Where to save for retirement

Question

TLDR: Given the option to save for retirement in Europe, USA or Japan where is the ideal place to save up money and why?

So I'm somewhat of a global citizen who has been moving around the world quite a bit. I've been extremely interested in properly preparing for retirement but have hit somewhat of a snag.

I've found extensive information regarding retirement in the USA, Europe or Japan separately but most if not all of these assume I will have my main residence and source of income in one fixed place. Unfortunately this has not been the case for me, making me reluctant to commit to any one strategy that relies on this.

As such I am turning to this community in the hopes of shedding some light on where I can find more information on how to properly plan for retirement with my situation.

key facts:

• I work in IT
• I have access to accounts in all 3 regions (because of citizenship and visa)
• I have roughly 1 years worth of salary in a savings account
• I save nearly 50% of my monthly income

EDIT: upon reading current responses I feel like the asked question might have been too complicated to ask here, as an alternative answer to the question I would be interested in: Where do you find a trustworthy qualified professional capable of answer questions in this scope?

Answer 1

I have no idea about retirement in Japan, but....

In the US you can have retirement accounts that actually contain your own money. That tends to not be the case in Europe. In Europe you get retirement insurance taken out of your pay and then you get paid in retirement depending on how many years and at what salary you worked in the country. Seeing how you move around a lot, that won't help you (or me, so I don't try).

In the US you can open a Roth IRA and a SEP 401(k). If you're self employed you can contribute pre-tax money to the latter while you can always contribute post-tax money to the former (up to 6k/year currently) on which you won't pay taxes in retirement. Both of those will greatly help you when you retire, regardless of which country you happen to be in.

Answer 2

This is a complicated tax issue that has a lot of implications. The draw to retirement accounts is preferential taxation. But preferential taxation assumes other jurisdictions will honor that preference. You have various citizenships or work visas. You need to understand what obligations those citizenships place on you to report income and pay taxes.

A simple example of the right hand not caring what the left hand is doing concerning two different tax authorities in the same country is earnings inside an HSA. The state of California considers interest, dividends and, capital gains earned within an HSA as income while the US federal government does not. If you contribute to a 401k in the US does Japan still count the contribution that as income? Etc. If you contribute to a retirement scheme in Europe will the US still want part of it?

This is a lot more complicated than picking the account with the lowest fees.

Answer 3

As a US citizen formerly living in the Netherlands, I looked into some aspects of this.

The short answer is that it is extremely complicated and full of potential pit falls. Your best bet is to find a unicorn tax adviser who is familiar with the ins and outs of each of the three locations. Finding ones with knowledge of the US and the Netherlands is not too hard, but they are not cheap. These advisers typically target high net worth individuals in expat communities. The best place to start is probably to find one that specializes in two countries of interest and see if they can refer you to someone who covers all three. Expect this to be a very limited set of people.

That said, as a US Citizen (or a green card holder), your best bet is probably to keep your investments in the US and in investments listed in the US. For those that you keep outside, try to avoid ones that would be considered PFICs.

Research and understand the tax residency requirements for the countries you are in. To the extent that you can be considered a non-resident, you may get favorable tax treatment.

Research and understand the tax treaties that exist between countries so that you understand what will and will not get favorable tax treatment. For example, the US / Dutch tax treaty lets you treat contributions with NL-based income to a US-based pension plan (including an IRA) the same way as to NL-based pension plans provided that you had the plan prior to residing in the Netherlands and still receive favorable tax treatment. From my cursory research, the Netherlands treats disbursements from a traditional IRA the same as disbursements from a disbursements from a Dutch pension plan, but Roth IRAs are treated as "Box 3" investments.

Answer 4

I'll tackle the EU part of the question. I'm in Germany and know a tiny little bit about what happens if you have been employed in other EU coutries. I have hardly any knowledge about the Dutch pension system, but the pension systems are to some extent harmonized throughout the EU so I hope my answer will allow you to ask relevant questions that then allow you to decide for yourself.

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Overall, I think you are in a very good position in that few people have the chance to diversify their retirement savings as much as you can: Europe, North America and Asia, and not only where to invest but also if applicable pension plans.

My approach would be to use this diversification: both in terms of region and what the pension system is based on (capital/investment vs. pay-as-you-go based pension system/Omslagstelsel).

Remember: diversification is not about picking the optimal investment, it is about avoiding to be subject to important losses. Wrt. retirement/old age this has the added importance that in old age, you may not be able any more to take action to avoid losses for a particular investment.

Of course, your judgment of the political and economic climate of those regions should come in. If you consider, say, the Dutch system not trustworthy (compared to US and Japan), then of course you should not invest there.

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I expect the Dutch pension system to give you payouts once you are above retirement age (or retirement contribution years - that's going to be extremely unlikely for you) till you die. The amount of the monthly pension probably depends on the overall amount you contributed (in Germany, contributions are counted in points that count contributed € relative to average wage for each year).

