Can I complete my path to financial freedom? I ask myself this question more often lately. Most financial bloggers set themselves ambitious goals: they want, for example, to be free up to the age of 40 or at least reduce the number of weekly hours. Especially the latter sounds already tempting, although I like to work. Because of my job I have variety, many social contacts and feel useful to the society. With the goal of financial freedom, I would have to invest in targeted assets. Actually, right now I could earn more than now by changing my job. That’s why I’m currently asking myself the question:
Do I want to be financially free at all?
Is currently not really on my to-do list. Maybe I would like to do that someday? Last week, my article was published by FFM. There I wrote that one should not only think of the current needs, but should act with foresight.
What could my future self want?
Lately, I’m working a lot of overtime. My mother pointed out to me that she had her first herniated disc at the age of 20 due to stress and no employer ever thanked her for it. Instead, it’s only made her life harder. Is that the kind of price you’ll regularly pay on the path to financial freedom?
Benefits of financial freedom
My dad and also the father of my best friend got a dismissal at the beginning of their 60th. One can’t be placed on a new occupation at the current labour market and as a thank you gets on top of it all also strong pension benefit deductions because of the early retirement. My father had to start his own business out of necessity. Even the personal conversation with his boss a year before, whether his job was really safe, to probe for the purpose of buying a house at an advanced age, was forgotten.
The fact that you have spent decades of your life in a company does not bother the employer when the numbers are no longer profitable enough or if he wants to devote himself to other business areas. Or if a new managing director wants to restructure everything as he feels necessary in his opinion. Older persons are in such cases a special thorn in the eye of every company. When I actually say: “I want to work forever!”, that does not mean that:
- I still want that in a few years.
- I am in a position to do so.
- my employer supports this.
This may force them to leave work early. I am sure to say that most employers would prefer that such employees voluntarily leave the company punctually on the occasion of their 60th birthday. As a result, there are less costs due to sick leaves and the freed-up budget leaves more room for new hires that way. If you get enough training for the new entrants, the loss of experience for the company is also only half as tragic.
Retirement age is likely to be further increased due to the aging population in the Western world and elsewhere, although performance in various sectors will decline in old age. So, while many people now expect their legal and private pension to be earned “At the retirement age of 67, they’ll eagerly estimate that they probably have a total of XXX available”, but it can be just as good that the retirement age will soon increase to 70 or even just complete abolish the concept of retirement. I am beginning to realize that I can’t avoid this path if I continue like this, but to enable me to leave the working world I have to rely on myself because…
Retirement provision has meanwhile become the main goal of financial freedom.
The state makes no secret that it can’t provide for my generation in old age. My path to financial freedom is almost a necessity in that regard. Private provision therefore does not only mean closing just a small pension gap. It may be that I’ll have to earn my living almost completely alone.
Short review: How does our pension system work?
As I have already described, many European countries have a pay-as-you-go system. The pension contributions of current employees migrate to the current pensioners. How the ratio of workers to pensioners has evolved over the last few decades can be well understood if one knows the birth rates in the EU countries.
While 6 workers financed a retiree in 1962, there are now only 2 people left to do the same. The next few decades will be probably worse as only 1.5 people or even less will finance one retiree.
Those who enter the world of work at the age of 27 after their studies, fortunately pay 40 years of pension contributions up to the age of 67 years. Afterwards, you also want to get a pension for around 20 years. Which means that you get half as long a pension, as you have paid in for it yourself.
Even if everyone would pay their own pension, that would give them a ratio of 1 to 2.
Now comes the dilemma:
The relationship between employee and pensioner does not remain constant.
The birth rate is falling and the baby boomers are retiring. 700,000 births and every year at least as many new-retirees. So a ratio of 1 to 1. Of the newcomers, not everyone will work in adulthood, so the ratio will be even more dramatic.
This is especially true for my generation: look at your current income statement and calculate your and the employers’ paid pension contributions and compute them together. With a 1:1 theoretical employee-to-pension ratio, this will be the contribution a retiree would have to live from in the future.
For an average earner who makes $35,000 a year, this is around $272.71 (employee share), with the employer contribution this makes a total pension contribution of around $545 per month from the monthly gross salary, health insurance contributions are also still to be deducted of course.
Some may say, “But I also earn well above average and every year I collect the maximum number of pension points!”. This may increase the chances of a bearable statutory pension, but as a welfare state it is also about the common good: that the same basic pension can be introduced for all who have not enough money to live and to die on. Anyone who has earned much as an employee to make a good living with it, had enough opportunity to take the necessary private precautions for their retirement and therefore they don’t have to get a higher public pension than others.
My Goal: Financial Freedom
I am becoming more and more aware that the issue of financial freedom is no longer a question of will or ability:
I have to become financially free.
Going onwards on the path to financial freedom is a necessity. The only question is how and when to do it. On time with 60 sounds like a good start for me. Because relying on basic pension security alone will not be enough. If fewer and fewer people work, that figure will not be very high. The alternative, of course, is to have many children, to work forever and die early to break the vicious cycle. That doesn’t sound too appealing or responsible.
When do you want to be financially free?