Author Topic: How much retirement/pension planning is enough (in Germany)?  (Read 3638 times)

Moonwaves

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Right, trying this again. Was just about finished and ready to post this last night when I managed to somehow find a combination of keyboard strokes that wiped everything. I tell myself over and over again to draft long posts in a program that auto-saves but I never do it. Oh well.

So, as background info, I'm Irish, living in Germany for nearly six years and planning to stay here. I've just recently cleared my debt (silly spending from when I was young, I posted about it on an Irish financial forum here in case anyone wants to read the details) so now thoughts turn to where to go from here. The few decisions I've managed to come to in the last couple of years have involved me deciding to seek a new job later this year and if things work out the way I plan, I'll be earning substantially less than I am now. But I cannot persuade myself to stay where I am just for the savings because the high-pressure and generally unpleasant nature of the company has just become too much. So, I'm not really aiming for early retirement but would like to at least get to a place where I feel ordinary retirement might be possible! Or maybe even be able to semi-retire in ten years or so (I'll be 40 this year).

With that in mind this year is the one when I sit down and properly go through the bits and pieces of retirement planning (planning is an overstatement though!) I have done over the years. When I started working it was a standard thing that your employer offered some kind of pension scheme, usually with a match of some kind and so I always paid in to whatever was on offer as soon as I could. My first three employers had age restrictions so I had to wait a year or so to start contributing (first was 22, I joined company when I was 21, next was 25 and I joined the company when I was 24, next was 28 and I joined the company when i was 27 - after that I was old enough for everything!). When I changed employers I didn't always get around to transferring the funds to the new employer scheme so I have two Irish pension plans that I paid into (for about six or seven years in total I'd say). These are the two that I need to chase up and find out what, if anything, they are worth now and make sure I am more conscientious about updating my contact details for the next time I move!

About a year after I moved to Germany I took out what is called a Riesterrente (rente is German for pension and Riester is the Minister who came up with the idea of rewarding people who saved privately for their old age with tax benefits and a premium). Apart from being silly with money for far too long, I have made three big financial mistakes. One of them was getting some not very good advice from a financial advisor and opting for a plan that front-loaded all of the admin costs into the first five years. And even when I found out a year or so ago that that was the case, I still didn't quite get it and just left it be. So, I am now almost through that five-year period, paying €150 per month and, so far, have very little to show for it. To get the maximum tax advantage from that plan you can contribute €2,100 or 4% of salary per year.

My second big mistake was not starting a Betriebliche Altersvorge, which is the company pension scheme offered by my current employer. For some strange reason, the first year I heard about this I completely missed the fact that they match up to 30% (percentrage depends on length of service) and also the fact that the money is deducted from your gross salary, so there are tax and social insurance savings to be had. I had a meeting yesterday with one of the two providers that offer this scheme and think it's a no-brainer to start paying into one. The schemes can apparently be easily transferred to new employers if you move jobs (although the new employer may not offer the same, or any, matching) and you can take a break of up to three years if you can't afford to make payments. The maximum you can contribute is €238 per month but, according to the nice Allianz man's calculations, deducting €238 from my gross salary would result in a bottom line reduction in my cash every month of €123. And then, as long as I am still employed with the company in February, they will pay me 30% of whatever it is that I have contributed to the scheme. It's unlikely that I will get a new job very quickly but I will be handing in my notice in December at the latest so will most likely still be here in February (have a silly three months from end of quarter notice period). There is a guaranteed return of 1.75% on what's invested - the actual return is calculated every year and this year, for example, is just over 4%.

So a summary of my pension planning:
  • Irish state pension and German state pension (paid enough into Irish system to be eligible and with a transfer of time credits over to Germany, I'm also eligible here. They're still figuring out exactly what and how so no figures on this yet)
  • Irish pension No. 1 - will come back and update figures when I have them. Edited 7th June. This retirement bond was purchased in September 2007 and at that time 9,265 was paid. Current value is 10,431, which doesn't seem to be a huge return, certainly not in comparison to the other Irish pension in about the same period.
  • Irish pension No. 2 - current value 7,300, up from 5,700 in mid-2008
  • German Riesterrente - currently paying in €150/month. Balance at end 2013 was 4,900
  • German company pension scheme - could start paying in €238/month, giving me an estimated 500-ish per month before tax from normal retirement age or a lump sum payout of 85k-ish
Even just typing out that list makes it painfully obvious that until I've actually got the figures my question might be moot. But I've gotten this far so I'll just go ahead and post.

