How much money you need in old age and how to provide for it efficiently

What we’re looking for: a comfortable retirement. Lean back and know that you are well provided for: That’s what most people want. But many of us find it difficult to tackle our own retirement planning. We show you how.

Illustration: Woman sees trees growing as a symbol of her wealth

If you want to invest your money for the long term, things currently look bleak. There will be no significant interest in the coming years. Those who put their money into savings accounts, call money and fixed-term deposits must even expect to lose money. Those who nevertheless generate a surplus will face inflation.

The solution, however, cannot be to spend one’s money as quickly as possible. Rather, it is important to switch to high-yield products. If you want to save wisely, you can’t avoid funds. Saving for retirement, in particular, is hardly possible without stocks, bonds or funds.

Securities should therefore form part of private pension provision. Investment funds are the easiest way to distribute invested money among many shares and companies.

But funds are also not a matter that can be settled by small talk. For many people, thoughts of stocks still trigger diffuse fears about stock market crashes and government bankruptcies. How do you do it right?

First step: calculate how much money you will need in old age

We need 80 percent of our last salary to be able to live well in old age. That’s the rule of thumb. People who retire usually spend their money a little differently than before. Most people will have paid off their house by then, their children will be financially on their own two feet and expenses for their job will no longer be necessary.

One thing is certain: Your expected pension will not be nearly as high as your earnings. Not even if you work continuously. Even today, the average statutory pension is just 44.7 percent of your last gross salary.

Example: Assume you earn 2,500 euros a month. In order to maintain your standard of living in old age, it is recommended that you invest around 80 percent of your net income. In our example, this is 2,000 euros. However, the regular pension payments you can count on are only 1,117.50 euros.

If you are lucky, you will also receive a company pension. On average, the pension level of company pensions is 4.6 percent of the last basic salary, according to the German Institute for Retirement Provision.

This means that at the end of the day, you still have around 30 percent of your last salary left to save for your old age. In our example, this corresponds to a private additional pension of 750 euros per month.

Second step: Check your time horizon and plan for the long term

Calculation example of fund savings: This is the effect of the return on regular savings

The good news is: you have plenty of time. The bad: You should start early. Don’t put off saving for funds for decades. It’s best to invest your money not just ten years, but 20 to 30 years before you retire. Only then will the compound interest effect really take effect.

With investment funds, you leave all other forms of savings behind. Funds have one great strength: their risk of loss is low. Although there are risks of fluctuation, the longer you hold the stock market securities, the lower the risk of loss. After 15 years, it tends toward zero, as the VZ Vermögenszentrum has determined.

Even small amounts saved regularly in shares pay off in the long term — without having to take excessive risks. Since the start of the German share index in 1988, a savings plan has generated an annual return of almost 8 percent on the money invested.

So anyone who saved 50 euros a month — a total of 18,000 euros — in Dax shares for 30 years can now look forward to assets of just under 70,000 euros. This sum is enough, for example, to receive a monthly extra pension of almost 300 euros for 20 years — small investment, big effect.

Please note: Past performance is not a reliable indicator of future performance. No one can guarantee that these above-average returns from the past will be repeated like this in the future. But compared to safe zero percent with many other forms of savings, saving with shares becomes an interesting alternative.

How you make provisions is ultimately up to you. However, it is advisable to start by checking out the state-subsidized forms of pension provision. For example, if you opt for a Riester pension with funds, the state will give you additional money. In the case of a company pension plan, your employer will contribute to your pension.

Third step: Clarify your budget and save monthly

You can invest in practically all funds from as little as 25 euros a month. So even for younger people who are at the beginning of their professional career and do not yet earn so much, there are entry opportunities.

Of course, funds are also subject to market risks. However, these are significantly lower than when buying a single share. Investors do not buy just one or two shares — as is the case with traditional stock purchases — and thus become dependent on the success of individual companies. Instead, he chooses a large portfolio of many shares of companies from different industries.

Illustration: A fund consists of many shares

Conservative stock investors can diversify their holdings worldwide. And so, when prices are weak, it is also possible to buy at a low price. If prices plummet and this has a short-term impact on your own fund, you have to keep your nerve: Keep your nerve. Such lean periods are cushioned by the long term and by the step-by-step payment.

If you are already a little further along and have reached the end of your fund savings plan, you do not necessarily have to sell all your equity funds when you retire. If market prices are not favorable for their fund package at the moment, they can keep the funds.

Income from rising prices then flows into the living expenses in addition to the statutory pension, other private pension models or a company pension. The equity component, on the other hand, is reduced in small steps over the years. The proceeds from this are then also available for living expenses.

In the run-up to retirement, there are also plenty of opportunities to shift your own fund into lower-volatility investments and bonds. Or you can have this done automatically and usually free of charge by a suitable fund savings model.

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