What products are most appropriate for retirement planning?
Which products are most suitable for retirement planning?
The topic of retirement planning is an ongoing issue in Germany. Every new study confirms that the retirement gap is widening in old age. Again and again I am asked the question, which products are particularly suitable for old-age provision?.
Many people like to suppress the topic of retirement planning. Not because they do not have the problem. No, quite the opposite. Most suppress it because they don't want to deal with the difficult subject. Ignorance and complicated contracts, as well as often misleading reports in the press and TV are the main causes, for the "head-in-the-sand-tactics".
Yet it is possible to explain to almost everyone in simple and understandable terms how and with what they can actually close their pension gap. There are many more people than regularly claimed who are perfectly capable of raising € 100 or € 200 per month or even more to supplement their pension. And low-income people, in particular, are in dire need of it. Not all of these people want to rely on government support to make ends meet in retirement.
To even begin to address the issue of retirement planning in a meaningful way, it is important to be able to answer certain questions in this context, z.B.:
– What steps to take to solve the retirement problem for yourself?
– What needs to be taken into account?
– What retirement savings products make sense?
– What are the benefits of these pension products for me personally??
– What are the advantages and disadvantages of the different products for my personal retirement provision??
A proven expiration from my everyday consultation to the age precaution, in order to be able to answer the appropriate questions, I would like to describe here in simplified form once. Imagine you are the following example customer:
37 years old; single; no children; employee; statutory health insurance; no church tax. Since the 20. Year of life employed. Gross salary € 4.100; net salary € 2.171.
Step 1 – What retirement goal do I have in the first place??
To figure out the best way to get to the destination of my journey, the destination should be clearly defined. It is therefore necessary to determine how much net pension income I will need each month to cover my living expenses when I retire, or how much net pension income I will need when I retire. would like to have.
If you consider your current net income, with which you finance your daily life now, you have a good indication of what you will need in old age.
Now subtract the running costs, which they will have in old age in any case no more.
This could be for example the installment for the house financing. Or the maintenance costs of the children who will then be out of the house. Then you have a reliable value that can be used as a pension target.
> Pension target example customer
Today you have a monthly net income of € 2.171. You have a loan for your condominium. You retire at the age of 67. The apartment is then paid and you live without rent costs. With pension start date (67 y.) you want a total monthly net income of € 1.500 according to today's purchasing power.
Step 2 – What are my existing pension entitlements??
Under entitlements are the pension benefits that you are entitled to from various sources. Here are z.B. see the statutory pensions or retirement benefits as a civil servant. But also a company pension belongs to it, as well as already existing private old age pension contracts.
To obtain a realistic pension amount, all pension entitlements must be adjusted for tax and health insurance deductions and for inflation, which is often forgotten. For € 1.000 I can safely buy more today than I will in 40 years' time.
a) Statutory old-age pension at the age of 67:
From the statutory pension insurance at 67. years ca. € 2.123 gross pension due. An annual pension increase of 0.5% has been included p.a. From this you still have to deduct health insurance contributions (we assume the statutory health insurance of pensioners) and income tax.
Net remain ca. € 1.733 left. Let's take into account an inflation rate of 2% p until then.a. In 30 years, our example customer will have a purchasing power of € 902 according to today's standards.
With just 3 pieces of information, you can use our "quick pension calculator" to calculate your statutory old-age pension fairly accurately. Quite simply and quickly!
b) company pension at age 67:
From a company pension will be € 200 monthly net. Here we assume for simplicity's sake that health insurance and taxes have already been paid off. After inflation, at the age of 67, this will result in a purchasing power of around € 105 according to today's standards.
c) Total pension at age 67:
In total, at the start of the pension at age 67, there is a net monthly pension of € 1.007 according to today's purchasing power.
Step 3 – Which pension gap do I have to close??
This step is done quickly and is probably the simplest one.
Pension target minus pension expectancy = pension gap
€ 1.500 minus € 1.007 = € 493
So, in the next 30 years until retirement, I need to close this gap of approx. € 500 to close.
Step 4 – Which pension products are suitable for me??
It is important to understand that there is no such thing as "the best product" for retirement provision. What is optimal for one person can be complete nonsense for another person. It is always necessary to look closely at the personal situation and the individual environment.
Products for retirement provision can basically be divided into 3 categories:
a) Annuity insurance
These are insurance contracts that generally guarantee a lifelong annuity at maturity. There are two main variants and a few relatively insignificant variants:
a1) The classic pension insurance
A contract variant, which makes no sense today because of the low interest on contributions.
Classic annuity contracts today only offer an average return of approx. 2,4% p.a. on the respective contract balance. Mind you, on what is contained in the contract in the year of interest; not on the sum of the contributions paid. The return on the premium paid goes so strongly in the direction of zero.
a2) Unit-linked pension insurance
The variant which, due to the separation of the insurance contract (guarantee of a lifelong pension) and the capital investment (in investment funds to be determined by the customer), offers a significantly better chance of return.
