Retiring in Japan: What’s the Best Strategy?

More and more of us have come to Japan and are choosing to stay. In the summer of 2000, I arrived here expecting to do two years on the Japan Exchange and Teaching (JET) Programme, then go onto bigger and better things. More than 20 years later, I am still living in Sendai, just down the road from my first apartment. Oops, it looks like I’m a lifer.

Suppose you do end up staying in Japan (and even if you don’t), “old you” will thank yourself for getting your finances in order as soon as possible. This is not difficult, but it is hard. Kind of like exercising and keeping yourself healthy—it’s more about habits than knowledge.

I meet many people who say something like, “I haven’t made plans to retire, so I will just work until I die,” which is fine until you realize that you may not be willing or able to do that. There aren’t many jobs for 70-year olds, and you might end up living several decades past that.

Foreign residents are not entitled to welfare in Japan, although local authorities have discretion and can choose to pay it anyway. Personally, I wouldn’t want to rely on the kindness of bureaucrats in old age, would you?

Why not save and invest just in case, then? If you choose to keep working, you can do so from a position of strength and do it because you want to and not because you have to.

The basic strategy

In Japan, traditional retirement is funded by an employee’s contributions (and employer matching) to nenkin, the national government pension system, or literally “year money,” possibly a retirement bonus as well as any personal savings and investments.

A government panel issued a report in 2019 stating that the average married couple would need ¥20 million in savings to supplement their nenkin in retirement.

Saving up ¥20 million is a formidable task. Fortunately, we can invest the money to speed things up a little—and Japan has several tax-advantaged accounts to help people invest for retirement.

Nenkin

If you live in Japan, you have a legal obligation to pay nenkin in one form or another, but it is also a good idea. A government-backed income in retirement is very valuable.

Most of us will pay kosei nenkin (employee’s pension insurance) via our employer’s deductions to our paycheck. Still, if that isn’t an option, you should pay kokumin nenkin (national pension) through the ward office or city hall. You need to pay ten years (120 months) of nenkin to receive a pension in old age, and a full pension requires 40 years of payments.

If you leave Japan before paying 120 months, you can get a refund of up to five years of contributions, and many countries have treaties with Japan to transfer pension credits.

Investing in Japan

Investing can seem daunting due to the language barrier and the fact that relatively few individuals here invest, which may be a hangover from the bubble bursting in the 90s. Nevertheless, Japan is actually a pretty good place to invest, and recent competition between brokers has seen fees come down and the range of products increase.

I should mention briefly that US citizens do not have many suitable options for investing in Japan due to US tax laws and regulations. Most people find it easiest to invest with a US broker. More on that later.

For the rest of us, here is the basic strategy:

1. Open an account with an online broker: Rakuten Securities, Monex and SBI are popular. These require you to navigate the application and website in Japanese. If that is a deal-breaker, jump down to the US section below.
2. Apply for an iDeCo account if you are eligible (most people are): and plan to stay in Japan until retirement. This allows you to invest tax-free and also reduces your income taxes. An iDeCo account can be opened with most banks or brokers in Japan, but the big online brokers tend to have the lowest fees and most competitive product lineup. You can read more about iDeCo here.
3. Apply for a NISA account: This means you can invest, and any profits (dividends or capital gains) will not be taxed. NISA accounts can also be opened through most banks and brokers. There are currently two types: ippan (ordinary) NISA and tsumitate (regular) savings NISA. Ordinary NISA allows you to invest up to 1.2m yen a year, and those investments are then tax-free for five years. Tsumitate NISA allows you to invest up to 400,000 yen a year but is tax-free for twenty years. More information here.
4. Decide what to invest in: The simple answer is to buy low-cost mutual funds. The eMaxis Slim range is very good. You can set up automatic investments, so the money is taken from your bank account each month and invested in your chosen funds.

Getting started

If you are not currently saving or investing, the biggest hurdle is going to be starting. Fortunately, you can start with small amounts—as low as a few thousand yen a month—and as you get more comfortable and start to see the results, you can increase your monthly investments.

I would recommend just doing one thing rather than trying to do everything perfectly from the start. Open a broker account, choose one fund and set up an automatic investment. Start with a small amount of money.

Once you get that one thing done, you will likely feel motivated to do more, so you can increase your monthly investment or look into the tax-advantaged accounts.

US citizens

US tax laws and regulations mean that you have few options in Japan. You should avoid Japanese mutual funds and exchange-traded funds (ETF), which means you can’t use iDeCo or tsumitate NISA at all. Most brokers will only let you buy Japanese individual stocks, so that is one option but not a great one for most people.

So in practice, you may want to just invest with a US broker. If you don’t already have an account, you will have to find one that will take on non-resident clients. Interactive Brokers is one option.

The benefit of using brokers based in the States is that you can use it in English and likely have access to a greater range of products. The disadvantage is that you can’t take advantage of Japanese tax-advantaged accounts, and your tax reporting will be a bit more onerous.

People who cannot use Japanese brokers due to the language barrier can also use Interactive Brokers. Another benefit with them is if you are planning to leave Japan, you will be able to keep your accounts after leaving the country. Japanese banks and brokers will ask you to close accounts if you leave Japan permanently.

More information

In this article, I present a brief overview of some of the issues and options around retiring in Japan. Hopefully, you are not confused at this point!

If you are, there are several places to get more information, advice and encouragement.