How Much Is Enough to Retire in Japan?

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What’s new: The results of a large-scale survey in Japan of people in their 60s have just been released, and the findings shed light on perceptions of whether the conventional wisdom that one needs 20 million yen ($134,120) to retire comfortably is actually accurate. "Voices of 6,000 People in Their 60s" (60代6000人の声), a survey conducted by the Finwell Institute, LLC among people in their 60s who are either nearing retirement or have recently retired and live in Japan's largest cities, covered a variety of topics with a particular focus on financial security.

Context: Just as William Bengen's famous "Four Percent Rule" has been the de facto burn rate for retirees in the West for more than a quarter of a century and continues to occupy an outsized share of the minds of retirees and prospective retirees, the media in Japan has focused on a specific dollar (or, more accurately, yen) figure for those who want to calculate a "safe" withdrawal rate and those who aspire to FIRE. In 2019, the Financial Services Agency published a controversial report suggesting that the "magic number" needed to ensure a comfortable retirement was 20 million yen ($134,120) on top of the state pension. The backlash was almost immediate, and the working group behind the original research effectively withdrew the report. The media, however, continued to fixate on this calculation, and it has stuck in the collective psyche ever since. This incident became known in Japan as the "20 million yen for retirement problem," which is referred to as the rogo ni sen man en mondai (老後2000万円問題) in Japanese.

As it has been almost 5 years since the report was published, the debate over whether the 20 million yen figure is indeed an appropriate target for a nest egg has died down to some extent, but with the recent rise in inflation after more than two decades of deflation and repeated price increases for goods and services over the past 12 months, many Japanese are concerned about the cost of living in old age.

Why it matters: Longevity risk is not a theoretical exercise in Japan. Developing an accurate estimate of the amount of money one will need to live comfortably in retirement is relevant everywhere, especially in the context of what is known in Japan as "the age of living to 100," or jinsei hyakunen jidai (人生100年時代). One of the most widely quoted financial planning experts, Laurence Kotlikoff, a professor of economics at Boston University and a New York Times bestselling author, has long advocated the merits of building personal financial plans to age 100, despite the fact that only about 2% of Americans are likely to live that long. In Japan, however, centenarians are much more common, currently accounting for more than 5% of the population. According to the Japanese Ministry of Health, Labor and Welfare, 25% of Japanese women born in 2022 are expected to live to age 95.

By the numbers: The extensive survey produced many relevant facts and figures.

Turning Point at Age 64: The age of the respondents was significant because it appears that the most common point at which Japanese people stop working is around the age of 64. Among the 6,503 respondents to this year's survey, the majority of those between the ages of 60 and 63 were still of working age, but by age 64, the percentage of those of working age had dropped to 46.1%.
This is probably because a special old-age pension becomes available at age 64. However, this special benefit will soon be available only from age 65. Thus, in the near future, it seems that more workers will hang on until they turn 65.
Annual Household Income: The average household income of all respondents was 5,529,000 yen ($37,068), which was slightly higher than originally expected by the Finwell Institute. However, the largest cohort was those earning only between 2.01 and 4 million yen ($13,500 to $26,800, or 26.6% of the total). Thus, it appears that the average is pulled up by those with high annual incomes. The median was just over 4 million yen ($27,100).
Incidentally, those in their 60s who are still active and working tend to earn considerably more, with an average household income of 7.69 million yen ($51,500). On the other hand, those receiving government pensions have relatively lower annual incomes, but it is still 4.87 million yen ($32,600).
A typical pattern is for each member of a married couple to earn about 1 million yen ($6,700) from part-time jobs while receiving their pensions. The total household income in such a case would typically be slightly more than 4 million yen.
Annual Expenditures: The average annual cost of living for a household was 3,583,000 yen ($24,000). The small variation in expenses compared to income suggests that even those in their 60s with high incomes are keeping their expenses under control. This can be seen as a sign that they are living a comfortable lifestyle, but it can also be interpreted as a sign that they are controlling their spending with an eye to future increases in expenses. However, it is possible that some respondents did not include taxes and social security contributions in their living costs, or so-called "nonconsumption expenditure," which is not expenditure on goods and services but should still be considered as part of the cost of living.
Incidentally, according to the 2021 Household Survey released by the Ministry of Internal Affairs and Communications (MIC), among households with two or more members, the amount equivalent to 15.6% of consumption expenditures for unemployed households aged 65 or older is for non-consumption expenditures, such as taxes and social security contributions. Thus, if non-consumption expenditures were taken into account, the actual expenditure would be just over 4.1 million yen ($27,500), or about 75% of average annual income.
Household Assets: The average value of household assets held by those in their 60s was just over 22.91 million yen ($153,600). However, there was considerable variation, and the segment with the largest cohort was households with no assets, which accounted for 23.3% of the total.
This percentage is consistent with the results of a similar survey conducted by the Central Council for Financial Services Information's "Public Opinion Survey on Household Financial Behavior," which also found that 20.8% of households with two or more people in their 60s had no financial assets in 2022.

