Thinking About Investing a Retirement Allowance: General Perspectives for Japan

For many people in Japan, a retirement allowance (the lump sum paid by an employer on leaving) is one of the few large amounts they will ever receive at once. Decisions about how to use it, and whether to invest any of it, call for care. This article explains, as general information, how to organize the money after you receive it. It does not recommend any product or institution, and it does not predict returns or the right moment to invest. For tax treatment and the details of your employer’s scheme, check the latest official sources such as the National Tax Agency and your company’s guide.

Start by dividing the money by purpose

Treating a large sum as one pot can lead to investing money that already has a use. A sensible starting point is to separate it by purpose.

• Payments already decided, such as the remaining mortgage, home renovation or help with education costs
• An emergency fund, meaning cash for sudden expenses or a drop in income
• Money you expect to spend within a few years, such as travel or replacing a car
• Money with no planned use for a long time, which is the part that might be considered for investing

Investing is considered only for what remains after the first three are secured.

A hypothetical split

Suppose you receive a retirement allowance of ¥20 million. The table below is an invented illustration.

As a check, ¥5 million + ¥6 million + ¥3 million + ¥6 million = ¥20 million. In this example only ¥6 million, or 30% of the total, is even a candidate for investing, and most of the allowance is kept for other uses. In real life the split depends heavily on household finances, pensions and other income, health and housing prospects.

Plan on lower income after retirement

While working, a drop in portfolio value can be offset by adding savings from salary. After retirement that room is smaller. It is therefore important to think in advance about how much a loss in a fluctuating asset would affect daily life. When the chance to recover is limited, some people set a smaller range of loss they are willing to accept.

To see how amounts, periods and assumed returns interact over a long horizon, the compound growth calculator (Japanese) at /tools/compound/ may help. The rate is an assumption and does not promise any result.

All at once, or in stages

When investing a large amount, one choice is to invest it all at once, and another is to spread it over time. Which is better depends on later price movements, so no one can say in advance. The differences are as follows.

• Lump sum: the money is invested for longer, but a price drop soon afterwards has a large effect.
• In stages: timing is spread out and the emotional load may be lighter, but some money may stay uninvested during a rising period.

The new NISA, Japan’s tax-free investment account scheme, has annual and lifetime limits, so using the full allowance takes time anyway, which resembles a staged approach.

Receiving the money and checking procedures

A retirement allowance may be paid as a lump sum or, under some corporate pension arrangements, in installments. Tax treatment differs by the method of receipt, and systems exist under which the burden changes with years of service and how the money is received. Please check the current details with the National Tax Agency. You also do not have to decide how to invest immediately after retiring. Keeping the money for a while in low-volatility forms such as deposits while you think is a valid choice.

After you receive a retirement allowance, financial institutions or acquaintances may contact you about investing. Receiving such information is not a problem in itself, but it is reassuring to take the materials home instead of deciding on the spot, and to check the following points.

• Can you explain the mechanism and the costs (at purchase, while holding and at sale) in your own words?
• Does the explanation show that principal can fall, and give some idea of how much?
• Are there restrictions or fees if you want to cash out partway?
• Does it fit your own purpose and time horizon, and does it start from your funding plan rather than from the seller’s convenience?

For advice, in addition to the counters at financial institutions, there are public consultation services and independent professionals who are not involved in selling particular products. Listening to several views and comparing them before deciding tends to reduce regret. If you have a family, sharing the amount received and your policy for using it helps prevent misunderstandings.

It may also help to write a one-page summary before any meeting: the total received, the amounts set aside for each purpose and the questions you want answered. Having this page in hand makes it easier to notice when a proposal drifts away from your plan, and it gives you a simple way to say that you will think it over and reply later.

Points to consider and risks

• Money invested can lose value in market declines, and your ability to earn it back may be limited.
• Rather than investing the whole allowance, secure planned spending and reserves first.
• Even if a financial institution suggests a product, check that you can explain its mechanism, costs and risks yourself.
• Tax and pension rules differ by scheme and can be revised. Check official sources for the latest.
• Share the situation with family and, if needed, consult a public advice service or an independent professional.
• There is no need to rush. Taking time to decide is also an option.

This article is general information and not personalized advice. See our editorial policy and disclaimer.

About this article: This is a basic guide article. Our policy is to check the content against public sources. It is not investment advice. If you notice an error, please contact us.