A lifetime of hard work and still not enough in old age. Anyone who pays into the state pension fund today should have no illusions: In old age, you will quickly run out of money. Especially if you don’t make additional provisions. But the people are hesitant to do so. A recent study shows that one in six people is not saving anything for later. Among low-income earners, almost one in three has no private pension provision. Most Germans are aware that their pensions will not be enough. But when it comes to investing money, they prefer to stick to their savings books – instead of adopting the right strategies for old-age provision.
But when should you start saving? And: Is it even worth starting when you’re well into your 40s? Depending on your life situation and income, the next question is: How high do the monthly installments have to be so that you have enough to live on in old age?
Retirement savings and pensions: Start saving early
Everyone, who would like to have additional 1000-euro pension later, must save and reinvest his money to reach 300,000 euro at the beginning of the retirement to generate enough income (with an assumed interest of 4 per cent). How much this makes in monthly contributions depends on a whole list of factors. How much profit do you get? When do you want to retire? How old are you now? What is your Tax rate? And we should not ignore, this is only about 1000 euros of income. The calculation ignores the inflation, the changes in consumer expenses and additional costs in old age.
If you are making a plan for your retirement, you should consider how much you will need in old age and then how much money you can actually put aside each month. After all, your anticipated needs later on will no longer be as high as they were during your working years. Costs such as travel time to and from work will often no longer be incurred, mortgages on the house will have been largely paid off, and the children will usually be old enough to stand on their own two feet financially.
Therefore, as a rule of thumb, it can be assumed that about 80 percent of the last net salary is necessary to maintain the standard of living in retirement. But be careful: If you own a property, you may have to make expensive or age-related renovations after a few years. In addition, you will also incur costs for care and medication. Therefore, you should better assume 95 percent of your last net salary.
Retirement savings: How much aside each month?
But how much money should you set aside each month? Here, too, there is a simple rule of thumb that says you should set aside around ten to 15 percent of your net salary each month for your private pension. Of course, it’s better to put aside even more, or as much as you are able.
In general, it is therefore advisable to start saving as early as possible. If you only start putting money aside for private retirement provision at the age of 40 or later, in addition to the statutory pension, the amount must also be correspondingly higher. This is the only way to achieve the required assets by retirement age.
This applies to employees – but what about the self-employed? According to experts, they need to plan for more, while civil servants need to plan for less. In general, the above rule of thumb is only an initial guide that needs to be adjusted depending on individual life circumstances.
Recommended retirement savings and the average amount saved for retirement by age
While it always depends on the personal situation and your own goals and wishes, some general calculations can be helpful to develop a feeling how successful you are with your own endeavors. It is also a good way to learn how to make such plans on your own.
How to start a retirement plan at 30
According to a recent study, a 30-year-old earns 45,213 euros gross per year. This corresponds to a monthly net salary of 2368 euros. If today’s 30-year-old retires unmarried and childless at 67, he would receive a statutory pension of around 1570 euros gross per month. This means that he would be missing an average of 1000 euros per month to maintain his current standard of living in old age.
If he wanted to make up the difference to his net salary, the 30-year-old would have to put aside a total of 181,000 euros by the time he retires. With this sum, he could make up his pension gap for 15 years. Assuming a savings rate of 10 percent, the 30-year-old could still save around 128,000 euros. This means that a 30-year-old should already have around 53,000 euros in his account today if he wants to close the remaining gap to his current standard of living of 2368 euros per month.
How to invest for retirement at age 40
Anyone who is 40 years old should already have 109,000 euros set aside for retirement today, as the calculations show. The reason: On average, a 40-year-old in Germany currently earns 55,627 euros gross per year, or, 2791 euros net per month. However, because his statutory pension in old age will only be around 1919 euros gross per month, he will be missing out on an average of 1140 euros per month (net pension approximately between 1550 and 1660 euros).
With 15 years of pension payments, taking inflation into account, this results in a total of 206,000 euros of missing capital in old age. Since he can set aside money for his old-age provision for another 27 years, he still has a savings total of around 97,000 euros at ten percent of net income.
How to catch up on retirement savings in your 40’s
Of course, it is always better to be ahead with your savings. But it is not impossible for a 40-year-old to catch up! It will be necessary to include high income investments, like stocks and ETFs, into your own portfolio. An investment that requires careful due diligence and some knowledge. If you need help, it would be best to contact our experts for a thorough consultation.
And it goes without saying, that the monthly savings well have to be significant higher, compared to and early start. But it is not too late to do the right thing.
How to invest for retirement at age 50
At the age of 50, consumers should have significantly more money on the side if they want to maintain their standard of living in old age. Experts often assume a gross salary of 58,213 euros per year for the average 50-year-old in Germany, making an average of 2892 euros net. This results in a pension entitlement, at retirement age 67, of 2020 euros gross per month (net pension approximately between 1630 and 1750 euros). The prerequisites – he is single and childless – are the same as for the 30- and 40-year-old.
The result: For the 50-year-old today, there is a gap of 208,440 euros if he wants to maintain his standard of living of 2892 euros net monthly over 15 years in retirement. If he saves ten percent of his net income from now on, he will only manage to save 62,671 euros in the 17 years until retirement. Accordingly, a 50-year-old should already have saved 145,769 euros. Otherwise, he will have significantly less money available each month compared to his net earnings.
Starting retirement savings at 55
To be frank, with you start your retirement savings at the age of 55, you are already passed into the age where many others actually go into retirement. And unlike a 40-year-old, the timeframe is now too short to use high income investments like the stock market; such investments require some time to accumulate their profits and to overcome bad markets and fallen prices. The only possible option left, would be to invest huge contributions into the retirement plan and try to save enough in the last 12 years to get at least some pension.
A possible solution could be to take a Rürup pension and invest the maximal possible contribution: 25.639 Euro per year. Since this money is tax-deductible, it is easier to pay it, than to use a fully private pension. If done for 12 years, this will lead to a total sum of 300000 Euro. Which should be enough to finance an acceptable pension.
A warning at the End
However, to really determine the age shortfall, consumers should calculate more precisely. Individual additional income from company and private pension plans, for example, must be included. And possible cost savings in old age should also be included in the calculation. For example, because the house is finally paid off. Because if you don’t have to pay rent, you can save a lot of money.
Just keep two things in mind: It is better to start early than late; and better late than never.