three-pillar model
The three-pillar model forms the basis of old-age provision in Germany and consists of statutory, occupational and private pension schemes. Unfortunately, many people view the topic of retirement planning from the wrong perspective and rely solely on statutory pension schemes or investments that are not profitable and even yield negative returns. In the following, you will learn how old-age provision is generally regulated in Germany and how you can invest your money effectively in order to enjoy your well-deserved retirement.
How is retirement provision regulated in Germany?
The statutory pension is funded through a pay-as-you-go system, in which current contributors finance the benefits of present pensioners and, at the same time, acquire an entitlement to their own statutory pension (the so-called intergenerational contract).
However, as the statutory pension insurance scheme builds up virtually no reserves, the sum of contributions paid must roughly correspond to the amount of pension payments in the same period.
As the ratio of contributors to retirees will change significantly in the future due to demographic shift, a substantial decline in the standard pension level is projected (learn more).
This means that future benefits from the statutory pension over the coming decades are likely to be significantly lower than they have been so far.
For this reason, some people are already saving privately for their retirement, although this is usually done through inefficient means.
Why do most Germans back the wrong horse?
According to a survey by the Association of German Building Societies, 48% of German assets are invested in savings books and instant access savings accounts. However, due to account management fees and low interest rates, these barely manage to outperform an inflation rate of 0.3 to 0.6% and often generate negative returns. To achieve higher returns, company shares in the form of stocks are classically suitable.
For this reason, large portions of the population in many countries already hold stock portfolios, whereas in Germany the share of the population with direct company shareholdings is very low. Many Germans avoid the capital market, even though it offers attractive returns at a comparatively low risk.
A study by the German Institute for Economic Research also proves that German net income has already shrunk by 15% within the last 10 years — an indication of ineffective wealth accumulation and a low level of pensions.
How can you invest your money securely and for the long term?
The solution is so-called Exchange-Traded Funds (ETFs). These are exchange-traded investment funds that can replicate entire indices or individual markets. ETFs are managed passively, meaning the composition of the funds only changes when the index changes, in order to replicate the respective index precisely.
Thus, one benefits cost-effectively from the performance of an index, including compound interest effects. The range of ETFs is developing rapidly, and thousands of ETFs representing different indices are now on offer.
To maintain an overview in the sea of financial products, Robo-Advisors are particularly suitable. By automating portfolio management, these enable clients to achieve the highest possible return, tailored to their individual risk tolerance.
As one of the leading German Robo-Advisors, Ginmon offers an online platform for wealth management through ETF portfolios. Based on the client's individual risk profile, an ETF portfolio consisting of equities and bonds is designed, managed, and optimised as required.