What kind of financial planning for the future is available for those who own their own business in Japan but are outside of the scope of the Japanese pension plan? Thanks for any input!

Trevor is co-author of several articles on finances for foreigners in Japan which were published on the "from-hannah" website by Sony (since disbanded and taken down). The article covered a breadth of subjects. I suggested that we might reprint some of them here at Japanwithkids but so far we haven't come to a conclusion.

Trevor Reynolds, Director
Banner Financial Services Japan K.K.
4F Esperanza Ebisu Bldg., 3-2-19
Ebisu-minami, Shibuya-ku, Tokyo 150-0022
Tel: 03-5724-5100 Fax: 03-5724-5300
http://www.bannerjapan.com

What options does anyone know about for (1) people who are not very good with figures, (2) who are in their 50s with another 12-15 years of work here, (3) who have at least one CD in the US maturing in 5 years, (4) who have heard that one strategy is to buy a 5 year CD once a year over 5 years (laddering), (5) who are interested in other relatively risk free investments (maximizing income for old age), (6) who may spend their life in Japan but may go back to the U.S., (7) who previously had mutual funds but found he didn't know what he was doing, (8) who currently use Citibank premium account (multimoney) and find the whole thing confusing and annoying to have to constantly change currencies each month or so.....Have contacted Banner Associates, but was under the impression they are mostly UK or offshore, awaiting an answer.....also wonder how easy to just go and buy online various risk free high return investments.....(have been told US municipal bonds are one answer.

If anyone has any personal recommendations on financial planners who do not mind working with someone who is conservative and not all that good with figures, and does not want to have to constantly move money in and out of currencies to play with exchange rates or to make profits for the bank, as I guess CB is doing, would like to hear from you.

I've had it pointed out to me that Banner has a bad reputation (by about 10 or so different people). So it is pretty important to do good research. Financial planning is not eveyone's cup of tea, maybe even annoying and tedious, but once the baby is born it becomes a looming shadow.

It starts more or less with making a will and getting a term life insurance policy (so the rugrats have something to grow up on in case we die in a plane crash). Saving some money out of every paycheck is the most time honored method, and eventually enough of that accumulates that we get the idea it needs to go somewhere more lucrative than a regular savings account. That's where all the confusion starts.

Basically, a financial planner starts by "interviewing" you about your goals (what you expect to have by the time you retire at for example 65), what you want your children to get when you die, etc. Then you are told about setting up a diversified portfolio that will have in it some conservative investments (regular savings, or certificates of deposit and a life insurance policy if you will be survived by dependents) and some more risky investments (starting with a mutual fund and ending with putting $5000 into your nephew's new dry cleaning business, etc.)

With a foot in two different economies, (Japan and country of origin) the choices become more confusing as well.

If you are going to get old in Japan, you definitely want some additional health coverage, on top of depending on the National Health Insurance. It is not going to cover you adequately if you get a slow moving cancer, or need extended hospitalizations and extended assistance and care. There is a lot in the news these days about how it is not going to cover all the people who are aging right now, and it is supposed to get even worse in then next couple of decades (until presumably the population correction has plateaued).

Finding the info you want on the internet is tricky because a lot of it is published by financial services companies that want to sell you something.

My basic formula, for what it is worth, is that if the total amount of money set aside is less than say $250,000 (USD) and you are under 50 years old, you might still try some aggressive investing (to make it grow faster). This would include buying and selling real estate for example, in Paul's case, in the USA. In Japan buying and selling real estate for gain belongs only to the biggest players.

If you are over 60 years old (actually this demarcation line depends a lot on you), and your kids are independent, the strategy leans more towards preserving the value of what you have accumulated against inflation, so more conservative investments are preferred.

