tax in Japan.
The first way is to simply choose a company and buy their stocks. This, however, will require due diligence on your part. It is not enough to simply choose a company you like. You need to research the health of the business; uncover how much debt it has, how much cash it has in the bank and more, lots more. For most people including myself, this is just way too much work.
Another option is to let someone else do the stock picking for you. There is a whole industry of "experts" who pick a bunch of stocks they think will be the great investments and then sell them together in what is known as a managed fund. This, of course, comes at a price for their "expertise", usually as an annual percentage charge. It usually sounds small like 2% but that takes a huge chunk off your nest egg. Our earlier graduate would find their $1,000,000 shrink to $500,000 with those fees! To rub more salt in the wound, these "experts" often underperform the average returns of the stock markets. You'd often get better results if you just invested your money in the top 500 companies in America than go all in on black with one of these funds.
Fortunately, there is a much easier way to invest and that is through indexes. An index is just a collection of stocks. The UK's FTSE 100 and the Dow Jones are famous indexes. The FTSE 100 lists the 100 companies in the UK with the highest market valuations. The Dow Jones is a list of the 30 most important companies to the USA economy. For every index, there is usually a company selling an index fund for it.
Now if you invested in a FTSE 100 index fund, the fund will invest your money in the top 100 UK companies and will automatically take into account companies dropping off from the 100th position and others climbing into it. Since it is all done automatically by computers and requires no crystal ball gazing by so called "experts", the fees are extremely low (around 0.5%) which means more money for you. It also requires no stock picking and the boring research it entails. You can set up an automatic monthly withdrawl from your bank account and set it and forget it.
If you want to learn more see the end for some great links to online resources.
When you eventually cash out your nest egg the Japanese government will charge you income tax on any gains you have made. How much income tax you will have to pay depends on your individual circumstances but 25% is not unusual.
For example. If over 40 years you contribute a total of $100,000 and your nest egg grows to $1,000,000 you have made $900,000. It's this "income" which the government will tax you on and the payable tax can be quite a big chunk of your nest egg.
Fortunately, the government has launched two schemes called iDeCo and Nisa to encourage people to invest more. As a sweetener, both of these schemes considerably reduce the amount of tax you have to pay on the growth of your investments.
So if you are planning to start investing for your retirement whilst in Japan you should definitely consider doing so via one of these schemes. Whether you choose one or the other, or both, depends on your individual circumstances.
Note: American citizens may not be able to take advantage of the following tax break schemes due to their IRS's strict rules and should speak to an expert before investing.
The iDeCo system allows you to make monthly contributions to various managed investment funds and cash saving accounts and provides tax relief on those contributions. It's amazing because the iDeCo provides tax relief not only when you cash out your nest egg but also when you put money into it.
When you cash out, you won't have to pay income tax on all of your investment's growth but rather a smaller proportion of it leaving you with more money in your nest egg.
However, the best part is the tax relief on the monthly contributions you put into the iDeco. Every month the government charges income tax on all the income you make. However, when you invest via the iDeCo the government will refund the income tax you originally paid on the monthly contribution amount which in effect allows you to invest even more. Given that for the average personal income tax in Japan is around the 20~25% mark this is a significant amount of money especially when you factor in compound interest. You can get an estimate of how much tax you will be refunded here.
You can invest up to a certain limit each month dependent on your employment status. For example, regular employees can pay up to ¥23,000 each month and self-employed ¥68,000. You can only invest via the iDeCo until you are 60 and you can not draw out any of your invested money until your 60th birthday. As a foreigner, if you leave Japan you can not continue to make further investments via the iDeCo but your existing investments can remain in place and can be drawn out on your 60th. Hence if you are not planning to stay in Japan forever and/or envisage needing access to your money before your 60th you may want to consider the next option.
The bad point about iDeCo is you are limited in what you can invest in and are often presented with a choice of managed funds. As mentioned earlier, you need to be careful when picking a fund and avoid high fees. The resources at the end will help you here.
The NISA allows you to buy individual stocks and shares and not pay any tax on those investments for five years. You can invest up to ¥1,200,000 (approx $11,000) a year. After five years any subsequent gains will be eligible for tax.
Whilst only providing 5 years of tax protection, the NISA does provide the most flexibility for foreigners as you are free to cash out your investments whenever you want which you may desire if you plan to move back home in the near future. It also allows you to invest in any stock or index in the world, unlike the iDeCo which gives you a fixed choice of managed funds to chose from.
The Global Expatriate's Guide to Investing. I've read this book multiple times and can't recommend it enough. It's aimed at total beginners who know nothing of investing and are living abroad. Written in plain simple English it's an easy weekend read. In the book, you will learn what to invest in, how to structure your investments to reduce risk and where to find the best / cheapest index funds.
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Whilst I havn't read this personally I have heard people recommend it highly as a great book on investing for total beginners.
RetireJapan. A fantastic online resource and community for foreigners wanting to get a grip on their personal finances. It's run by Ben an English teacher in Sendai who is extremely knowledgeable about investing in Japan. He regularly posts useful information on the blog and the forum is home to a friendly community of ordinary people helping each out with impartial advice.
The RetireJapan Guide to iDeCo. If you just want a comprehensive explanation of the iDeCo in English then RetireJapan has written the (only?) English book on the matter.
An introduction to the iDeCo by RetireJapan. Ben has recently followed this up with iDeCo and Taxes where he digs even deeper into the iDeCo system and its tax relief.
The official iDeCo tax calculator. See how much you can benefit from investing via the iDeCo system. Japanese only.
一番やさしい! 一番くわしい! 個人型確定拠出年金iDeCo(イデコ)活用入門. My wife found this book an amazing guide to the iDeCo system.
The RetireJapan Guide to Nisa. RetireJapan again have written the only English book on Nisa's.
最新版! 税金がタダになる、おトクな「NISA」活用入門. I haven't personally read this but for those who can read Japanese this book has great reviews.