How much is thought to be enough: A relatively large number of respondents or 26.8% said "20 million yen is not enough" for retirement. 14.8% thought that "about 20 million yen is necessary," and 12.1% said "20 million yen is not even necessary.”

Curiously, the majority of respondents who said "I don't think 20 million yen is enough" were those with the most assets. This response came from people who had accumulated an average of just over 36 million yen ($244,000).

How much is really enough: The author of the study calculated that 168 million yen ($1.13 million) is really how much one should accumulate for a comfortable retirement. This number is more than 8 times higher than the figure touted by the media. Let's see what's behind this logic.

Standard of Living: The first thing to consider is one’s standard of living around the age of 60, while being aware of the following, essential formula for keeping one’s spending habits under control:
退職後の生活費（消費支出＋非消費支出）＝勤労収入＋年金収入＋資産収入
Cost of living in retirement (consumption + non-consumption expenditures) = income from work + pension income + asset income
Seniors need to shift from routinely relying on their wages during their working years to thinking first about living expenses and how their income will be used to cover those expenses in retirement. Ideally, a good starting point is not to reduce one's standard of living in retirement, but numerous studies indicate that expenses tend to decline in retirement--especially in Japan, where health care is subsidized.
Adjusted Standard of Living: In the U.S., data suggest that the cost of living in retirement tends to be about 70% of the last year of salary. The author contends that in Japan, this rule of thumb should be about 60% on average for the duration of retirement.
Thus, the following equation can be applied:
退職後の生活費総額＝現役最後の年収×60％×生存年数
Total cost of living after retirement = last year of working income x 60% x number of years of survival
Length of Retirement and Final Result: Assuming a realistic goal of an annual household income of 8 million yen ($53,700) at age 60, one would need 60% of that amount, or 4.8 million yen ($32,200) per year, for retirement. The author recommends planning for 35 years from retirement at age 65 to age 100. Thus, the total amount needed for retirement would be 168 million yen ($1.13 million).
Reality Check: Given the discrepancy between the 20 million yen figure widely quoted in the media and this calculation, the author went on to prove that such a goal is not really unattainable.
Even after finally retiring from a long-time employer at age 65, working part-time for another 10 years at 3 million yen ($20,100) per year until age 75 is now fairly common in Japan. Thus, the supplemental, cumulative income during this period would be 30 million yen ($201,000).
If the retiree were to receive a government pension of 2.5 million yen ($16,800) per year from the age of 65, their income would total 87.5 million yen ($587,000) over 35 years. The total from these two sources would be 117.5 million yen ($788,300), leaving the remaining 50.5 million yen ($339,000) to be covered by asset income.

What’s next: At the very least, retirees need to be aware of their own long-term calculations and come up with a realistic plan to supplement any shortfalls with asset income while managing expenses. A few tweaks to income and/or expenses can have a significant positive effect over such a long period.

For example, deferring public pension benefits for 5 years would increase annual benefits by 42%. Thus, the total benefits from age 70 to 100 would be 106.5 million yen ($715,000) (= 2.5 million yen x 1.42 x 30 years). In that case the required asset income would be reduced to only 31.5 million yen ($211,300).

Furthermore, if one were to live a slightly more frugal lifestyle and reduce living expenses from 60% of annual income during one’s final working years to only 55%, total living expenses over 35 years can be reduced by 14 million yen ($94,000) (= 8 million yen x 55% x 35 years - 168 million yen). In such a case, the required amount of asset income would be only 17.5 million yen ($117,400), which seems much more reasonable given the 35-year time horizon.

In addition, it is possible for those who are enrolled in the National Pension Insurance program and those who are enrolled in their retired employer's Employees' Pension Insurance scheme under the age of 65 (voluntary enrollees) to increase the amount of the basic old-age pension they will receive in the future by adding a monthly premium of 400 yen ($2.72) to the National Pension Insurance premiums. While this may not sound like much, over time it can have a significant impact on the size of the investment gains.

Furthermore, the Japanese government has developed two long-term, tax-advantaged investment vehicles that can be used to build a nest egg over time.

NISA: Modeled after the Individual Savings Account in the United Kingdom, the Nippon Individual Savings Account or NISA (少額投資非課税制度) is a tax incentive program that allows tax exemption on profits from investments in financial products that meet certain conditions. The benefits will be drastically increased from 2024.
iDeCo: The Individual Defined Contribution Pension Plan (個人型確定拠出年金) is a private pension plan under which an individual can contribute and manage his or her own contributions and receive them as a pension after the age of 60, in principle. Contributions can start as low as ¥5,000 ($34) per month, but the maximum amount varies depending on national pension eligibility and occupation.

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How Much Is Enough to Retire in Japan?