Hello fellow mustachians!
It is well established: ETFs are the instrument to FIRE.
In Germany, employer funded pension plans usually just suck. They try to sell it to you by advertising tax benefits in the presence vs. taxation once you are retired, but 95% of all pension plans force you to put your money into a "financial product" containing small exposure to the stock market and a horrible cost structure - the result being that the only party enjoying good returns is the seller of said product that your employer is using.
So whenever you ask financially educated people in Germany whether you should invest your own pre-tax money into these plans, they will answer with a harsh no.
Behold my employers pension plan: 90% ETF, 10% fixed income, no costs exceeding the TER of the funds. The ETF closely resembles the MSCI World, whith SRI marketing attached. TER is 0.5% for the ETF, 0.31% for the fixed income (investment grade bonds). On top of it, 20% matching is provided. Funds are available 25 years from now.
To keep the numbers trackable, I only evaluate the scheme for contributions in 2024.
In 2024 the maximum matched contribution is 3624€ of my pre-tax pay, which is matched with 725€. Total pre-tax contribution: 4349€. Reduction in net pay for me: 1920€. Contributions can be changed or stopped every month.
As an alternative, I could take those 1920€ of after-tax money and put it 90% into the MSCI World and 10% into bonds. TER would be lower by appr. 0.13% for both.
If you assume 6% real returns over 25 years for this tiny lump sum, you end with 8240€ - 6320€ of that being capital gains - in your private ETF you can access any time.
If you assume 5.87% real returns within the pension scheme, you end up with 18101€.
Depending on the payout scheme, taxes are due on the pension. If you go with a lump sum, taxation and health insurance will eat away up to 55% of that sum. If you go with a monthly paying plan, taxes will more likely be around 35%.
Taxation on the capital gains for the private ETF are 26.5% according to current taxation laws.
So in the end the numbers look like this:
6413€ for the after-tax-money funded ETF you can access any time.
8145€ for the pre-tax-money funded ETF with matching you can access only in 25 years as a lump sum.
Or the equivalent of 11765€ if you go for the pension payout plan if you have average live expectancy, starting 25 years from now.
All assuming the taxation laws don't get any worse.
So at first glance, contributing to this very specific plan seems like a good idea for now if you don't mind the fixed date for getting access to your money. I hope to start coasting towards FIRE in less than 25 years of course. You can scale the numbers up if you keep contributing for several years - although the numbers change over time with fewer gains to be made.
Am I missing something or wouldn't that be a nice diversifier of taxation / "government-is-crazy" risk? Once the additional pension is payed, you can reduce your withdrawal rates from your own stache accordingly.
