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  • Collin Brennan

The Cost of Delaying Retirement Contributions

Updated: Jun 20

The impulse to delay saving for retirement is strong — especially when you’re young and know that any retirement contribution you make now is money you won’t see for another three to four decades. But far from kissing your hard-earned money goodbye, contributing to a private pension or other tax-efficient savings vehicles can be the best gift you ever give yourself. 

Unfortunately, we’ve met plenty of expats in Germany who don’t heed this advice. Usually, this isn’t because they don’t care about their future. On the contrary, they believe they’re already saving for retirement by contributing to the German state pension (Gesetzliche Rentenversicherung). While it’s true that all employees in Germany contribute to the state pension, this belies a much harder truth: state pension benefits will almost certainly not be enough to cover what most people need in retirement. 

Without some kind of supplemental income, future retirees will ride off into a sunset marked by financial shortages and a decreased standard of living. The good news — at least for now — is that time is still on your side. And the earlier you save, the better shape you’ll be in. In this guide, we’ll reveal both the costs of delaying retirement contributions and the long-lasting power of money saved today.

  • Why state benefits won’t be enough for most retirees

  • Why earlier retirement contributions carry more weight 

  • How much do you need to retire?

  • The cost of delaying retirement contributions: A case study

  • Start saving for your retirement today with LeX-Wealth 

Why state benefits won’t be enough for most retirees

To understand why state benefits likely won’t be enough to support your standard of living in retirement, let’s review a bit of history. 

Germany was actually the first nation in the world to adopt a state-funded social insurance program when Otto von Bismarck introduced the concept in 1889. Bismarck initially set the retirement age at 70, though this was lowered to 65 in 1916. Fast-forward more than 100 years, and the retirement age has risen only slightly. If you retire after the year 2031, you will begin to receive your qualified pension payments when you turn 67. 

While the retirement age in Germany has stayed more or less static in the last century, life expectancy has ballooned. This means that more and more people rely on pension payouts for their income in old age — and they’re doing so for a longer period of time. All of these pensioners exact an immense toll on the state pension system, which was admirable at the time of its conception, but now appears to be fundamentally flawed.

It’s clear that the average worker in Germany can no longer expect to rely on the state-managed pension system to cover all of their retirement needs. This is perhaps doubly true for expats, many of whom move to Germany later in life and thus have fewer years to collect the pension points that lead to higher payouts in retirement.   

All of this means that you’ll need to rely on other means to supplement your retirement income. A private pension plan can be a great start — and the sooner you start saving, the more impressive your returns will be down the line.

Why earlier retirement contributions carry more weight

You may roll your eyes at age-old adages like, “The sooner you start saving, the easier it will be,” or, “Doing something is better than doing nothing.” Full disclosure: We love this advice, and we say things like this to our clients all the time (simple advice is often the best). But it always helps to see the real, concrete numbers behind these relatively simple catchphrases.

Which brings us to the most powerful force in the world. No, we’re not talking about gravity or nuclear energy — we’re talking about compound interest. This is a truly magical concept, and it will be your best friend if you let it. Compound interest allows you to earn interest not only on the money you’ve invested, but also on the interest you’ve already earned on your initial investment. 

Let’s use a simple example to illustrate how it works:

  • You invest €1,000 in a private pension. We assume that this initial investment will grow by 6% annually, which is roughly in line with historic market averages.

  • By the end of Year 1, your initial investment will be worth €1,060.

  • If we assume the same rate of growth in Year 2, we are no longer talking about 6% of €1,000 (€60) — instead we’re talking about 6% of €1,060 (about €64).

  • This is where the magic happens. If we assume the same rate of growth, by Year 30 your investment will have grown to nearly €5,750. That’s an increase of 475%!

So, compound interest is one of the most powerful concepts working for you in terms of saving for retirement. But the same is true on the flip side. The longer your money has to compound, the more powerful the effect of compound interest. In the above example, most of the growth actually comes at the tail end. Whereas the initial investment only earns €60 from Year 0 to Year 1, it earns more than €300 from Year 29 to Year 30!

How much do you need to retire?

It’s difficult to say exactly how much you’ll need to retire, as different people can expect to have different expenses and different standards of living in old age. One way to determine how much you may need is to work with a qualified financial advisor, who can help you examine your total annual expenses today and account for the ways these expenses might change come retirement.

Retirement often comes with additional monthly financial costs, which the state pension alone will likely not cover. Some of these costs may be considered essential (medical, housing, etc.). Others may have to do with maintaining or even increasing your overall quality of life in retirement (travelling, healthier foods, gym memberships, etc.). 

Be realistic about your current standard of living and what you expect out of your retirement. As a general rule, it’s very easy to increase your standard of living, but very, very difficult to go back. For example, if you start regularly shopping at an expensive organic supermarket and spending more on a gym membership with a pool and sauna, chances are that you’ll become accustomed to this improved lifestyle and struggle to cut back (especially if there are health benefits).

Unfortunately, being forced to cut back is one of the hidden costs of delaying your retirement contributions. If you start now and contribute as much as you can without significantly affecting your current standard of living, you’ll be in better shape for the future.

The cost of delaying retirement contributions: A case study

We’ve already illustrated the power of compound interest. Now, let’s see what it can look like in a real-life scenario, starring a fictional couple named Mark and Sarah.

Mark and Sarah are each 40 years old and have decided that they will require €3,500 per month to supplement their state pensions in retirement. Working with their LeX-Wealth advisor, they have determined that they will need €1,720,000 saved by the time they are 65 to produce this level of income.

If Mark and Sarah were to start saving entirely in cash deposited into a shared bank account, they would need to save €5,742 per month to reach their goal. That’s an intimidating number — but what would they need if they invested in a private pension plan instead?

Much less, thanks to the power of time and compound interest. Assuming an average of 6% net growth in their investments per year, Mark and Sarah would only need to save €2,486 per month to hit their goal. That’s less than half the amount they’d need if they saved cash in the bank!

Starting early also benefits Mark and Sarah. If they start investing €2,486 per month at the age of 50, their assets would only grow to €745,800 — a shortfall of nearly €1,000,000. If you wanted an eye-popping number to help you visualise the cost of delaying your retirement contributions, now you have it!

But what if Mark and Sarah started saving even earlier, at age 30? Time would be even more on their side, and they would only need to contribute an estimated €1,209 per month to meet their goal. The moral of the story? The sooner you start, the better.

Start saving for your future with LeX-Wealth

By now, you should be convinced that the costs of delaying retirement contributions are astronomically high. And they only get higher, the more you delay. If you want to live a full and financially stable life in retirement, the time to build a plan for your future is now.

Our experienced advisers at LeX-Wealth are here to help. We’ll work with you to clarify your specific retirement needs, set achievable goals for your future income, and take advantage of the most tax-efficient savings vehicles available to you as an expat in Germany. 

Contact us today. Your future self will thank you.

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