To say we’ve had a few difficult years is putting it lightly. Lehman shock, sub prime mortgages, toxic derivatives, bad banks, sovereign debt crises, near zero interest rates, rising energy prices, Arab spring, Occupy Wall Street are just some of the most prominent news pieces we’ve had to digest in recent years. And for us in Japan the apocalyptic and heart-breaking disaster that occurred a year ago, the persistently strong Yen, a debt to GDP ratio of almost 250% and no economic recovery boost in sight has led to even greater anxiety about the future. 

In view of world events spinning faster and faster and because life is getting ever more complicated, we have to make sure we are brave and focus much more diligently on our personal finances in general and retirement planning in particular. 

I believe all surveys ever published on retirement planning have come to the conclusion that the majority of people just don’t save enough and don’t start early enough with the focus on saving rather than spending. It is of course difficult not to spend and people go through tough times like sudden unemployment, divorce, illness, etc. Then there is the cost of children’s education, the need for a new house, a new car, and so on. 

Putting off retirement planning until later, whenever that may be, having best laid plans derailed by sudden tough times, living beyond one’s means, not having a healthy savings habit, etc. are major reasons for experiencing a shortfall in your savings in later years. Another reason that cannot be denied is the fact that annualised growth rates have come down over the last 15 years and the usually projected rates of 7~9% have been more around 3~5%. Some investments haven’t delivered their expected returns and interest bearing products pay next to nothing. People have been put off by extreme market events and volatility and have also learned that real estate investments are prone to cycles and crashes; a stand-alone property investment is not a suitable retirement strategy. 

So what to do? Go back to the basics and be undeterred: Consider your time horizon until you will likely have to draw from your savings, save as much as you can on a regular basis, pay attention to and discuss diversification and allocation between conservative and aggressive assets to ensure you have enough overall growth. People in their 50’s, for example, can’t take the downside of the stock market but need the upside of equity or equity-like returns. That is where careful asset allocation comes into play, and a strategy of regular investing combined with ad hoc lump sum investments usually works well if allocations are changed as time and market cycles progress. 

Having a realistic outlook on retirement life is also helpful: Maintenance of standard of living vs. something you always wanted to do but haven’t had time for during your working years – the latter should be budgeted for separately. Consider changes in housing needs, i.e. downsizing to cut cost. A new study has shown that single retirees are having a tougher time in retirement compared to married couples; e.g. single baby boomer men compared to their married counterparts have a 19~34% higher savings deficit for retirement.  

To sum up: Be undeterred, build up your savings as consistently as possible (aim for a higher retirement income, let’s say 75~80% of your pre-retirement income to keep the shortfall to a minimum and to factor in inflation), keep an eye on diversification to maximize growth and review your progress regularly (at least once a year!), and be realistic in regards to your retirement years.

Last but not least, don’t hesitate to contact me to have a chat about your personal strategy and how I could possibly help. Feel free to email me your comments and feedback. Now is not the time to do nothing but high time to review what you have been doing so far.

by Stefanie Richert, Senior Adviser

Japan has been shifting investment and production to locations overseas and this has contributed to the first annual trade deficit in more than 30 years—just when Japan can least afford it: national debt will surpass one quadrillion yen by March 2013, the end of the next fiscal year, the Ministry of Finance announced in January. About $14 trillion. A breathtaking 240% of GDP. By comparison, Greece’s debt is a paltry 160% of GDP.

The forecast is based on the budget that the cabinet approved on Christmas Eve when it hoped that no one would pay attention, apparently. After excluding two acknowledged accounting shenanigans, the deficit jumps to a horrid ¥54.4 trillion. The government will have to borrow 56.2% of every yen it spends in 2012, a record even for Japan.

Did you know; On December 24, 2011 the cabinet approved a draft budget for fiscal 2012 whose headline numbers were horrid enough: ¥90.3 trillion ($1.173 trillion) in outlays, ¥42.3 trillion in tax revenues, and a deficit of ¥48 trillion. 49% of the outlays are to be covered by issuing bonds, a record even for Japan. But it gets worse. Accounting shenanigans gloss over the fiasco by removing two items from the general budget: the reconstruction budget of ¥3.8 trillion and pension payments of ¥2.6 trillion. When they’re included, the deficit jumps to ¥54.4 trillion.

The Japanese government will have to borrow 56.2% of every yen it spends in 2012. But it gets even worse! Japan regularly passes “supplementary budgets” during the year—four of them in 2011, the last one on December 1 for ¥2 trillion. So there may be a few in 2012 as well, which could push borrowing requirements toward a dizzying 60% of outlays.

Despite the near-zero interest rate policy the Bank of Japan has been pursuing for years, interest expense on the debt—at 230% of GDP by far the highest in the developed world—will eat up ¥21.9 trillion in 2012, a stunning 51.8% of tax revenues! If yields on 10-year JGBs were to rise from 1% to 2%…. Better not think that way. Keeping yields near zero is simply a matter of survival.

Funding these deficits and rolling over the gargantuan debt has been made possible by the institutional setup and cohesive psychology of Japan Inc.: 95% of JGBs are held within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, the government-owned Post Bank, financial institutions the government can lean on, and the BoJ. Foreigners hold 5% for decorative purposes.

But two of the strengths of the Japanese economy that have supported the absurd deficit levels—a high savings rate and a large trade surplus—have collapsed. The savings rate is in the low single digits, and the trade surplus has turned into a ¥2.2 trillion ($29 billion) trade deficit in 2011 through November.

2011 Trade Balance in billion ¥

In November, imports grew 11.4% over a year ago, in part due to liquefied natural gas imports—up 21%. Since the Fukushima disaster, utilities have shut down reactor after reactor for scheduled maintenance but have not restarted them. Of the 54 reactors, only six are operating (one was shut down December 26, three more will be shut down in January). To make up for the shortage, utilities have revved up natural gas plants—though reductions in power consumption have also been implemented.

Exports dropped 4.5% from a year ago. Exports to China, Japan’s largest export market, declined 7.7% while imports grew 6.6%. Japan used to have a trade surplus with China. No more. The pace of offshoring is picking up, particularly in the auto and tech industries. While a weaker yen could slow down that trend, it would also drive up the cost of imports, including fossil fuels and raw materials—posing additional strains on the struggling economy.

If you have not guessed, this will affect the YEN . . time to move to different currencies and GOLD to protect yourself.