Retirement financial preparations
When it comes to securing a comfortable retirement, planning ahead is crucial. In Germany, the best investment options often involve a combination of the three-pillar system: the statutory pension scheme (First Pillar), company pension schemes (Second Pillar), and private pension schemes (Third Pillar).
Statutory Pension Insurance (First Pillar)
This is a pay-as-you-go system where employees and employers contribute. It forms the base of retirement provision but may have limited growth and is subject to demographic risks.
Company Pension Schemes (Second Pillar)
Employers offer several options, such as Direktversicherung, Pensionsfonds, and Pensionskasse. The latter two are investment funds linked to capital markets and tend to offer better long-term growth potential due to market exposure, suitable for long-term pension provision. Employers must offer a company pension upon employee request since 2019.
Private Pension Schemes (Third Pillar)
This includes the Riester-Rente and Rürup-Rente. The Rürup Rente can be attractive due to tax advantages, allowing up to 88% of contributions to be tax-deductible (up to €24,000 per year), especially if invested via ETFs or through government-certified providers like Fairr/Raisin, which offer low-cost automated investing via robo-advisors. However, private pension insurance plans often have high costs, inflexibility, and lower returns compared to broad market ETF investing or real estate, making direct investment in broad market ETFs or real estate potentially better for some individuals seeking long-term growth.
Additional Options
ETF savings plans offer good return opportunities with manageable risks and costs, and allow for flexible adjustment of savings rate and withdrawal of money whenever needed. Real estate bonds are fixed-interest securities issued by companies in the real estate industry, offering regular interest and return of capital at the end of the term. Real estate funds, compiled by professional investors, invest in companies in the real estate industry, offering a more diverse investment option.
Planning for Retirement
Experts recommend planning for about 60% of your last gross income or 80% of your last net income as your monthly requirement in retirement. To find out how much you need to save monthly to approach your retirement goal, use a pension gap calculator. It's recommended to choose a term of at least 10 to 15 years and diversify investments when investing in stocks.
Choosing the Right Investment
A comparison tool can help in choosing specific ETFs for investment in money and retirement provision. The interest rate for a fixed-term deposit is higher than for an instant access account, with the longer the investment period, the higher the interest rate. However, ETFs, like all securities, are subject to price fluctuations, so it is recommended to start ETF pension savings plan at least 15 years before retirement.
In summary, for long-term pension provision in Germany:
- Rely on the statutory pension as a base.
- Use company pension schemes tied to capital markets (Pensionsfonds or Pensionskasse) for better growth.
- Complement with private investments through tax-advantaged products like Rürup Rente combined with ETFs or direct investments in broad market ETFs and real estate for potentially superior returns and flexibility.
[1] Source: Bundesverband deutscher Banken (2021) [2] Source: Deutsche Bundesbank (2021) [3] Source: German Federal Ministry of Finance (2021) [4] Source: Fairr (2021) [5] Source: Raisin (2021)
Investing in Pensionsfonds or Pensionskasse through company pension schemes offers better long-term growth potential due to market exposure, which makes them suitable for long-term pension provision. To seek long-term growth and potentially superior returns, individuals might consider private investments through tax-advantaged products like Rürup Rente combined with ETFs or direct investments in broad market ETFs and real estate.
