[When to Stop Investing] How much should you stop at with the new NISA? 3 criteria to calculate your retirement fund goal in reverse

You work hard every day and invest the funds you’ve scraped together into index funds like All Country (eMAXIS Slim Worldwide Equity). When does this marathon of asset formation reach its finish line? With 70% of the public setting a goal of “50 million yen or more,” if you keep running without a benchmark, “increasing the numbers” itself becomes the goal. Based on the “3 criteria for when to stop investing” that I shared in my YouTube video, this article will delve deeper into “counterarguments to crash risks” and “more precise data analysis” that I couldn’t fully cover in the video due to time constraints.

1. The cruel trap of the average value of the “20 million yen retirement problem”

As I touched upon in the video, the “20 million yen (currently about 15 million yen) retirement problem” based on the Ministry of Internal Affairs and Communications’ Household Survey is merely an “average value” that lumps together all elderly unemployed households across Japan. However, a more cruel trap that I want to convey precisely because this is text is the “real decline in pension value due to the macroeconomic slide” and the “differences in inflation tolerance between households.” The current public pension system incorporates a macroeconomic slide that adjusts benefit levels in line with changes in wages and prices across society as a whole. In other words, even if the face value of the pension amount does not drop dramatically, a structural real decline is unavoidable because “the pension benefit amount will not perfectly rise in tandem with future price increases (inflation).” Furthermore, the differences in lifestyle between households are immense. For example, in a two-person household (without children), while it is easier to optimize living expenses compactly from one’s working years because there are no educational expenses, there is a tendency for the weight of entertainment expenses and medical/nursing care expenses for the couple to increase in old age. The first step in asset formation is to not swallow the model case of “average monthly expenditure of about 270,000 yen” presented by the government, but to drop into a spreadsheet with your own hands what you can cut and what will increase in your old age based on your current living expenses.

2. Criterion 1: When the “seed” for retirement funds is complete (the blind spot and counterargument of Coast FIRE)

In the video, I explained by calculating backward from the funds needed at age 65, for example, “If you create a seed fund of 21 million yen by age 50, you can reach your goal through compound interest even if you make your monthly contributions 0 yen (Coast FIRE).” However, there is a counterargument that almost always comes up here. It is the question, “What if a Lehman-level crash happens right after you create the seed fund and stop investing?” To conclude, excessive fear of this risk is unnecessary. This is because even if you stop investing, you are “not going to withdraw those assets immediately.” The “sequence of returns risk” in finance theory truly bares its fangs when a crash occurs while you are “in the middle of regularly withdrawing” assets. If you are in a period where you are leaving the assets alone while continuing to manage them, even if the market crashes, you have enough time (10–15 years) to wait for the subsequent recovery. As past market data such as “A Random Walk Down Wall Street” shows, if you continue to invest in a worldwide equity index for 15 years or more, there has never been a period in history where the real return became negative, no matter when you started investing. As long as you “stay in the market (don’t sell)” even after you stop investing, the data that a crash is merely a passing point is the greatest basis for Coast FIRE.

3. Criterion 2: Filling the new NISA “18 million yen” (the reality of a 5% annual return)

As a second criterion, I mentioned “when you have fully filled the new NISA lifetime investment quota of 18 million yen.” In the video, I presented a simulation that “if you fill 18 million yen at age 45 and leave it for 20 years at a 5% annual return, it will become about 68 million yen.” What should be delved into here is the answer to the doubt, “Isn’t the setting of a 5% annual return too optimistic in the first place?” Looking at the data for the MSCI All Country World Index (worldwide equity) over the past 30 years, the real return after inflation has generally converged in the range of 5% to 7% per year. Even if we incorporate the current era of global low growth and geopolitical risks, considering the long-term “risk premium” of stocks (the added return over risk-free assets), a 5% annual return is by no means a pipe dream, but a number close to the median of a reasonable “expected return.” Also, for those who say, “I can’t even put 100,000 yen a month into investments,” please rest assured. What is important is not “when” you fill the quota, but completing the game of “fully filling the box called the tax-exempt quota.” Even if you fill it over 30 years at 50,000 yen a month, compound interest will definitely work in that process, and the base of your retirement funds will be completed. The fact that you have a box with a filled quota in your hands turns into “mental capital” that reduces excessive dependence on your company and expands your options for how you work.

4. Criterion 3: When the presence of investing becomes thin (the trap of the hedonic treadmill)

In the latter half of the video, I explained the phase where the presence of monthly deposits (investing) becomes thinner as assets grow, using behavioral economics concepts like “diminishing sensitivity” and “Weber-Fechner law.” In this phase, which shifts from deposit-driven to compound interest-driven, there is a psychological trap that many investors fall into. That is the “hedonic treadmill” phenomenon. Humans have a powerful adaptive ability to quickly get used to any wonderful environment or high asset amount they reach. The joy of the moment you achieve 30 million yen in assets is fleeting; it quickly becomes “normal,” and you are driven by endless desires, like running on a treadmill, thinking, “Next is 50 million, then 100 million…” That is why, if you reach the feeling that “even if I invest 100,000 yen every month, the total assets only increase by 0.3%,” that is a strong signal that you should get off the game of increasing numbers. The sense of happiness gained from the increase in numbers does not last long. You need training to intentionally shift that 100,000 yen toward experiences you can only have now, time with your partner, and self-investment.

Asset formation from “obligation” to “choice”

The reason we still cannot stop investing even after the target seed fund is completed or the NISA quota is filled lies in our “defensive instinct for the future” and “habitual sense of security.” However, the degree of freedom in life is fundamentally different between the obsession of “I must invest because I am anxious about the future” before achieving the goal, and the proactive choice of “I will invest because I want to increase it further after fully enjoying my current life” after achieving the goal. While keeping the right to stop investing at any time tucked away in your pocket, you continue to build assets at a comfortable pace. That is what can be called true financial independence, where you are not swayed by money. Were you able to calculate your own numbers and draw up your own “when to stop” scenario? I hope this article serves as material for your contemplation to refine your strategy.