350,000 is enough to retire
InvestmentOld-age provision: the 1000 euro question
The first impulse comes completely unexpectedly, sometimes during a lively dinner. If the old friends don't serve anecdotes with the main course, but instead argue about their financial situation in retirement, the subject is on the table. And everyone immediately agrees on one point: more pensions are needed. Let's say: 1000 euros would be nice.
Let's assume an academic who today at 52 years of age as an employee earns decent (if not generous) and has been paying into the statutory pension fund for more than 25 years. In the official annual report, he is advised of around 2500 euros for the start of retirement at 67 - provided that he continues to earn as before. In addition, he will receive an estimated 100,000 euros from tax-free life insurance in the same year. Another 50,000 euros are bobbing around on call money accounts. So the starting position is not that bad.
However, the freely available capital will not be enough for his wish for an extra pension of 1000 euros. If the man also keeps a generous reserve of 50,000 euros, 100,000 euros are available for the supplementary pension so far. But that doesn't get you very far at first glance: if the man withdraws 12,000 euros annually from the capital, this has completely evaporated after a good eight years.
But the man's motivation to get an additional 1000 euros is high, and the possibilities are also right. The employee still has 15 years until retirement. Like many his age, he's already got rid of some costly obligations, the kids are out of the house, and he's making good enough money to set aside a few hundred euros a month.
Financial planner Michael Huber from VZ Vermögenszentrum in Frankfurt am Main knows the final spurt strategy from practice. “In this phase of life, the pension comes more into focus, for many it becomes real for the first time,” says Huber. He encourages: “It's never too late. You can also readjust at the age of 50. "
However, due to the manageable savings period until 2032, capital accumulation cannot be achieved without a show of strength, especially not with the persistently low interest rates. Investors benefit from the compound interest effect with every additional year of savings. But that also means: the shorter the savings time, the lower the effect.
How can an additional pension of EUR 1000 be possible?
The simple answer is: by decreasing entitlements or increasing the savings rate. Anyone who sets aside 500 euros a month for 15 years can hardly wait to be able to relax and withdraw twice that amount over 20 years or more. The return required for this would be unreally high (namely almost eleven percent per year). So it has to be done differently.
Financial planner Michael Huber:
“A supplementary pension of EUR 1000 is associated with an enormous saving effort. But that's no reason not to start. Anyone who saves has more from the start of their retirement "
An initial setting of the course promises some relaxation: Does the 52-year-old want to consume the capital he has built up himself or will he still bequeath it? If the saver can decide to butter his future fortune down to the last cent into a more comfortable lifestyle in old age, he will have to put away considerably less.
The capital requirement is then easy to estimate: Because he wants the supplementary pension until the end of his life, he carefully calculates payments from the start of retirement at 67 to the age of 90. What remains should be given to the heirs. Roughly, he needs 1,000 euros times 276 months, which can be calculated in his head: 276,000 euros.
For comparison: If he wanted to leave the savings capital untouched, he would have to raise more than double that amount with an investment interest rate of two percent: 600,000 euros.
Financial planner Michael Huber:
“Most Germans are fixated on leaving their children a fortune. However, if you are aiming to build up a supplementary pension in your early 50s, you should choose capital consumption. Otherwise the finish line can realistically hardly be reached "
A rough calculation shows the starting position, initially without any dynamics: The employee's capital requirement for his desired target of 1000 euros extra pension is just under 280,000 euros in 2032, with life insurance contributing 100,000 euros. The bottom line is a capital requirement of 180,000 euros. So far, however, he has done the bill without the finance minister, who pushes this target line backwards again.
The life insurance payout is tax-free because the contract was concluded before 2005. However, income on the capital market is very much subject to tax. The tax authorities are currently demanding around 25 percent withholding tax on the income from free investments such as funds, interest-bearing securities and savings. In order to have 180,000 euros after taxes at the start of retirement in 2032, between 190,000 and 200,000 euros must be saved - depending on the amount of income.
If you want to make things easier for yourself, you calculate differently - and deduct the tax burden from the expected income from the outset. This is done quickly, as an example shows: The employee plans with a pre-tax return of four percent for his portfolio. After deducting 25 percent taxes, that leaves three percent. In order to achieve the desired capital of 180,000 euros after taxes in 15 years, the savings rate is then 783 euros. Voilà.