My real worry is that I'd end up devoting most of my savings to pension plans and that money isn't accessible until normal retirement age or a few years before. Am I just being blinded by the holy grail of tax advantages and would it be better to start trying to invest money directly in funds?

I would like to buy a small house sometime but am not sure at this stage if this is really realistic. A lot depends on where I end up with a new job. Ideally I'd like to live somewhere a bit rural but that means the expense of a car. So until I know where I'll land, it's hard to figure out what finances will be needed. For the rest of the time I'm in my well-paying job (€51,300/year), I'll be saving as much as I can so that at least I have some kind of money behind me when I move and as an emergency fund. Everything is a bit up in the air at the moment which is why I'm a bit nervous about starting the company pension scheme I think.

Anyway, I'd appreciate any advice and opinions. I'll come back and add in actual figures as and when I have them. But from a general point of view, when do you say enough is enough, conventional retirement planning is covered, now I need to invest elsewhere?
« Last Edit: June 07, 2014, 10:41:28 AM by Moonwaves »

Woody

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Re: How much retirement/pension planning is enough (in Germany)?
« Reply #1 on: May 30, 2014, 05:58:19 AM »
Hi Moonwaves!

Right, trying this again. Was just about finished and ready to post this last night when I managed to somehow find a combination of keyboard strokes that wiped everything. I tell myself over and over again to draft long posts in a program that auto-saves but I never do it. Oh well.

If you're using Firefox, I'd recommend using "Textarea cache" as an add-on.

So, I'm not really aiming for early retirement but would like to at least get to a place where I feel ordinary retirement might be possible! Or maybe even be able to semi-retire in ten years or so (I'll be 40 this year).

Being a German in your age and have gone about 40% for FI, in my humble opinion your aim ("ordinary retirement might be possible") shouldn't be a problem. Looking at your current financial situation, I wouldn't expect you to be able to semi-retire in ten years - maybe quarter-retire ;-) is possible.

About a year after I moved to Germany I took out what is called a Riesterrente (rente is German for pension and Riester is the Minister who came up with the idea of rewarding people who saved privately for their old age with tax benefits and a premium). Apart from being silly with money for far too long, I have made three big financial mistakes. One of them was getting some not very good advice from a financial advisor and opting for a plan that front-loaded all of the admin costs into the first five years. And even when I found out a year or so ago that that was the case, I still didn't quite get it and just left it be. So, I am now almost through that five-year period, paying €150 per month and, so far, have very little to show for it. To get the maximum tax advantage from that plan you can contribute €2,100 or 4% of salary per year.

I'm not a friend of insurance-based finance products just because of these high costs which kill the good intentions. Even though it is not possible to judge a product without knowing the precise situation of the customer, I would rather advice against these products.
Is your front-loaded product a Riester-Rentenversicherung or are you paying into a Riester funds product? AFAIK, the "DWS Riesterrente Premium" is also front-loading its product.

My second big mistake was not starting a Betriebliche Altersvorge, which is the company pension scheme offered by my current employer. For some strange reason, the first year I heard about this I completely missed the fact that they match up to 30% (percentrage depends on length of service) and also the fact that the money is deducted from your gross salary, so there are tax and social insurance savings to be had. I had a meeting yesterday with one of the two providers that offer this scheme and think it's a no-brainer to start paying into one. The schemes can apparently be easily transferred to new employers if you move jobs (although the new employer may not offer the same, or any, matching) and you can take a break of up to three years if you can't afford to make payments. The maximum you can contribute is €238 per month but, according to the nice Allianz man's calculations, deducting €238 from my gross salary would result in a bottom line reduction in my cash every month of €123. And then, as long as I am still employed with the company in February, they will pay me 30% of whatever it is that I have contributed to the scheme. It's unlikely that I will get a new job very quickly but I will be handing in my notice in December at the latest so will most likely still be here in February (have a silly three months from end of quarter notice period). There is a guaranteed return of 1.75% on what's invested - the actual return is calculated every year and this year, for example, is just over 4%.

