How to Start Preparing for Retirement Now
This is about a 3-minute read.
How Much Do You Need for Retirement
The "20 million yen retirement problem" that made headlines in 2019 was an estimate based on government household surveys, suggesting a shortfall of approximately 20 million yen over 30 years of retirement for a married couple. However, this figure is merely an average model case, and the actual amount needed varies significantly depending on individual lifestyle and housing arrangements.
What matters is not harboring vague anxiety but calculating the required amount concretely based on your own situation. By organizing your current living expenses, expected retirement lifestyle, and projected pension benefits, the shortfall becomes clear.
Understanding the Pension System
National Pension and Employees' Pension
Japan's pension system has a two-tier structure. The first tier, the National Pension (basic pension), covers all citizens aged 20 to 60, with a full benefit of approximately 65,000 yen per month. The second tier, the Employees' Pension, covers company employees and civil servants, adding an amount based on income and enrollment period.
Can You Live on Pension Alone
The average combined benefit including the Employees' Pension is approximately 220,000 yen per month for a married couple. Meanwhile, government surveys show average monthly expenditure for elderly couple households at approximately 260,000 yen. This gap represents the retirement funds you need to prepare through your own efforts. Books on retirement financial planning can help you learn more detailed simulation methods.
Three Pillars of Retirement Preparation
1. Maximizing Public Pension
For instance, the most reliable way to increase pension benefits is to extend your Employees' Pension enrollment period. Additionally, choosing to defer pension receipt increases the benefit by 0.7% for each month of deferral. Deferring for five years from age 65 to 70 increases benefits by 42%.
2. Private Pensions and Investments
iDeCo (Individual Defined Contribution Pension) allows you to build retirement funds while saving on taxes, as contributions are fully deductible from income. Combined with Tsumitate NISA, you can maximize tax advantages for wealth building.
For long-term investing, diversified products like global equity index funds are suitable even for beginners. With an investment horizon of 20 years or more, the risk of short-term market fluctuations is significantly reduced.
3. Optimizing Expenses
Reducing retirement expenses is also an effective way to lower the required funds. Paying off your mortgage before retirement, reviewing fixed costs, and maintaining good health to minimize medical expenses are all preparations that should begin during your working years.
Preparation Plans by Age Group
20s to 30s
Time is your greatest ally. Starting early, even with small amounts, maximizes the power of compound interest. Investing 10,000 yen monthly for 30 years at a 5% annual return grows to approximately 8.3 million yen, with 4.7 million yen in investment gains on a 3.6 million yen principal.
40s to 50s
With less time until retirement, increasing your contribution amount becomes important. Simultaneously, take inventory of your current assets and create a comprehensive financial plan that includes projected retirement benefits. Practical books on life planning can also help with plan development.
The most important factor in retirement planning is starting early. Investing 20,000 yen monthly at 4% from age 25 yields about 23.7 million yen by 65. Starting at 35 under the same conditions yields only about 13.9 million yen, a 10-year delay costing roughly 10 million yen.
Mistakes to Avoid in Retirement Preparation
The biggest mistake is doing nothing. The longer you postpone, the larger the required monthly contributions become. Falling for investment scams promising high returns or venturing into high-risk financial products is also dangerous. Stick to steady long-term diversified investing, and maintain the principle of never investing in products you don't understand. (Related books may also help)
Key Takeaways
- Understanding the Pension System
- Three Pillars of Retirement Preparation
- Preparation Plans by Age Group
- National Pension and Employees' Pension
Summary - The Earlier You Start, the Easier It Gets
The earlier you begin preparing retirement funds, the lighter the monthly burden becomes. Understand the pension system, supplement the shortfall through long-term investing with iDeCo and Tsumitate NISA. Executing this basic strategy according to your age and circumstances is the first step toward a secure retirement.