On the other hand, it is really tricky to assess the consequences of inflation for wealth. When it comes to inflation, there is often a wide gap between perception and reality. A study by the European Central Bank recently found that consumers mostly overestimate the inflation rate. Savers, on the other hand, underestimate the loss of purchasing power of their wealth. For example, the planned 100,000 euros from life insurance in 2032 will only be worth 74,300 euros after inflation of two percent. Exact calculations facilitate asset and cash value calculators on the Internet, for example at ihr-vorsorge.de.
What does the calculation with inflation look like up to the year 2032? In order to compensate for the purchasing power, his target pension of 1000 euros extra must already be 1346 euros at this point, assuming an annual price increase of two percent. But that's not all: Even in the 23 years of drawing a pension, the amount must continue to rise by around two percent.
For this reason, the employee - please don't be alarmed - has to keep a sum of 392,000 euros. In the savings phase, the values are based on an interest rate of three percent after taxes, and in the retirement period on half. After deducting the life insurance, there remains a debit of 292,000 euros. For the next 15 years, the man would have to invest 1,272 euros a month.
This prospect is extremely sobering because cutting down on consumption would be drastic - if it is realistic at all.
Financial planner Michael Huber:
"When the necessary savings rate is on the table, you can readjust it again - but at the expense of reserves or security"
The hoarded daily money could provide relief. If our employee gradually reduces his reserve from 50,000 euros to an indispensable remainder of 10,000 euros, he can add around 222 euros every month from this capital. That lowers the savings rate to 1050 euros.
Last but not least, compromises in terms of security are also possible. The employee could calculate with fewer retirement years. If he only plans the supplementary pension for 20 years instead of 23 - i.e. up to the age of 87 - he only has to finance 240 months. This further lowers the savings rate to 819 euros. But you shouldn't take less than 20 years of retirement into account. According to the official figures of the Federal Statistical Office, 67-year-olds already live another 16 to 19 years - and the trend is rising.
Even if all the adjusting screws cannot push the savings rate enough, the man does not have to give up his supplementary pension yet. He can also lower the target pension by a few hundred. For an additional pension of 700 euros, the savings are further reduced to a comparatively tolerable 375 euros per month - because of the money from life insurance and the daily money account.
In the case of the system, however, the options are currently clear. If you want to generate an annual return of four percent during the savings period, as in the calculation example - that's how much it takes to earn around three percent after taxes - you can hardly ignore stocks in view of the low interest rates.
Financial planner Michael Huber:
“The risk with investing right now is not having any stocks. There are no serious alternatives to quickly creating a small fortune for the supplementary pension with the final spurt strategy. And otherwise not "
The employee should therefore take all his courage. For example, he could invest in the capital market through inexpensive ETFs. For the savings phase, Huber recommends an equity component of 70 percent, the rest goes into bonds. More anxious temperaments turn the ratio around. At the start of retirement, both will remain in shares, but will halve their share of shares.
In this way, the investor preserves the chances of a supplementary pension without too high a risk. Naturally, there are no guarantees for future investment success of four percent. However, the planning should be long enough to even out fluctuations. Historically, portfolios with an investment horizon of 15 years have at least achieved a plus.
During retirement, such a deposit not only helps with the return, the deductions are also relatively clear. The tax authorities get 25 percent of the revenue, and that's it. The situation is different with many old-age pensions, however: taxes and duties are confusing and often expensive, especially for company pensions or life insurances. That makes it difficult to estimate the available salary.
When calculating the pension benefits, an approximate figure helps: 20 to 30 percent of the savings capital is gone - someone will always help themselves, regardless of whether it is the tax authorities or the health insurance company. This also applies to one-off payments, for example from direct insurance.
An example shows how hard the deductions will have on retirement income in the future. Even if the employee in 2032 - can build on a statutory pension of 2500 euros and also draws a company pension of 1000 euros from his company, he should de facto only have around 2500 to 2800 left of the 3500 euros. For this reason alone, the plan for a supplementary pension of EUR 1,000 is a good idea.
The article first appeared in Capital 06/2017. Click here to go to the subscription shop, where you can order the print edition. Our digital edition is available from iTunes, GooglePlay and Amazon
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