What you get is in financial terms an annuity with unlimited length (till you die) starting at pension age.

• Unlimited length means that the older you get, the better this type of investment turns out. (The German name of the pension system is literally "pension insurance" - and I actually think of this as an insurance that will yield at least some money regularly if I get so old [which will hopefully happen] that all other capital is used up [which will hopefully not happen]).
  And yes, I expect to pay (by getting lower returns compared to investing myself) the insurer to take up my risk of getting older than average.

• Payout of this annuity is variable: Here, so far, contribution points convert proportionally to payout. The value of a point is subject to changes though: it is bound to a (falling) percentage of the average wage when the payout takes place.
  Thus, while you do not know the actual value of a point, unless there are very dramatic changes in legislation (see politics below), contributing more will lead basically to proportionally more payout.
  Here in Germany, the pension cass tells me every once in a while the monthly payout if I were above pension age today for 3 scenarios:

  • the pension points I've accumulated so far, and I stop contributing now.
  • go on contributing as much as I did on average during the last 5 years till I reach pension age
  • I'd be pensioned early now for being 100 % unable to work

• Any German citizen or inhabitant of German can volountarily contribute. If they do, contribution must be between ca. 1000 and 15000 € per year (their own decision, just < 1000 €/year is not possible).
  The published statistics of the pension cass says that currently ≈ 0,3 mio people use this (of a total of 55 mio contributors - however, the vast majority doesn't have any choice, they have to contribute). This study suggests that only 7 % of solo freelancers and business owners decided to volountarily contribute to the governmental pension cass (but about 1/3 does contribute to some pension cass: there are professions who run their own pension cass, e.g. medical doctors, pharmacists, lawyers and notaries, architects, ...)
  In other words, only a small fraction of people in a position with some similarities to your position decided such contributions to be worth while for them.

• However, there may be minimum contribution years that are required (in Germany: 5 years).

  • Across the EU, EWR and Switzerland, there are contracts so that contribution years in all those countries count together.
  • I know that Germany has agreements with a number of further countries (including the USA and Japan), but I do not know their content. However, I'd recommend asking the Dutch pension system info office whether such contracts exist and what they mean and cover.
  • I don't know what happens if you contribute less than those 5 years, whether all contributions are lost or whether they'll have to payout a lump sum.

  • It may be worth while doing volountary pension cass contributions to make sure you have those minimum contribution years.
    If you don't have them but are somewhat close, relatively small investment could get you comparably large return.

  • The German pension has further thresholds in terms of contribution years. However, that's highly country specific and won't help wrt. the Dutch situation.

• The "insurer" behind that "annuity product" is huge: currently, some 55 mio contribution payers and some 21 mio people receive pensions from them right now, and this thing is further backed by German taxes. This puts the whole thing into the category where performance is probably as decoupled from general economic development as you can get with a financial product. (Low correlation is bette for diversification)
  Still, there are private insurers who sell annuities (incl. products approved for tax deduction) and it may be worth while to look into that (regardless of country). As you commented that Dutch governmental pension is too unpredictable in its payout: there are annuity products with a guaranteed minimum monthly payout, and the contract terms specify a date when payout starts which is not subject to political changes.
  But again, expect to pay for that added security.

• Political environment:

  • Personally, my retirement planning includes the expectation that pension age will go up, and the percentage-worth of the pension points will go down, and there may even be a cap on the payout that is below the proportional payout of the maximum possible contribution.

  • On the other hand, the vast majority of Germans (AFAIK, that's also the case for the Dutch) depend entirely or mostly on this governmental pension plan. This means that I expect short of true shit-hits-the-fan these plans with pay something which will keep sufficiently large portions of the old age population form starving.

  • Or, to put it the other way round: I expect heavier taxes on investments and/or wealth to come long before the pension plans cease to operate (politically, having investments means that you are rich/wealthy -> tax the rich).
    Remember Malta cropping bank accounts? Also, Germany had in the past legislation that put morgages in favor of the government on real property (after WWI and WWII), ...

• taxes and burocracy:

  • There are pension plan treaties (similar to tax treaties) between many countries.
  • In consequence, e.g. Germany allows to deduct certain contributions to approved foreign pension plans from taxable income.
  • Which doesn't mean that it is not a burocratic nightmare to claim those deductions...
  • However, this mostly plays a role for income tax. Thus, the low tax burocracy approach is probably to contribute to approved pension plans whereever your tax residency is (at least unless you are US citizen) as instructions and advise for this most like much easier and cheaper to find than advise on deducting foreign pension plan contributions.

My last point is just FYI: there are also capital based retirement investment products here, but they are notorious for not being a good deal for many "normal" people. Thus, the decision in Germany is usually governmental pension vs. do your own investments.