Author Topic: Question about German pension system: what does it mean for my "net worth"?  (Read 3485 times)

Rafaello

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Greetings, fellow (German) Mustachians,

Does anybody have an idea how to factor in the "must-pay" part (or more its "if you keep doing this until the age of 67, youŽll get X per month" part) of the German state-controlled retirement pension system into your personal net worth?

Am currently 33, and do not plan to work until an age of 67 (or 75, or whatever they will require us to work before we are allowed to benefit from the system). So, I assume for the pension claims to have any "net worth", there would have to be a way to withdraw them before reaching that age. Are there any ways?

Even if there are not, I figure it would still have some money stream towards my retirement plan (although I would not benefot for another 40 or so years), hence reducing the need to save a certain amount of money...
So, does anybody have an idea how to calculate that?

Thanks and cheers,
Rafaello

arebelspy

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There's a few ways.  The best, IMO, is to price what a SPIA would cost you to buy to provide the same benefit.  Count that amount as part of your net worth.

It gets tricky if the pension is COLA'd, as it's harder to find COLA'd SPIAs and they're more expensive, but it's still doable.

Another way is to calculate the NPV of the payment streams - this has more assumptions built in (you have to choose a discount rate, and also guess at how long you will live).
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worms

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I am not in Germany, but I think the same issue applies here.

The way I look at it is to keep things in today's money and forget inflation.  I Estimate how much income I think I would need if I retired today, then deduct from that the current state pension sum plus the current estimate of my compulsory employee pension.  I then Multiply the remaining balance by 25 and that is the sum that needs to be amassed as the "stache". 

I know that this is a conservative estimate (and I certainly hope that the compound interest on the current stache beats inflation) but as a back-of-the-envelope estimate it is as accurate as I need.

Woody

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Hi Rafaello,
being a German myself, I treat the retirement pension as a kind of safety margin (see http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/). Today you just know the current wealth of the retirement points you are collecting now. I would bet, that this value will decrease within the next 30 years. I would consider it as not being there at all and if I will receive any pension, I'll treat it as a nice bonus.

BTW: Where do you live in south-western of Germany? (I guess you already found this thread: http://www.mrmoneymustache.com/forum/meetups-and-social-events/any-german-mustachians-here/).

Best regards,
Woody

Rafaello

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Hello all,

thanks for the responses. I will parse them tonight from home.

@Woody: thanks for pointing out that thread - I wrote a quick response there (hooray for meetings that are done, but not quite "done"...). The answer to your question is: I live between Karlsruhe and Heidelberg.

Best regards,
Rafaello

pom

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Hi Rafaello,

When I do my own calculation, I multiply the value by 50%. The reason is that in most countries the current contributions are about enough to pay 75% of the benefit promised (I don't know for Germany but most western economies are in that situation; you may be able to find the % for germany in the social security annual report). So either in the future they will increase employee contributions by 33% or they will decrease benefits by 25%. Probably they will do a combination of both.

So 75%-80% of promised benefit is my best guess for social security. Still, I use 50% in my projection for prudence (It may be 75% in average but I may not get the average, for exemple they may reduce high net worth individuals more than others).

Christof

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So, I assume for the pension claims to have any "net worth", there would have to be a way to withdraw them before reaching that age. Are there any ways?

Not really... The earliest official withdrawal age is 63 years with permanently reduced monthly payments. Should you become disabled or unable to work at all, you can apply for "Erwerbminderungsrente". As a soldier who was injured in war you would receive "Kriegsversehrtenrente". I wouldn't aim at any of those, though.