This article is adapted from the business magazine Capital and is available here for ten days. Afterwards it will only be available to read at www.capital.de. Like stern, Capital belongs to RTL Deutschland.
Most people dream of a comfortable retirement: sipping cocktails on the sundeck of a cruise ship or watering flowers in their own garden. But the reality in Germany looks different for many people. The fear of poverty in old age hangs like the sword of Damocles over many – especially younger and female – workers. If you want to save yourself a fortune by the time you retire, you need perseverance and a good plan.
The good news: If you start planning early, you at least have a better chance of being wealthy in old age instead of poor in old age. This is thanks to the compound interest effect, which Albert Einstein called the “eighth wonder of the world”. This benefits those who do not take their regular income from their savings out of the savings pot, but rather reinvest it again and again – be it interest income or share profits through sales or dividends. Interest accrues on the profits and the capital increases by itself. Time is an essential factor. An example: If you invest 10,000 euros in a fixed-term deposit account with four percent annual interest, you would have 14,802 euros in your account after ten years thanks to the compound interest effect. If the money had 20 years to grow, the account balance would be 21,911 euros. And if you save 10,000 euros for your pension at the age of 30 and don’t touch it in the 37 years until you reach retirement age, you would have around 42,681 euros available at the age of 67.
The calculation looks even rosier when investors invest in the stock market: historically, anyone who invests a lump sum in an ETF on the MSCI World for 37 years can expect returns of 7.5 percent. The 10,000 euros would become 145,249 euros within 37 years. ETF fees of 0.2 percent per year are already included, but capital gains tax is not yet included. This amount doesn’t make you rich as a pensioner. Especially considering the fact that money will lose purchasing power over the course of 37 years due to inflation. But the examples show the miracle of the compound interest effect: within such a long period of time, assets can quadruple or even fourteenfold if you invest them wisely. Savers can easily calculate the compound interest effect on savings deposits, salary increases or inflation themselves using online calculators, for example Zins-Berechner.de.
But how much money do I have to save to be rich in old age? The answer to this question is complicated because what is meant by wealth is highly individual. A look at the Germany-wide comparison can provide some context: the median net income of pensioners is 1,947 euros per month. This is shown by a computer from the Institute of German Economics in Cologne. Anyone who has more to spend on a monthly basis as a pensioner is part of the wealthier half of the population. With a pension of around 3,460 euros or more per month, you would currently be in the top ten percent in this country.
However, since living costs and desires are different for everyone, it makes little sense to define wealth solely by comparing yourself to others. Assuming you already have a secure job and a salary that you can get by well, it is wiser to calculate what your last net income will be before retirement. If you then aim for a monthly pension that will be the same or higher, you should ideally be financially comfortable in old age.
Employed people should take salary increases into account. On average, wages in Germany have risen by around 2.5 percent per year since 1992. Let’s take Mila, for example, as a fictional saver: at the age of 30, she earns 2,500 euros net per month. With regular salary increases – we assume 2.5 percent per year – that would be around 6,233 euros net per month after 37 years. But your statutory pension probably won’t be that high. In the next step, she should take a look at the annual information from the German pension insurance. The projection provides information about how high the statutory pension is likely to be, taking salary adjustments into account. Our example saver calculates: 6,233 euros minus the expected statutory pension.
Let’s assume that there is a pension gap of 2,000 euros per month. Now Mila has to plan her savings so that this gap is at least filled by the time she retires. There are now various options for additional provision for old age: These include company pension schemes, life insurance, Riester pensions, Rürup pensions for the self-employed, real estate income, savings deposits and securities assets. What the right approach is depends on many factors, including your individual risk appetite. Either way, a rule of thumb is: When it comes to retirement planning, as with building up assets, it makes sense not to put all your eggs in one basket, i.e. to rely on several building blocks.
To calculate how much money a 30-year-old needs to save in order to achieve her wealth goals in old age, we use an ETF savings plan for the sake of simplicity. With this variant, the investor invests a fixed amount in an ETF every month for the next 37 years in order to then withdraw the money when she retires. The important question is: How long should the savings last? According to the Federal Statistical Office, someone who is now 30 years old, i.e. who was born in the early 1990s, has an average life expectancy of 73 (man) or 79 (woman) years. The savings would therefore only have to last for six or twelve years at a retirement age of 67. However, the investor could also live to be 90 years old – then it would be bad if the savings were used up at the age of 79. Savers should therefore play it safe and expect a longer life expectancy.
Mila expects to live to be 90 years old. If you retire at age 67, your money should last another 23 years. With a pension gap of 2,000 euros per month, she calculates:
23 years x 12 months x 2,000 euros = 552,000 euros.
However, due to inflation, Mila will need more money in 37 years to be able to afford the same things as she does today. If we assume an average inflation rate of two percent per year, then in 37 years it would need a total of 1.15 million euros. That initially sounds like an exorbitant amount of money. The question arises all the more: How much money would Mila have to save every month so that she has the money available when she retires?
This can be easily calculated using a savings rate calculator: Without initial capital, Mila would have to save 510 euros per month with an savings period of 37 years and an average monthly return of 7.5 percent to end up with 1.15 million euros. And if she wants to live richly in old age – whatever she means by that – she adds a few euros every month.
