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ONE OF the most common financial objectives is to achieve a degree of “financial independence” by a certain age. Financial independence can be defined as “having enough capital and assets at work for you that work becomes optional and you’re your lifestyle is still affordable.” Financial dependence, on the other hand, can be defined as “relying on the state or other means of income support from your partner, family or friends.”

Unlike our parents’ generation where retirement was typically at the state retirement age, people often want to take advantage of enjoying life to the full by having those extra five to ten years of freedom.

We can no longer depend on the state for our income. Health care is constantly improving and consequently we are living longer and need our income to stretch further. Japan’s demographics alone indicate that by 2025, more than 25 percent of its population will be age 65 and older. The burden on national taxes and public pension and social service payments is therefore expected to rise significantly to fund this aging population. Similar problems will be experienced in Europe and the USA, putting considerable strain on government funds.

Many governments have recognized these problems and have passed responsibility onto the population by offering incentives to initiate self-funded retirement schemes, contribute jointly to a company scheme or where possible, both. However, an increasing number of people change their jobs at least four times in their life. This, results in discontinuity of retirement schemes, leaving them dotted all over the place to be collected at some time in the future. Even if a new employer’s scheme provides excellent benefits, normal retirement age tends to be at age 60 with a reduction of benefits if taken early.

Annual Income
Required ($)
(today’s money)
 20  25,000  60  121
 55  223
 30  25,000  60  266
 55  503
 40  25,000  60  627
 55  1,278

All these factors point toward the need to commit adequate savings while working to ensure that lifestyle needs can be met after retirement. Consider this: You are age 30. Your goal is to stop work by age 55. Longevity in your family is to age 75. You have 25 years to save a pot of money large enough to provide an income for 20 years of your life! The main question is, how much needs to be saved? The table above demonstrates using certain investment growth and inflation rate assumptions.

The result is that if you are age 20 now and require an annual income equivalent to $25,000 at your chosen “independence age” of 55, you need to make savings of $223 a month from now until age 55. Note that as you become older, the savings rate increases. The cost of delay therefore becomes expensive!

Clearly, the decision to become financially independent early is largely a  financial one, and planning for adequate provision must be tackled early and reviewed regularly. Although many of us in our 20s or 30s may consider this goal to be on the “back burner” because “I’m too young to plan for this yet,” the above table demonstrates that the younger you are, the better chance you have to achieve what you want.

For information about suitable savings plans to help you reach “financial independence” please contact Magellan Japan.