Unit-linked annuity contracts benefit from the yield opportunities of the capital market. The more equity-heavy the chosen funds of the policies are, the higher the expected return of the policies. After taking policy and fund costs into account, realistic net returns of 5% to 6% are possible here. We have a lot of fund annuities in the support, which are currently in this area.
b) Capital or. Investments
Here a freely available capital sum is available at the beginning of the annuity. How this capital is used from the start of the annuity can then be decided freely.
Thus, z.B. an investment depot to the age precaution lucrative net yields in height of 6% or more after costs show. For this, the portfolio does not even have to accept above-average risks. The longer the term or. The longer the planning period for these fund deposits, the more reliable the calculations. In this area, too, we have had client portfolios in our care for over 29 years, returns of 5-8% p.a. after costs show; depending on risk tolerance and despite all stock market turbulences.
c) Real estate
Here, too, there are basically two variants.
c1) The owner-occupied home (house or condominium):
Instead of having to spend pension income on rent payments, the rent saved on a debt-free home is to be valued like an annuity.
A return resp. Calculating the interest rate is difficult here. After all, a lot of money is tied up in the real estate quasi interest-free. The average increase in the value of the real estate can be used as a quasi-interest rate. The (omitted) rent increase, which would have to be applied to a rented property, could also be included in the yield calculation.
With a few exceptions (geographic locations) and on a long-term average, I would only expect a return for owner-occupied homes of ca. 2% p.a. calculate according to costs. It therefore at least compensates for inflation.
c2) The rented property:
The incoming net rent (less reserves) is an additional pension income; here, too, we assume freedom from debt at the start of the pension.
Here are clearly higher yields than with the owner-occupied home. Depending on the equity capital used, the rent increases, the tax incentives and the purchase price increases, yields of approx. 3 to 4% p.a. achieve. Under optimal conditions there are also sometimes objects with a net yield of 6%. Due to the long-term high debt burden, however, a high financial risk must be accepted in return.
Now it is unfortunately not so that we must select now only one of the product categories. The decision, with which variants from which of the categories the personal old age provision is to be built up, depends on the personal circumstances.
The following conditions play a decisive role:
– Occupational status (self-employed, freelancer, employee or civil servant)
– Income level
– Tax situation
– Risk tolerance
– Family status & children
– Figures from steps 1 to 3
Step 5 – Calculation of the necessary monthly investment
Before we turn to the question of what the current net income leaves to reach our pension goal, we should calculate how much would actually be needed to completely close the pension gap. This is the only way to determine whether we can close the gap immediately or whether several steps will be necessary – possibly at intervals.
Since all o.g. categories of the products under consideration for retirement provision entail different return corridors, it is almost impossible to use all categories at once. After all, our disposable budget (what is available from net income for retirement savings) is usually limited.
It therefore makes sense to first make a "best case" calculation. This calculates how much monthly savings would be needed to close the complete pension gap.
It should be clear that the higher the interest rate on our savings rate, the smaller the monthly savings amount may be. For this first overview, the calculation should therefore be made with a product variant that offers the highest possible chance of interest and the greatest possible flexibility.
I have chosen a mutual fund deposit for this purpose.
Specifications & basis for calculation
€ 500 mtl. Withdrawal from the 67. Years of life.
The withdrawal amount must correspond to today's purchasing power. Therefore, an inflation rate of 2% p.a. to consider.
The capital accumulated up to that point must be large enough to cover the withdrawal for at least. 30 years is guaranteed.
b) Yield until withdrawal:
With a term of 30 years until the start of the pension at the age of 67, the fund portfolio may have a higher risk (fluctuation range = volatility).
We calculate a return of 6% p.a. (after costs; before taxes).
c) Return from withdrawal:
Since the capital may no longer be exposed to large fluctuations in value from the time of withdrawal, a return of only 2% (inflation compensation) is calculated from the time of withdrawal onwards.
d) Question 1:
How high must the total capital in the fund deposit be in order to be able to withdraw € 500 per month (see a).
e) Question 2:
How high must the monthly savings rate be in order to reach the total capital (see b) & d).
In order to be able to make a monthly withdrawal of € 500 at the age of 67 based on today's purchasing power (inflation of 2% p.a. was taken into account) for 30 years, € 270 must be saved monthly from now on. Also in the savings plan until the start of the pension, the loss of purchasing power due to inflation was calculated at 2% p.a. takes into account.
Which retirement provision products would I now recommend to this example customer??
This is quickly answered in this case. As this customer already has a considerable entitlement from the statutory and company pension scheme and a savings rate of € 270 is possible with his net income, I would recommend an investment savings plan as a further building block. The o.g. figures make this product perfect for this example customer. He is not contractually bound. And he can flexibly change his savings rates if necessary.
If his income should increase significantly in the near future, thereby also increasing the amount of his desired pension provision, it is still possible to add another component in the form of a unit-linked pension insurance (z.B. as a tax-subsidized basic pension) must be added.
Until then, the example customer has the certainty that his desired pension target will be reached. This also answers the question of which retirement savings products are best for him.