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How do I calculate and close my pension gap?

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How can I determine my retirement savings needs and close the gap in my pension coverage?

In today's world, the statutory pension alone is often insufficient to guarantee a financially stable retirement. To live worry-free in the future, private retirement savings are essential. This means that additional retirement provisions such as ETFs, fund savings plans, Riester pensions, or company pension schemes are necessary to close the pension gap. To do this, it is first important to determine your financial needs in retirement and the pension gap.

What is the pension gap?

The pension gap refers to the difference between income from statutory pension insurance and the actual financial needs of a pensioner.

The statutory pension typically does not cover all financial needs in retirement, as it usually does not correspond to the last net income earned. The pension gap therefore represents the amount needed to cover living expenses after retirement.

Financial needs in old age vary from person to person, but experts generally estimate them to be between 70 and 80 percent of the average net income.

How do I calculate my pension gap?

70 – 80 % of average net income / Financial needs in old age

– Claims arising from the statutory pension insurance

= Pension gap

To determine the pension gap, the following steps are necessary:

Know your entitlements from the statutory pension insurance: From your 27th birthday onwards, the pension fund will send you an annual pension statement from which you can derive your entitlements.
Determine your financial needs in old age: As a rule of thumb, you can assume 70 to 80 percent of your average net income. Also consider factors such as your housing situation (renting or owning) and any additional income from renting or leasing.

Example calculations for calculating the pension gap:

A warehouse worker earns an average of 2,000 euros net and has pension entitlements of 1,250 euros.

Pension gap: 350 euros

A hairdresser without a master's certificate earns an average of 1,350 euros net and has pension entitlements of 660 euros after 45 years of contributions.

Pension gap: 420 euros

Inflation further increases the pension gap.

Inflation exacerbates the pension gap problem, as the purchasing power of pensions decreases over time. Therefore, we need more capital to meet our financial needs.

Let's assume we have a pension entitlement of €1,250 per month and an average inflation rate of 2.2 percent. After ten years, the pension would decrease to a value of €1,037 due to inflation.

Value of the pension after ten years: 1,037 euros

This reduces the purchasing power of the old-age pension by a further 213 euros. This means that with a financial need of 1,600 euros, the pension gap increases to 563 euros (previously 350 euros) when inflation is taken into account.

Closing the pension gap

To close your pension gap, various options are available, including private pension products, government-subsidized programs, and investments in ETFs, stocks, funds, and real estate. Which of these options is right for you depends on several factors:

Your professional and family situation
The duration of the savings phase
The size of your pension gap
Your individual wishes

To find the optimal retirement savings strategy, it is advisable to seek advice from a financial expert. They can work with you to analyze your financial situation and develop tailored solutions to close your pension gap and ensure a financially secure retirement.

State-subsidized retirement savings

State-subsidized retirement savings plans receive support through allowances or tax advantages from the government. These include the Riester pension, which is particularly attractive for families. The government grants annual allowances not only to the savers themselves, but also for each child eligible for child benefits. Savers only need to contribute four percent of their previous year's gross income to the contract to receive the full government subsidy. This Riester subsidy can also be used for future home ownership through the "Wohn-Riester" (homeownership Riester) scheme.

Other subsidized retirement savings products include the basic pension and company pension schemes (bAV). The basic pension is primarily aimed at self-employed individuals and high earners. Its contributions are tax-advantaged, and its concept is essentially similar to that of the statutory pension insurance.

With company pension schemes (bAV), contributions are deducted directly from gross salary, leading to a reduction in taxes and social security contributions and thus lowering the actual net burden. However, since this also means that fewer contributions flow into the pension fund, company pension schemes are only worthwhile if the employer contributes to the asset accumulation.

Private pension provision

Private pension plans offer flexibility, even without government subsidies in the form of tax breaks or allowances. You can freely choose your contributions, adjust them as needed, withdraw capital, and individually determine the term. Another advantage lies in the payout: While government-subsidized pensions are 100% taxable, private pension plans are only subject to tax on the income portion, i.e., the difference between contributions paid in and the payout.

You can choose between traditional fixed-interest and unit-linked products. Traditional pension insurance policies offer a high guaranteed value, but often only low returns. For this reason, we often recommend unit-linked retirement savings plans, where investors can define their investment strategy according to their personal preferences.

ETF and fund savings plans

ETFs and fund savings plans allow you to take advantage of the opportunities offered by the capital market, similar to unit-linked pension insurance. With small monthly contributions, you can build a solid retirement nest egg without having to worry about minimum contributions, minimum investment periods, standard retirement ages, or penalties. Our experts are available to advise you and help you develop an optimal investment plan.

Tip: Real estate as retirement provision

Real estate plays a crucial role in retirement planning. Depending on your usage scenario, you can live rent-free in retirement, reducing your financial needs. Alternatively, you can rent out your home and supplement your pension with the rental income. Real estate is one of the most popular forms of retirement savings in Germany. However, it's important to invest in a home early to be debt-free in retirement. For those who don't want to buy their own property, there are options to invest in real estate through real estate funds or by purchasing cooperative shares.

Close your pension gap - Get advice now

The pension gap is a serious problem that is often underestimated and can lead to poverty in old age, especially for women. Additional retirement savings, whether private, government-subsidized, or through ETFs and fund savings plans, are therefore essential to provide for the future and gain confidence in a worry-free future.

Our experts are ready to answer all your questions and help you close your pension gap with a solid retirement plan. Schedule an appointment today and let us advise you.