Those who stop working usually have less money available than before. But limiting oneself at retirement age is often not an option. A calculation of the financial requirements creates an overview.
How much capital do I need to maintain my standard of living when I retire? This is a question many people who are about to retire ask themselves. And rarely has the answer been as difficult as it is now. The war in Ukraine, Corona, extremely low interest rates on savings, plus an inflation rate that is nipping at the money: These are factors with imponderable long-term consequences – also for pensioners’ finances. After all, there are a few rough guidelines for calculating how much money you will need in old age.
Financial expert Thomas Hentschel from the North Rhine-Westphalia consumer advice center in Düsseldorf describes one of these points as follows: “You should have as much money as possible on the high edge.” He banishes the thought of some pensioners to the realm of illusion that they can put something aside when they get old. “For most, it’s no longer about saving, it’s about de-saving.” The reason for this is the low interest rates. There is currently almost no profitable return for safe investments.
In addition, the statutory pension itself is to blame. Experience has shown that this is well below the level of earned income. “Pensioners should aim for a net income of 70 to 80 percent of their previous status in old age,” says Hentschel.
Professor Olaf Stotz from the Frankfurt School of Finance, who specializes in pensions, believes it is realistic for prospective retirees to only count on 60 percent of their last gross income. Because a growing part of the pension is taxable and social security contributions are due. That should be in the back of your mind when you look at the pension information if the number mentioned there seems promising: “It’s about gross amounts, less will end up in the account net,” says specialist book author Isabell Pohlmann, who wrote a guide for Stiftung Warentest.
On average, the monthly standard pension that can be drawn after 45 years of contributions is around EUR 1,500 gross. That sounds a lot at first. However, inflation, interest rates and rising rents must be taken into account.
A financial check can provide an approximate guide to the financial leeway. Which expenses are eliminated in old age, which are added? Will the second car be abolished? Is there another move coming up? Should the bathroom be remodeled or the home energetically renovated? Has the home loan been paid off? How does the contribution to private health insurance increase? Past lifestyle should also be considered. Anyone who has always liked to travel will also want to be on the road as a pensioner and need money for this.
The expected pension and the reserves are compared to the expenses for obligations and wishes. The calculation provides approximate information about how much capital is required to maintain the usual standard of living.
The Federal Statistical Office provides an online calculator on the Internet that consumers can use to determine their personal inflation rate. This is also useful for seniors. Because inflation in relation to individual consumer spending is more meaningful than the official average rate when determining the capital required for old age.
Life expectancy also matters. On average, people in Germany live to be 83 years old, and the trend is rising. This also extends the period of time for which the money should last. “There must be reserves for this phase of old age,” says Hentschel. This means that a monthly subsidy from the savings pot should be smaller from the start because the total amount may have to be stretched.
Life expectancy also plays a role when people over 50 want to invest money in retirement provision. One option is to put capital from a life insurance policy into compensation payments from the statutory pension fund in order to be able to retire earlier without deductions. In order to find out whether this investment is worthwhile, Pohlmann recommends extrapolating the deposits and withdrawals with the life expectancy. The first point of contact for this is the Deutsche Rentenversicherung.
When paying into additional, private pension insurance at the beginning of the old-age pension, it should be noted that there is currently little interest. On the other hand, the insurance companies generally assume a life expectancy of more than 90 years. “Those who die before then make a loss,” says Thomas Hentschel.
He advises flexibility with a kind of staircase model – i.e. only keeping the capital liquid for one year. The rest can be invested in the short term for one, two or three years. “In this way, it is possible to react promptly when interest rates rise,” says Hentschel.
Olaf Stotz begins his considerations with the times of professional activity and recommends creating additional capital for old age very early on with company pension schemes, share and real estate savings plans and home ownership. A free online tool developed at the Frankfurt School of Finance can help consumers calculate the assets and savings they need to secure their standard of living in old age.
(This article was first published on Tuesday, May 10, 2022.)
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