Learn more about closing your pension gap
The public pension you can get in Germany is higher than in many other countries. Nonetheless, while it is a solid basis for those who worked and contributed most of their life, it won’t be enough to maintain your standard of living in old age.
The shortfall is especially large if you did not contribute for a longer period, or if your income increased substantially, and your pension is hence in part based on the lower income you used to have, and less so on your current high income.
It is also very relevant to know that the public pension is a so-called pay-as-you-go system. This means that the contributions you pay into the pension fund today are used to pay the monthly pension of current pensioners. Your pension will therefore be paid by future generations. However, as there are many baby boomers that will retire in the coming years, fewer young people have to pay for more retirees.
Based on our funding and demographic analysis we expect that the public pensions will just keep up with inflation, but no more than that. That is another reason why you will need supplementary components for a decent pension. Do you want to calculate whether you too will have a pension gap at retirement? Our pension calculator gives you a preview.
The term "pension gap" refers to the difference between your pension income and your needs to maintain your standard of living in old age. Traditionally, many people in Germany rely on the public pension. However, this is usually significantly lower than the last net income before retirement.
For example, if you retire as a salaried employee in Germany at the age of 67 after 45 years of employment and your last monthly gross income was 6.000 €, you will receive a public pension of around 2.130 €.
If there is no further income from a private pension, renting of real estate or other, the difference with your last net income as an employed person is 1.480 Euro. It is usually assumed that you will need less money in retirement as you no longer need to save for your retirement and the tax regime can be different.
Therefore, let's consider that 80% of your last net income will be enough to maintain your accustomed standard of living. In our example calculation, the difference is then still 760 €. This amount is the pension gap. In Pensionfriend's Pension gap calculator (soon to come) you can see exactly how big the gap is, and how you can close your gap.
At Pensionfriend, we have made it our mission to build up a private pension plan and close this gap, for example with private pension insurance or real estate.
Pensionfriend is your 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 plan. 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 underlying stock basket. We also applied 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.
You can find out more about all the various solutions (and their pros and cons) in the German retirement system here.
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, 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 benefits, as this is the only way to measure and compare the impact of the various costs and benefits.
With the Pensionfriend pension plan, you can start with a one-time investment or with a monthly or quarterly savings plan. We are looking for a minimum commitment, and your capability to save this much given your income.
Our webinars and software are free. We do have an expected minimum for a consultation. Currently, the minimum is 10.000 € or 200 € per month. This is necessary to keep our costs low. Our system is designed around self-service, so you can go really far, and if you want all the way, without any consultation.
Do start with calculating your pension gap online and what numbers are relevant for you. If needed our experts can then help you with the evaluation and next steps.
How much you should invest in your savings 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.
A promise for a certain growth rate is simply not possible, but we can share with you what the longest time series in the world tell us in an unbiased way, what outlook is in line with insights from the economic profession, and what is "belony".
Fundamentally a representative mix of stocks will grow in line with the economy over the long haul. That means the return is on the order of 6-7 % (nominal GDP growth plus dividend yield or buybacks). You can outperform in a sustained way if the economy or business you focus on is more innovative. Our ETF mix historically beats the MSCI World benchmark by about 2 % as it focuses on small (and more innovative companies) and on the more innovative economies in the world with a stable investment environment.
In addition, there is always a certain volatility risk when investing in equities. However, over an investment period of XX years, ETFs have historically always delivered gains, making them a safer investment than annuities with guarantees, which unfortunately often only guarantee high costs and minimal returns.
Our cost structure is very simple and transparent: we charge you 0,8 % of your portfolio annually. That's all. No hidden service fees, no closing costs, no rising costs as your portfolio grows.
Compared to ETFs you buy through a broker you have three major benefits:
A tax efficient structure where you only pay capital gains tax once at the end at a reduced rate, instead of every year. This saves the average user 0,6 to 0,8 % per year over a 30-year period.
We rebalance for you, so you don't have to be bothered. Moreover, our algorithms can add about 0,1 to 0,2 % per year.
We pick ETFs that cost less and even earn some side fees that get reflected in an extra appreciation. This saves the typical user 0,2 to 0,4 % annually over the medium-term.
Compared to other Private pension plans, a huge benefit is that you have no large upfront fees. This means you have flexibility. Moreover, we work with the lowest cost insurance companies to bring you these offers. And don't be mistaken: higher cost does not mean better returns. Higher cost insurance companies just have higher profits and advertising budgets. The underlying risk is exactly the same. With Pensionfriend, you can choose out of 500 ETFs, but we recommend our Pensionfriend ETF mix, which outperforms benchmarks like the MSCI World and S&P 500 in unbiased data trials and in line with fundamental economic logic.
The tax benefit of a private pension plan with Pensionfriend is that:
You pay capital gain tax only once, as the Private Pension Plan functions as a tax wrapper namely when you take out the money. If you would instead have an ETF portfolio with a broker, you pay tax every year on the gains beyond the threshold. The big drawback of that is that the tax you paid is no longer invested and no longer earns money for you.
You pay just half the capital gains tax if you take the money out after age 62 in a lump sum.
Keep in mind that the capital gains tax rate is much lower than the income tax rate for most people. This, in combination with the absence of limits on investment, make this solution attractive compared to other plans.
Our pension team is passionate, dedicated, and world-class focused on all aspects of the pension decision, to help you plan for a safe and sound financial future. Our most significant advantage is that we understand investments.
