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Seven steps to saving for retirement — how women can save on a small budget

When money is tight in everyday life, saving for retirement seems impossible. Yet even women on a tight budget can build up retirement savings. Get started on your financial independence with these seven steps.

Providing for old age in seven steps

Dragica Mischler Member of the Board of Management of Sparkassen-Versicherung Sachsen

According to the latest wealth barometer, one in ten women in Germany says she is not financially able to secure her future. Yet building up a private pension is by no means only feasible for people who can raise large sums. With good planning, you can set aside money for your retirement even on a tight budget. With these seven steps, you’ll be well on your way to financial independence.

1. take responsibility for your retirement planning.

Often, the needs of today seem more pressing than those that the distant future will bring. Whether you’re a single mother or a low-income earner, if you have to turn over every euro several times, you don’t think first about life in retirement. But for many women, the statutory pension will not be enough to live on in old age. Single women in particular are at risk of old-age poverty.

But even women in a relationship should not rely on their partner to pay for their living expenses later on. Dragica Mischler, member of the Board of Management at Sparkassen-Versicherung Sachsen, explains the hard facts: «As things stand at present, the pension level of the statutory pension insurance scheme will be 44 percent in 2030. This means that more than half of the previous income will be missing in old age.»

Those who make private provisions are on the safe side — no matter what turn life takes.

2. How would you like to live in old age?

Think very specifically about what you would like to be able to afford in old age. Do you want to do a lot, go out to a restaurant or finally take dancing lessons? The money from the statutory pension insurance will probably not be enough for this. If you imagine your retirement in your mind’s eye, you will know what it is worth saving for.

Most people need a little less money in old age than they did before, but for a longer period than they expect. Pension experts refer to this as longevity risk. «Statistically, this risk is higher for women,» Mischler explains. «And it continues to increase as life expectancy gets longer.»

3. Leverage your savings potential.

If you want to put money aside, you should know what amount you can afford to put away each month. Only those who have higher income than expenses can save something. The free budget book from the advisory service Money and Household helps you to gain an overview of your financial situation.

If you want to know where you can possibly save, the so-called reference budgets will help you. Here you can compare your expenditures with other households in a similar situation and thereby critically examine your own expenditures. In this way, you may find one or two new opportunities to save that you were not aware of before.

The goal should be to set aside ten percent of your gross income for retirement. But the rule is: small sums are better than nothing. Korina Dörr, head of the Money and Budget advisory service, says, «Even small amounts help if you start as early as possible and take advantage of government subsidies. Even with minimal interest, savings amounts add up over time.»

Dragica Mischler adds, «The secret is compound interest, which means that the annual returns are reinvested and you then benefit from higher performance. The longer the period of time money is set aside, the higher the returns.»

4. Let the state and employer help you save.

The state and many companies encourage company and private pension plans. Take advantage of the support and take advantage of all the allowances!

«Women with small and medium incomes and mothers benefit most from the Riester pension,» says Mischler. «The advantage is that the state allowances allow assets to grow in addition to earnings.»

The basic allowance is 175 euros per year — the prerequisite is that four percent of gross income is paid into a riester-eligible savings contract each year. In addition, 185 euros are paid for each child born up to the end of 2007 and 300 euros for each child born from 2008 onwards.

«Those who earn little or nothing can receive the full state subsidy from a contribution of just 60 euros per year,» explains Dragica Mischler. Married women who are not in an employment relationship subject to compulsory insurance can «co-tribute» via their spouse and collect the full allowance. For this, too, only 60 euros per year are due.

Of interest to women in permanent employment: Every employee has a legal right to deferred compensation. This means that you can demand from your boss that parts of your salary be paid into the company pension scheme. An important advantage for you: the contributions are tax-free up to eight percent of the contribution assessment ceiling, and free of social security contributions up to four percent. So in 2018, a monthly savings amount of up to 520 euros remains tax-free, and no social security contributions have to be paid on 260 euros.

Some companies are already adding something to the company pension today. For contracts from 2019, all companies will have to pay at least 15 percent of the deferred compensation as a subsidy. From 2022, this will even apply to all existing contracts.

Around 94 percent of all employees are also entitled to capital-forming benefits, or VL for short. Here, the employer pays up to 40 euros extra as a monthly savings amount directly into a specific financial investment. You can also put this money into your retirement savings.

If you remain within certain income limits, you also receive state subsidies: the employee savings allowance and the housing subsidy.

You can find an overview of all the variants of subsidized old-age provision in the guidebook «Saving for later» from the Money and Household advisory service.

5 Combine flexible forms of saving

Never put all your money into one investment. Instead, opt for a mix of different forms of savings. Since you are setting aside money over a very long period of time, these forms of provision should also be as flexible as possible. Your income and life situation will certainly change several times over the years, and the contracts should then be able to be modified to fit the new situation.

With a Riester contract, for example, you can reduce the installments to a minimum of 60 euros a year in an emergency. The saved assets are also «Hartz IV-proof».

6 Set up a standing order

Waiting to see if there will be enough money left over at the end of the month for retirement is not a promising strategy. It’s better to take out a flexible pension contract with monthly payments or set up a standing order so that a fixed sum is paid into your savings account as soon as your salary is received. The motto here is: Out of sight, out of mind! This way, you won’t be tempted to spend the money elsewhere, and you’ll quickly feel a sense of achievement as the financial cushion for your retirement grows bit by bit.

Another automation that makes sense: Apply for a permanent allowance through your Riester provider. This saves you having to fill out a new subsidy application every year.

7 Don’t change strategies too often

Every cancellation and every new contract costs money. This eats up the return on investment. Take time for your personal strategy and stick to it. Our experienced financial advisors will be happy to help you develop the retirement savings strategy that best fits your life situation and budget. This service is free of charge so that all savers can take advantage of qualified advice, regardless of their financial means.