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What is the most effective way to save for retirement?

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. 

Eine Grafik mit der Versorgungslücke zwischen Arbeit jetzt und in Rente, unter Berücksichtigung der Inflation.

 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.

Eine Darstellung der benötigten Sparraten um die Versorgungslücke in der Rente zu schließen, in Abhängigkeit der Startzeit,

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€.

Eine Darstellung der benötigten Sparraten um die Versorgungslücke in der Rente zu schließen, in Abhängigkeit der Startzeit,

When you calculate with the average of 9% now, it is only 350€ you have to put aside.

Eine Darstellung der benötigten Sparraten um die Versorgungslücke in der Rente zu schließen, in Abhängigkeit der Startzeit,

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.

Rollierende Rendite des MSCI World von 1970 bis 2016 für verschiedene Anlege-Zeiträume

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.

About the Author

David Reinhard Profilbild

David Reinhard

Senior Consultant 
David is our expert for English-speaking customers as well as US citizens. He helps customers un­der­stand and make the best use of the German system. 

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