When you put money aside for your retirement, you need to invest that money somewhere. Btw: With the help of a good advisor, you get massive tax breaks doing that. The problem with many traditional „investments“ such as bonds, gold, and savings accounts, is that the interest is very low. In absolute numbers, there are historically positive returns, but when deducting inflation, the returns may not be enough or even negative growth, which is a huge problem for your retirement planning.
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You need a high return
For example, let’s say you are 33 years old and a little late to start planning for your retirement. You make 60k a year, which is 3k a month after taxes and social fees, and you want to maintain the same standard of living when you retire. We calculate with 2% inflation, which is an optimistic scenario.
Guess what you need to put aside monthly to fill that gap when you invest in low-yielding assets that give you around 3–4% appreciation a year: You would have to put aside over 1.000€ a month to fill your pension gap.
When you calculate the same scenario with the historical worst-case return over 35 years in a broadly diversified stock fund, that is 7% interest, the amount you have to save to fill your pension gap cuts itself in half, 500€.
When you calculate with the average of 9% now, it is only 350€ you have to put aside.
This shows that over time, funds are much better to invest in for your retirement compared to low-yielding assets.
Are funds really save?
One question that is commonly asked is whether funds are safe and what the worst-case scenario is. Of course, nobody can look into the future, the best we can do is to look as far into history as possible. As seen in the following graph, historically, when you save monthly into broadly diversified funds and hold them over 15 years, you always had a profit, even in the worst-case scenarios. When you look at the worst-case scenarios for 30 and 35 years, that’s 7% interest in the worst-case and 9% on average, which is great for saving for your retirement. As long as there is innovation and a world’s economy, fund investing will always work long-term.
In summary, when you have enough time, funds are the way to go to save for your retirement. Of course we will advise you towards what funds to choose and also how to get massive tax breaks from the government to achieve your retirement goals.
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