The Citibank Japan products are confusing and expensive. And, especially if you are making a trip to the USA once a year, not too interesting. Between one trip and on-line banking, you can do everything that Citibank Japan offers for less and at greater gain at a bank in the USA. Currency trading is generally considered sort of high risk. So why bother. Incidentally Shinsei bank allows 8 foreign currencies to be held in savings and their English web site it better than Citibanks. I haven't read it all but it looks more manageable. They've got term deposits too. For Australian dollars there is one paying almost 12% right now. (However there is no deposit insurance so if one keeps one's US dollars in the USA, they would be safer there.)

Offshore investments again are really only useful to people with LOTS of money. If your net worth is under about a million USD, you can do just as well in the USA, not pay any more in taxes, and not have to worry about potential illegalities. The USA has some of the lowest tax rates in the world (comparison charts can be found via internet).

If you know exactly where you are going to be, and when, you can plan accordingly. If not, then you could split your money 50/50 between the USA and JAPAN. And that would also help absorb exchange rate swings. I.e. open a super teiki (or whatever it's called) for 5 years at for example http://www.Shinseibank.com (right now offering 1.25% for five years minimum Y500,000) and put $5000 into a Fidelity account in the USA or just a 5 year CD.

Trying to grow one's money takes effort and diligence. The more conservative portfolio is also the lower maintenance one. It's not a bad idea to split one's assets up between several institutions, just in case one goes bust, and the deposit insurance doesn't come through. Of course this is supposed not to happen, but one never knows.

The majority of Americans have only one thing to show for their effort when they reach 65 and that is their house. In Japan, most of the so-called housing is worthless after 30 years (or sooner). Only the land is worth something, and in Tokyo an apartment has little or no land attached to it. Plus most foreigners here are shut out of the real estate market (no financing available), so the house as a life-long investment component of one's portfolio never happens here in Japan. If you don't know how long you will be staying in Japan, you might try to buy a house somewhere back home and rent it out. At least you will have started on the long term investment component that the house represents in most American portfolios. But again careful research of the rental market proportionate to price, and so on is important.

Pato- Thank you for taking time to create such a long, interesting post. You might want to do another check on your statement at the end about foreigners being shut out of real estate financing. Tons of articles & stories now that it is quite open. Shinsei Bank, which you mention is one of the instigators. Current issue of Japan Inc. magazine has a cover story with references, etc.

I believe there is also discussion elsewhere here.

P.S. The Japanese pension plan is also not going to be enough. Already a few elderly Japanese with no additional incomes from their own savings are having trouble living on the pension. This is largely due to living longer, requiring more assistance, and not having children to rely on for the extra help. Other elderly who would have had trouble, have been able to avoid it because they do have children helping. The majority of elderly have huge savings tucked away, so the problem is not "huge", but now all the government support sources are being nibbled at. For example, there are plans for the health services co-payment for elderly to be increased. Another plan is to increase the consumption tax just to cover the cost of taking care of the elderly. A couple of years ago a new insurance component of the National Health Insurance was instituted for all people aged over 40, just to cover the old age years. If you are on NHI, and you are over 40, you are paying into this. To compound things, the newer generation is saving less too!

Because of aging populations in the richer countries, their welfare institutions are cracking. Thus financial planning on the part of individuals is increasingly important.

Dear Scott, How timely of Japan, Inc!
That is a new development and thus far is still geared more to the high end I believe. Also it still does not really change the fact that a lot of housing, particularly apartment housing, in this country has only a small investment component to date. New construction seems to be of higher quality and may have a greater investment potential. But at the moment most housing here loses value after you buy it (like a car). Also there is (was?) a stiff penalty for selling after owning for less than 5 years.

May 2003 article by Gavin Blair:
http://www.japaninc.net/article.php?articleID=1092&page=4

December 2005 Frugal Watch newsletter - hints
http://www.japaninc.com/newsletters/index.html?list=fw&issue=82

December 2005 Issue of Japan, Inc:
http://www.japaninc.com/contents.php?issueID=71

Shinsei Bank Mortgage product:
http://www.shinseibank.com/english/housing/index.html

Pato is right about real estate as an
investment. Only the land has worth. This
is a society of newbies. Houses are built to
last only about 30 years. The house - even
brand new - decreases in value at such a
drastic rate that its nearly worthless after
15 years. If the house is too old - in Japan
over 30 years is way too old - it can
actually decrease the value of your land
because it becomes too troublesome,
since, it would have to be torn down.
Better to buy land with nothing on it.