Dr. Chris Mulder was head of public investment advisory at the World Bank and knows how to separate the chaff from the wheat. Our advice is based on unbiased data, unlike virtually every other investment advisory.
Our team of economists, insurance, legal, and finance experts have dissected the unprecedentedly complex German pension and tax system so that we have the exact formulas that are needed to calculate taxes and benefits to the cent. The Pensionfriend team is moreover supported by a brilliant team of software engineers and product managers. This allows us to bring you calculators others can only dream of. This way you can calculate for yourself how your future looks. In sum you have finance, tax, pension and calculation experts all at your service, so you can already in minutes review your basic situation and then take your time to go over different scenarios to help you build a safe and sound financial future.
Yes, it absolutely makes sense, as you can take your Pensionfriend private pension plan to any country and continue saving from there. Paying out in other countries is also no problem. You only lose the tax advantages if you no longer live in Germany. However, you continue to benefit from the Pensionfriend ETF Mix, which historically outperforms the MSCI World by about 2% per year.
If you move out of Germany and do not want to take your Pensionfriend private pension plan with you, you can of course cancel it at any time.
You can cancel your Pensionfriend private pension plan at any time. We will then transfer the capital that you have saved in your portfolio up to the time of your termination. You will not be charged any additional costs, except for a 0,15 % translation fee on any ETF sales. You can also adjust your plan at any time with additional contributions. Effectively what we aim for is to give you the benefits of an ETF savings strategy with the tax advantages of a private pension insurance, at the lowest feasible cost.
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. 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. 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. In addition, for some people, an own home is ideal as it gives safety and the freedom of change. At the same time, it is not for everyone.
You own a property? Congratulations, you have already set the foundation for your retirement. In many cases, however, this is not enough to close the pension gap. If you live in your property yourself, you will save on rent, but that will probably not be enough, as you will still have other expenses, that may not be covered by other pensions you are entitled to
The same applies to a property you rent out: you have a steady income from the rental payments, but still have to pay your own rent and the running costs for the property.
Use our pension gap calculator to evaluate your personal situation.
There are indeed some forms of company pension plans that are attractive. These are the ones where only your employer contributes or where the assets are invested through a company or industry pension fund.
However, these forms only exist in rare places; in the vast majority of cases, company pension plans are so-called direct insurance policies nowadays. And those are anything but suitable for closing your pension gap.
The main disadvantages include
High up front and ongoing acquisition and administration costs
Very low returns due to limits on how your contributions are invested
You pay for the tax advantages in the savings phase back through taxation of the pensions you receive in retirement.
When you change your job, the tax advantages also fall away: your upfront costs are lost if you stop the program, in the limited cases you can, and if you continue it is basically dead money with zero return at current interest rates.
You can read more about this in our article Why company pension schemes via direct insurance do not make sense.
Our conclusion is quite clear: In most cases by far, a company pension plan is not a beneficial investment and not suitable to provide for a financially secure retirement. Use our Pension Gap Calculator to find out which investment makes more sense for you.
ETFs are a wonderful invention to buy in one go a basket of stocks, that give you the benefit of diversification, at a low annual cost.
You can for example use "Exchange-Traded Funds" to track indices, such as the S&P 500, which contains shares of 500 of the largest US companies. So when you buy a S&P 500 ETF, you're investing in not only one company but all 500 companies listed in the S&P 500. This way you spread your risk.
ETFs are available for all kinds of stock indices, for example, the EURO STOXX 50, which contains the largest companies in the eurozone, or the MSCI Emerging Markets Index, which tracks the performance of nearly 1.400 companies from 24 emerging countries.
ETFs are not free and do not track the underlying stock baskets or indices perfectly. This leads to a so-called "tracking difference". You will be shocked to find out how costly some ETFs are, and pleased if you would see the positive tracking difference some ETFs are able to generate.
The most important decision you need to make is the index or basket of stocks that you want to track. Next comes the ETF that tracks this basket.
In choosing among thousands of ETFs you also have to watch out for all kinds of unsavory ETFs with high fees, and odd baskets of stocks.
At Pensionfriend we focus on data and cost. Our aim is to find those ETFs that replicate our preferred stock indices with the best tracking difference and cost combination. For the Stoxx 50 index, this can save you over 0,5 % per year.
To select the preferred stock indices, we compare their performance using the longest unbiased data series available, which spans over 150 years and across many business cycles and crises. This way we understand the relative performance and risk much better.
The high performance of the well-known MSCI world index has a lot to do with the starting date that included a huge upswing in the Japanese stock market, which however going forward is underperforming due among others to aging and lower agility of the Japanese economy.
It's true, with direct investment in ETFs, the ongoing costs of mostly 0,2-0,5 % are even lower than with our Pensionfriend pension plan.
If you invest for the short term that is fine. But for longer-term investments, we really recommend a different approach. A Private Pension Plan gives you the advantage of saving the full capital gains tax every time you rebalance and paying only half the capital gains tax when you withdraw your capital in retirement.
If you change your portfolio more than 10 % per year, and hold the funds till 62, the tax advantages alone support a private pension solution, compared to a zero-cost stock broker. Here you can calculate the tax impact for your situation.
In addition, Pensionfriend's Pension Plan gives you the benefit of low-cost ETFs, ETFs with positive tracking difference, a superior ETF mix, and automatic rebalancing for a no-headache additional return.