Sorry, but I'm not sure whether not starting a Betriebliche Altersvorsorge was really a mistake. Yes, your contributions are not taxed and you do not pay social insurance on your savings now, but you will pay tax and social insurance on your withdrawals in your retirement phase.
Maybe the tax rate will be lower during retirement - nobody can tell how much lower. Just think about the demographic situation in about 25 years from now: If the group of retirees is growing in size, they will have to pay more taxes as well.
Additionally keep in mind that during your working phase the employer pays half of your health insurance (if you're in a statutory health insurance). During your retirement you will have to pay both halfs on the withdrawals. The Allianz agent did not mention this? Well mine didn't mention this as well - maybe both have "forgotten" to mention this.

"There is a guaranteed return of 1.75% on what's invested" - sorry to tell you, but this is a wrong assumption. The guarantee is based on the amount which is left after the costs have been substracted. The costs are not fixed, so in my humble opinion this guarantee is worthless. (I used the figures which were given by my Allianz agent and just calculated the real rate of return based on the guarantee: 1,25% per year.)

I would ask you to re-calculate the numbers - don't forget to include the taxes during both phases (saving and withdrawal) if you include this into your calculation at all.
(I did not sign the contract afterwards even though the Allianz agent was very well trained in selling his product. But of course this is a personal decision.)

And please don't get blinded by the 4% this year. The insurance companies profitted from the rising bond prices (due to the falling interest rates) in the near past. If the interest rates will keep staying on this low level, this 4%-level will not be kept. There is no magic in investing - the insurance companies have no magic wand to get higher returns than you in the low-interest environment.
The current discussions about lowering the guaranteed rate from 1,75% even to 1,25% shows that even the insurance companies do not think that they can mantain higher rates of returns for a longer period. (They will try to sell as many contracts as possible this year to profit from the "better conditions" - you should really think about this twice. Always keep in mind that you are investing money for more than 20 years. I would expect a higher rate of return for parting with the money for such a long time!)

My real worry is that I'd end up devoting most of my savings to pension plans and that money isn't accessible until normal retirement age or a few years before. Am I just being blinded by the holy grail of tax advantages and would it be better to start trying to invest money directly in funds?

The holy grail of tax advantage ;-)! Speaking as a German investor this tax advantage almost always comes with a lot of regulations and you will not be able to access this money until way in your sixties. And the costs of these products are quite high compared to CDs or index funds investments. In my humble opinion you are sacrificing flexibility for the tax advantage and I'm rather uncertain whether you will really profit from it. The high costs are certain, the benefits are not.

I would like to buy a small house sometime but am not sure at this stage if this is really realistic. A lot depends on where I end up with a new job. Ideally I'd like to live somewhere a bit rural but that means the expense of a car. So until I know where I'll land, it's hard to figure out what finances will be needed. For the rest of the time I'm in my well-paying job (€51,300/year), I'll be saving as much as I can so that at least I have some kind of money behind me when I move and as an emergency fund. Everything is a bit up in the air at the moment which is why I'm a bit nervous about starting the company pension scheme I think.

If you're really thinking about building/buying a house I would rather advice you to avoid any speculative investments and rather save as much as possible in short-term assets to lower your interest rate for the credit you'll need. 

Anyway, I'd appreciate any advice and opinions. I'll come back and add in actual figures as and when I have them. But from a general point of view, when do you say enough is enough, conventional retirement planning is covered, now I need to invest elsewhere?

I'm not sure whether I understand your question correctly. What do you consider "conventional retirement planning"? Riester and Betriebliche Altersvorsorge? I don't use any of them - I just invest in Tagesgeld, CDs and index funds. All of these products are low cost and ignore taxation completely. I have to admit, at first glance this might appear counter-intuitive since "everybody" (public media, banks, insurances) tells you to pay close attention to taxes but I think this is rather a fake argument to pull you away from easy-to-understand, flexible and low-cost products.

