Calculate your pension gap

Pensionfriend is your digital companion and advisor on the way to a financially safe and sound future. We help you evaluate your individual pension needs and the best solution to get to a solid pension. 

Germany's pension system is immensely complex. We have therefore made it our job to understand it better than anyone. And we want to use those insights to help you navigate the system and get the best solutions.

In Germany, for nearly all, the best way to supplement your pension, with current interest rates, is through real estate or with a private pension insurance. Pensionfriend has therefore focussed on finding a low-cost solution to offer a private pension plan.

Our Pensionfriend Pension Plan is an ETF-based private pension insurance. In addition to low cost, we have focussed on finding ETFs that outperform the best standard stock index. We apply unbiased data methods and fundamental economic and financial insights to select among 500 ETFs, a superior ETF mix, which outperforms the MSCI World index by 2 %. And finally, you don't need to worry about rebalancing your portfolio, our algorithms take care of that for you and eke out yet some further extra return.

In our article How do pensions work in Germany? you can learn more about the various solutions (and their pros and cons).

In a nutshell, the reason why most alternatives do not work is that they de facto limit the investment to products with 0-2 % return before cost, have disproportionate costs (1,5-4 %), and or have a sizable drag in the retirement phase as assets are no longer invested. We quantify exactly the after-tax benefits of each product, as this is the only way to measure and compare the impact of the various costs and benefits.

How much you should invest in your pension plan each month depends primarily on your pension ambitions. When to retire and how comfortably. Our calculator translates that, together with life expectations, into a pension gap and shows the impact of different options on the amount you then need to invest. 

Especially if you choose an investment property or own home your initial investment will need to be of a minimum size. We show you how much, and you can evaluate if those options are so attractive that you will save for several years and then go for these choices. 

The calculation of your pension gap for us, therefore, is always the starting point of any consultation. You can use our Pension Gap Calculator to find out for yourself how large the gap between your existing pension plans and your needs to maintain your standard of living is.

In principle yes, owning a property is good for your retirement, but you do need to check the numbers.

Basically, there are two types of real estate ownership: owner-occupied residential property or rented investment property.

Both can contribute to a financially secure future. 

• A home that you live in yourself saves you on monthly rent payments till the end of time. This is a big benefit as rents normally increase every year, and it is hard to find an investment that offsets this other than real estate. For e.g. stocks are volatile and annuities come with huge implicit costs. Moreover, you can bequeath your use or use it for loans.

• With a property that you rent out, you can benefit from a stable and growing income, especially once your mortgage is paid off. You can also sell it or borrow against it for further investments.

But you need to keep in mind that a house or apartment must be maintained, and renters need to be found if it is an investment. 

All in all, real estate is often a very useful component of a good retirement plan, but how useful it is depends on the interest rates for mortgages and the rental yield. In addition, for some people, owning their home is ideal as it gives safety and the freedom of change. At the same time, it is not for everyone. We suggest you use our Pension Gap Calculator to discover how big your pension gap will be and find out what is the best solution for you to close it. 

It is really not a good idea to plan for your retirement without taking into account your housing situation, as this is such a major part of your budget. Housing also does not behave like normal spending as house prices tend to increase faster than inflation, and the price of your own home is not straightforward to calculate--you have to reflect mortgage payments, the savings part of the mortgage, maintenance, etc.

To include housing, we do need to make all your key choices numerically comparable. Otherwise, it becomes like comparing g apples with pears. We do so as follows:

For your own home, we assume that you live there until the end of time. We assume that you pay off your mortgage at retirement if you have not given us the repayment schedule. We assume that interest rates remain unchanged, and that maintenance costs 0.75% annually. We assume that you spend a constant percent of your income on non-housing expenses. So your mortgage payments stay the same you will run a surplus compared to a renter. We assume that this surplus is invested in a pension plan. Likewise, if you buy an investment home, you will start running surpluses as the rental revenue increases, and this we assume is invested in a PPP. We assume that you sell the rental property at age 72 when most people no longer feel like managing a property. We assume that you invest the proceeds in a pension plan. For any pension plan investment, we assume an expected return of 6%. We assume that you de-risk 15 years before your expected end of life (as stocks have a risk of a decline over shorter periods), and then invest such that your return is equal to inflation (2%). We do provide for a 10% best and worse case scenario, The 6 % is historically conservative, economically feasible, and less than what we expect for our Pensionfriend Pension Plan with recommended ETF composition.

So as a homeowner, you have at the end of your life a large valuable asset, but we assume you cannot do much with it. In reality, we do hope and envisage that also in Germany markets will develop where you can sell your home, predicated on the condition that you can live there till you die for free. But for now, as these markets are really non-existing, we treat the house only as a means to live rent-free. This does imply that if you buy a large home you will not really gain anything from a pension perspective, and actually incur slightly larger maintenance costs.  We also do not make the assumption that you buy longevity insurance, i.e. insurance that you are paid your PPP till the end of your life. Our assumption of de-risking provides a buffer for longevity risk. And whether you need to buy such insurance is a complex decision. Buying longevity insurance is a decision you will need to make at retirement and in conjunction with your retirement decision. The public pension (GRV) and having an own (or investment) home can give you quite a bit of longevity protection. If you have ample assets in your pension plan you can keep investing these and manage the assets such that you have ample left no matter the age you die, in other words in this case you do not need costly longevity insurance either. However, if you retire with modest assets and no own home, or a modest public pension, you will need such longevity insurance. Currently, such insurance is very expensive as interest rates are low. If this remains the case, and you need such insurance, you will need to work longer, until your pension with longevity insurance is enough to retire with confidence or scale down your expenditure ambitions during your retired life. Life is full of uncertainties. Investment risk is in our calculation the largest risk and opportunity. Therefore we stress the importance of realistic numbers in this regard. Your main option to change your retirement income and deal with investment risk is to be a bit flexible and pragmatic with your retirement age. If you take risks, you are most likely (and in many cases almost certainly) going to be able to retire earlier than if you do not take risks. Your second main option is your savings rate. You can adjust this over time to add more to your retirement cushion or less. Our calculator should help you make that decision, not with perfect but with a reasonable range of accuracy.