Retirement Planning in Germany: Expert Tips and Strategies to Save for Your Future
The German public pension seems to be completely sufficient. However, this is not the case. That's why we describe for you in this article how you can best secure yourself for retirement and how to save for retirement in Germany.
- The average pensioner in Germany gets 1.620,90€/month or 19.450,80€/year from the German public pension.
- There are several rules of thumb to calculate your needed money in retirement, such as 80-90% of your pre-retirement income.
- If you save for retirement in a regular investment account, you may eventually run out of money in retirement.
- Private pension plans in Germany are, among other things, a tax-efficient way to save specifically for retirement.
Introduction: Why should you save for retirement in Germany?
People often say about Germany that the social security system is so good and effective. However, if you take a closer look, you will notice that the government has to support the system with extreme co-payments on the one hand, and on the other hand, the benefits are decreasing more and more due to the high costs (more on this here).
If we look at the German public pension system alone, then the average pensioner in Germany gets a 1.620,90€ gross pension (PRE-tax) per month (as of 07/2022). That is 19.450,80€ per year. Not much, if you consider that 18.6% of the salary up to an income of 87.600€ are paid in.
With such figures, it relatively quickly becomes clear why additional savings should be made for your retirement. Not only do we claim this, but even the German government actively recommends additional private pension savings. Thus, what is the best way to invest money for your pension? That’s exactly what you’ll find out in this article.
Which pension is best for you? Let’s find out together.
How much money do you need in retirement
Before we can enjoy our golden years to the fullest, we need to make sure we have enough money saved to get us through retirement. But how much money do we need for this exactly?
The answer to this question varies from person to person and depends on several factors such as lifestyle, health care costs, and life expectancy. A general rule of thumb is to plan for 80 – 90% of your pre-retirement income to maintain your standard of living. However, it’s important to know that this is only a general guideline and your actual needs may differ. In addition, there are additional expenses to consider such as long-term care and inflation.
Another rule of thumb is to save a multiple of your current income for retirement at different ages. For example, at age 30, you should have saved the equivalent of your current annual income. By age 40, you should have saved three times your current income, and by retirement age, you should have saved 10 – 12 times your current income.
There are very many different rules of thumb that also include, among other things, an amount such as 1 million euros for retirement. All of these rules may make different sense to you. However, what you should definitely pay attention to is how you invest the money you need. For example, if you invest 1 million euros in an investment account, and retire from it, you may live longer than the capital is available. So, maybe you can save the same amount by investing more beneficial for your retirement. Let’s take a look at this in the next section.
How to save for retirement in Germany
When it comes to the right way to save for your retirement in Germany, there are several ways to do it. For example, you can simply do it by using a regular investment account. This also works, but there are special pension plans for this that offer advantages compared to the investment account. Using these plans, you can then also decide whether you want to invest your money in ETFs and mutual funds.
One advantage of the pension savings plan is a guaranteed pension payout until passing away. While your capital accumulated in an investment account may eventually run out, this cannot happen with a pension plan. Here you get the pension paid out for the rest of your life and thus do not have to worry that you will one day be without a pension.
In addition, pension plans are very tax efficient. Not only during the pay-in or pay-out phase but also during the lifetime. There are no taxes on anything in the pension plan. This means that if you want to switch your investments, you can do that easily and not have to worry about the extra taxes like you have to with an investment account. And these are not the only tax advantages. Therefore, let’s take a closer look at the different options:
Base pension (Rürup pension)
The base pension is basically the private version of the public pension. You receive a monthly pension in the payout phase and a one-time payment is not possible, like in the public pension. The great advantage here are the tax deductions.
In 2023, 26.528€ can be deducted from your taxable income. In addition, you can freely choose the monthly contributions. These can also be changed virtually always and also stopped.
The Riester pension is most suitable for families. Here, every adult who has a Riester pension receives a bonus of 175€ from the government. For each child born after 2008, there is an additional 300€ bonus per year (185€ for each child born before 2008).
In addition, the Riester pension can be deducted from taxes up to an amount of 2.100€/year. If you are also planning to buy your own home, you can use the Riester pension as collateral for a loan.
With the company pension, you also receive tax benefits and save on social contributions, while you also receive at least 15% of your contributions from your employer.
In fact, no social contributions are due on the company pension up to a savings rate of 3.504€/year. Taxes are not due up to an amount of 7.008€/year (both numbers are for 2023).
The private pension is the closest to an investment account. Here you get the maximum flexibility possible for a pension plan. Nevertheless, the private pension allows you to save for your pension in a tax-advantaged way. Here you receive tax advantages in the payout phase.
While your capital gains are normally taxed at 25%, with a private pension taxes are incurred depending on your retirement age. If you retire at 67, you only have to pay income tax on 17% of your monthly pension (e.g. 100€ monthly gross pension – 17% taxable * 42% income tax rate = 92,86€ net pension).
At the age of 69, it would even be only 15% (=93,70€ net pension from 100€ gross pension). In addition, you can also use the private pension as collateral for a loan, both for an investment property or a home.
“Depending on the age that you like to retire, private pensions can save you tens of thousands of Euros in taxes compared to regular investment accounts thanks to tax-deferred growth.”
Conclusion: The right way to save for retirement in Germany
As in any other case, there is no “best” way on how to save for retirement in Germany. There are only different reasonable ways to save specifically for retirement. Here it is important to note that you do not have to decide on one system but can also choose several options at the same time. For example, you can choose a Riester pension with family supplements and a private pension for flexibility and tax advantages in retirement.
To determine the perfect investment strategy for your individual situation, it makes sense to consult a financial advisor. With them, you can work together to determine which option is best for you, based on your individual financial situation and retirement goals. Together with the advisor, you can find the perfect combination of different pension systems and other asset classes (e.g. real estate) for your future life. For this purpose, you can schedule a free consultation here.