If you need advice how to invest in index funds in Germany, I would like you to read some nice German blogs (I guess you understand the language well enough to follow the main ideas):

http://zendepot.de/passiv-investieren/
http://der-privatanleger.de

But keep in mind that buying a house (and taking a credit)while investing in volatile assets is not without a risk. I would rather do one of them (and I guess you know already which one I'm talking about).

Well, I don't know whether my long post was really the help you were looking for. I'm sorry for being very critic with the investments you've chosen - but unfortunately the lobby for these products is strong and very lucrative for the sellers.

Best regards,
Woody

gavint

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Re: How much retirement/pension planning is enough (in Germany)?
« Reply #2 on: October 18, 2018, 08:59:40 AM »
Hi Guys, I'm Canadian, living in Germany, and have spent a lot of time looking around for good options for investing with the goal of being able to retire at some point before the obligatory age of 67. 

If you're planning on staying in Germany for the long haul, you absolutely have to be investing and saving in addition to what you are obligated to pay into the state pension program.  Germany is in the midst of a demographic crisis, where by 2040 up to half of the entire population will be retirement age, and there will be millions fewer people in the country.  This does not bode well for the state pension plan - or the economy generally - people my age (around 40) are being told to expect around 75% of what money they and their employers have contributed to come back to them as pension payments .  My kids' position will be way worse.  So, don't rely on the state pension program!

Luckily for me, I'm self-employed, and as such am in one of two groups who are not obliged to pay into the state system - the other being 'Beamter' or civil servants.  So, instead of a minus 25% overall return over 40 years of investing, I can look into other options.  At some point the government is going to come after these two groups to start contributing, I just hope to be part-time or FIRE by then.

Germans are a very, very conservative bunch, safety and risk aversion are very important to them.  You see breathless ads from banks and other investment companies exclaiming their amazing 0,99% annual returns... wow!  Things like Bausparverträge (construction savings plans) are very popular, but offer poor returns and strict conditions.  Riesterrenten (mentioned above) are also very highly targeted, allowing maximum contributions and inflexible terms.

Also relatively popular are the private retirement insurance policies offered by various insurance companies.  They are advertised as the way to bridge the 'pension gap' between your expenses and what you'll get from your state pension.  These are flat out 'Verarschungen' - designed for fools.  Here, the insurance company takes a monthly payment, guarantees a pitiful interest (around 1%), and keeps the capital when you croak.  But, it's safe, so the Germans buy them.

The other big way Germans invest for the future is building or buying a house or apartment, staying in it until they croak, and then bequeathing it to their children.  Not a bad strategy if you can afford to get going there - but anywhere there are jobs, land and building prices are really high.  In my city, building land sells for well over 1000€ per square meter, and that's before anything is put on it.  This is a solid way to invest for the future if you can get the credit for it.  Even though Germany's population is shrinking, a few cities will always be doing well - Stuttgart, Munich and Hamburg particularly, as other regions (mostly in the former DDR) lose more and more people.   

I've ruled out property ownership and the various investment packages on offer as viable investments for me.  Instead, I have an account with a funds bank, where I buy ETFs.  Usually I throw a chunk of my profit from every job in there, and buy whatever looks reasonable.  We'll see how it works out in the long run! 

I have also invested some money with Auxmoney, the German equivalent of Lending Club in the USA.  It's okay, the returns are okay, but you have to use the automatic invest option to be able to get a piece of the better credit projects, and you don't have much control over what you invest in - you must take on projects up to 7 years long.  I'm not 100% satisfied.

One big bit of bullshit here that is done better in Canada - All of my retirement investments come out of my after-tax income, and when they grow and I redeem them, I pay capital gains on that.  No tax-free savings accounts or RRSPs here! 

I've got my investment plan working well for me, I'm not at all worried about the future, and am quite confident that I can slow way down with work in my mid-forties and coast until retirement around 65.  All that while supporting a family in an expensive city!