Personal finance for the self-employed teacher in Japan
The Bulletin (Issue 26)
One of the fears that stops people from teaching English for themselves is the same one that affects anyone contemplating going self-employed — that you will have no pension to speak of if you go it alone. Well, like all things for the self-employed person, it really depends on you. I can’t give you personalised financial advice, but I can tell you what I understand about personal finance and what I do myself. Your mileage will vary…
Earn a reasonable amount of money. The more money I can get from my work, without hurting my physical health or mental well-being, the better. How much money is enough is a subjective thing, but I’d just add that saving larger percentages of my income is a lot easier now that I am earning more than I ever did as an employee.
Save money. In many ways this is in fact more important than earning money. If I don’t live below my means, I will always be short of money, no matter how much I make. All personal finance depends on the ability to routinely save. Getting into this habit has made my life immeasurably better.
Emergency fund. My first savings objective was to build up a pile of cash — about three months of family expenses — that sits in the bank ready for emergencies so I don’t have to panic every time I hear a strange noise from the car or I get a pain in my tooth.
Pay off debt. I used to have credit card and car loan debt but I know now you can’t increase your wealth if you are always paying off high interest debt. I’ve learnt my lesson. I will never buy a new car on credit ever again. I pay off the credit card balance every month. The only debt I have now is on a Japanese mortgage which charges less than 1% pa.
Pay the basic Japanese state pension. This is the law, you have to do it, but I didn’t for a few years when we first moved to Japan. We literally had no income to make the payments. When I realised it was in fact a legal requirement and we did finally have something approaching a regular monthly income, I wiped the cold sweat from the back of my neck and approached the tax office with cap in hand. I had to pay two years’ worth of missed payments in one go and now I happily pay the monthly deduction of ¥16,470. My understanding is you have to pay 40 years to get the full pension at age 65, but you will get a proportion of the final pension as long as you have been paying in for at least 10 years. My mother-in-law gets the basic state pension payouts of just over ¥60,000 a month. I predict I’ll have paid in 20 years to the pension folk when my ticket comes up, so that will entitle me to half a pension — ¥30,000 a month or so when I’m 65. That’s nice, but it ain’t nearly enough to live on.
Save as much as I can and invest as much as I can. I do this through maxing out two tax efficient Japanese government approved programmes open to any non-US citizen residents of Japan ー iDeCo and NISA. iDeCo is great for a self-employed person like me. I can put in up to ¥68,000 every month, which I can deduct from my income tax, and invest in any of 30-or-so government-approved stock market and bond index funds. As far as I remember, the only drawback is I can’t take my funds out until I am 60. But since I’m 52, that’s not far away, sadly. I also put ¥33,000 a month into my NISA investments, which I intend to do for 20 years, or until I stop earning money. These payments are not tax deductible, but there’s no income or capital gains taxes to pay when I cash them in, and I can cash them in at any time.
Will I have enough to retire by age 60? Probably. I figure my investments should double in value over the next 10 years, and even if they don’t, at worst I should be able to take my foot off the pedal and help make ends meet by teaching just a handful of lessons a week until the state pension kicks in.
You never know what will happen in the future (well, we do know what happens in the end, ahem)— and for that very reason it makes sense to get your personal finances in order. Even if you say you’ll never retire, wouldn’t you like the option to? Those who fail to plan, plan to fail and all that.
If anything here has resonated with you, or you just want to know more about iDeCo and NISAs, I strongly recommend checking out RetireJapan.com for as near-as-damn-it impartial advice. I interviewed the founder in 2018 on my old blog, and the chat we had there changed my life. Within a few months, I’d made my first payments into iDeCo, and for the first time in my life could look to the future without fear I’d messed up financially.
What do you think? Anything here that you didn’t know? Anything you disagree with? Anything you’d add?
All the best,
Patrick
I seem to be in a similar situation to you. I didn't start paying the pension early so I pension will be minimal. I have about 15 million left in mortgage payments and we invest some money in something similar to IDECO which means we can avoid paying tax on the income until we start to draw on it. At that time my income will probably be lower so tax will probably be lower.