On the other hand, this thinking can be an
advantage for investment. Land with older
houses on them, in odd locations, can be
acquired at unbelievably low rates
compared with the going market rate and
with modern or western renovation may
achieve close to the going market rate in
re-sale.

Pato is also right that the loaning
mechanisms set up by the Shinsei bank
and other foreign banks are mainly for
people with money.

However regular house loans are not out
of reach for the rest of us. For most
Japanese banks, to qualify for a mortgage,
you only need to have a steady income of
6 million or so. This is typical of most
Japanese families starting to buy 20-30
tsubo houses in the countryside. The more
income you have, of course, the bigger
house/land you can get in the city or
country. The key to getting a loan, is to
show earning potential, good credit rating
and permanence (through permanent
residence visa). All quite reasonable.

The primary difference in the real estate
market in Japan versus North America
is that mortgages are not assessed
by property value where mortgage is equal
to collateral of the house plus down
payment. Property value in Japan is
assessed by the government according to
area land values (stats you can view on the
net) and land designations. Then
the real estate agents collude and add a
huge mark up. This creates a
collateral conundrum. Banks are often
touting that they will give mortgages
up to 200% of the collateral but this is rare
and only for people with money. As a
result real estate values are negotiated
heavily when a property doesn't sell due to
conflicts between assessment value and
loan needed to purchase. Negotiations
overseas for this sort of discrepancy are
usually in thousand dollar increments.
Here they are in the 10 thousand dollar
increments. I have seen properties put on
the market for 80 million yen and sold for
less than 40 million yen.

So investment in real estate in Japan is like
any other investment. Get to know your
market and look for the opportunities.

Hope this helps.
anne

So, in normal situations, what kind of down payment / % of collateral are banks looking for?

Is it different for "normal Japanese banks" vs the ones seeming to promote to people with money?

Quote:
"The house - even brand new -
decreases in value at such a d
worthless after 15 years. If the
house is too old - in Japan over
30 years is way too old - it can
actually decrease the value of
your land."

All of this is true and
extremely relevant when you are
buying or selling. But, while
the house has a value on paper
of zero (or a negative value)
after a certain age, people
should keep in mind that
Japanese houses can and do last
much longer than the 30-35 years
often heard.

I recently had to make a
decision over whether to tear my
own house down (over 35 years
old) or go through with
improvements. The major issues
in old houses are (1) rot under
the floorboards from all the
humidity, (2) earthquake-
proofing, since the house will
have been built under an old,
less strict building code, and
(3) old wiring.

(1) and (2) you can take care of
rather easily. The big problem
is (3), as it costs a fortune to
get it fixed. For (3), you might
as well just tear the house down
and start from scratch.

I interviewed several builders
and they all agreed that the
most common reason that Japanese
people rebuild houses after 35
years is that "they have decided
that they want a new house"--
not a structural issue with the
house itself.

If it IS a structural issue that
forces the decision, it is
either (3) or (1) when the
floorboards start to sink, but
again, (1) is entirely
preventable with proper
maintenance.

If the house has been well-
maintained, a Japanese house
will easily last for 50 years or
more.

Good points Tara.
Wanting a new house is definitely the
primary reason - also tradition. Its
expected that when you reach 50 or 60 -
you rebuild your house. Its one of reasons
you will see a new house right next door
to a very run down house. Renovation is
not common here - yet - but do-it-
yourself large hardware stores are opening
up everywhere so its starting.
Also, as you say many houses are built to
last and can be renovated. Our house is
now 14 years old. We bought it when it
was 11 years old. It still looks and wears
like new and will easily stand up to 50
years.

Scott
You can buy a house here without any
downpayment but 10-20% is the norm.
cheers
anne