Millions of Germans hardly know how to use what they earn today to prevent poverty in old age. That needs to change. Saving, investing and investing are urgently needed.
It has long been clear that most people in Germany will not be able to finance their standard of living in old age from the statutory pension alone. For today’s generation of retirees, this was and is still largely possible. For the cohorts born after around 1960, however, probably no longer.
The main causes are quickly listed. For decades, birth rates in Germany have been very low, people’s life expectancy is increasing, the average retirement age is too low and economic growth is too weak. Formulated in a somewhat more drastic and less detailed manner: the so-called pay-as-you-go system, on which the statutory pension insurance is based in Germany and many other European countries, has an irreparable design flaw.
In the face of these problem factors, the only way to keep the pension system from financial collapse is necessarily a combination of high tax revenue subsidies, pension cuts and continual increases in the retirement age.
If you want to maintain your standard of living, you have four options
But let us not dwell on complaints, but instead turn to possible solutions. If you want to maintain the standard of living that you had just before retirement, you should take one or more of the following measures – unless you want to rely on a now unlikely, unpredictable miracle:
First: You have to work several years past today’s average retirement age. For men, this is currently just under 62 years of age, and slightly lower for women. This path is – if your health allows it – fundamentally realistic. However, according to surveys, most Germans are not taken with it.
Secondly: You must have been lucky enough to inherit appreciably or win the lottery. It is clear that you can either not influence these “forms of wealth formation” (inheritance) or represent a rather counterproductive case of “victory of hope over reason” (playing the lottery).
The “ETF Pope”
Dr. Gerd Kommer has been a best-selling investment guide book author for more than 20 years. At the same time he is the managing director of Gerd Kommer Personal-Financial.com GmbH, a digital asset management system where customers can start with small amounts as well as the Gerd Kommer Invest GmbH, a fee consulting company. In his t-online column, he and his colleagues Felix Großmann and Daniel Kanzler write every two weeks about his specialty: long-term wealth accumulation with ETFs.
Third: You must have bought your own home and have paid off any or all of the loan for a house or apartment when you retire. In this bi-weekly column over the next few months, we will show that home ownership is a good, but generally not the best route to meaningful retirement provision in terms of returns, although many people have always believed it.
Fourth: You must have achieved a noteworthy fortune through money or financial investments. How high these financial assets must be when retiring depends on the standard of living of the household and other factors. As a rough rule of thumb, employees who pay more or less their entire professional life into statutory pension insurance should also save around ten percent of their current net income over decades and invest in an investment that generates a permanently positive return after inflation, costs and taxes. Anyone who does not save and invest in this way on average for at least 20 years will have to spend more than ten percent due to the shortened period.
Savings book and fixed deposit account do not achieve the goal
A long-term return after inflation, taxes and costs cannot be achieved with savings books, fixed-term deposits, overnight money, capital-forming life insurance and most private pension insurance – there is no doubt about that. Unfortunately, in addition to owning a home, it is precisely these forms of savings and investments that Germans particularly love.
A permanently positive return can only be achieved with investments that are at least partially investments in shares, i.e. equity in listed companies. This is exactly what works with listed investment funds that track a stock index, or ETFs for short, more easily than with any other investment vehicle and, in the vast majority of cases, cheaper.
This column will show you why that is and how best to do it. The week after next it starts with the question “What are ETFs?“