Retirement: Doing nothing is the worst!

Employees and employers need to address pensions; doing nothing is the worst mistake. We asked three experts: What are the best tips and what are the biggest mistakes when it comes to pensions?

This article is part of the special feature on retirement planning – what's worthwhile for tradespeople.

Everyone knows: The statutory pension won't be enough in old age, so it's essential to make provisions. But retirement is still a long way off, and the money is usually needed for ongoing expenses. Added to this is the confusion amidst the many different – ​​and often difficult to understand – retirement products and the numerous critical reports on Riester, Rürup, and other pension plans. Low interest rates also lead to frustrating returns, and employees and entrepreneurs quickly put off the topic of retirement planning.

Private pension provision is indispensable

A dangerous decision! Anyone who wants to live a relatively carefree life in old age must make private provisions. And all experts agree: The biggest mistake when it comes to retirement planning is not making any provisions. "Regardless of whether you're employed or self-employed: everyone needs to address the issue early on," emphasizes Jörg Hagedorn, Head of the Social Security Department at the Central Association of German Skilled Crafts (ZDH). Hagedorn is one of three speakers at an information event organized by the Düsseldorf Chamber of Skilled Crafts for employees and employers in the skilled crafts sector on March 20th. His topic is company pension provision, which has seen new developments in recent months. The federal government recently introduced the Company Pension Strengthening Act (Betriebsrentenstärkungsgesetz). This will introduce a new tax incentive model for low-income earners within the framework of company pension provision. The law is scheduled to take effect on January 1, 2018.

Additional retirement provision is worthwhile in any case

This includes increasing tax-free contributions to pension funds, pension funds, and direct insurance. Voluntary supplementary pensions such as company and Riester pensions will remain exempt from taxation for basic old-age security up to €202, and the basic allowance for Riester pensions will be increased, explains the ZDH expert: "This sends an important signal that additional retirement provision is worthwhile in every case."

The German Crafts Journal asked two speakers at the event and the head of business consulting at the Düsseldorf Chamber of Crafts: What are your tips on retirement planning?
 

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All information about the event "My Future – Your Future. The right retirement provision for people in the skilled trades" at the Düsseldorf Chamber of Skilled Crafts on March 20th can be found in this article.

This is the advice of the Consumer Advice Center NRW

What are the three biggest mistakes in retirement planning?

1. Many people don't consider how much money they'll need in old age, i.e., how large their pension gap is. And they don't start private retirement savings early enough. Those over 50 find it difficult to save large sums until retirement.
2. Women who don't work or work part-time often don't finance their own retirement savings from their husband's earnings. This puts them at risk of poverty in old age, especially in the event of divorce.
3. Consumers often choose the wrong products to plan for their future. We advise against whole life insurance and pension policies because they require customers to pay high acquisition costs to brokers. Furthermore, such policies lack flexibility and, with a guaranteed interest rate of 0,9 percent, are unattractive. Generally, it's best to keep insurance and savings products separate. If you want to protect your family and have a property to pay off, you're better off with an affordable term life insurance policy and a separate savings product than whole life insurance.

What are the three best tips for retirement planning?

1. First, protect yourself against existential risks with personal liability and occupational disability insurance. Then repay loans: Their interest rates are usually higher than those on current investments. And stash two to three net salaries as an emergency fund in a savings account.
2. Given the low interest rates, you can't avoid stocks if you want to save for retirement long-term and achieve reasonable returns. To diversify and keep risk low, low-cost savings plans with equity index funds (ETFs) are a good option. A few years before retirement, shift some of your savings into safer investments.
3. If you want zero risk, bank savings plans are suitable. The money is secure, there are no closing costs, and the interest rate is very low. Owning a property that you live in yourself also makes sense, provided it is paid off by the time you retire. You should seek independent advice, for example, from consumer advice centers, on whether company pension plans or subsidized products like the Riester pension plan are worthwhile.

And if there isn't enough money?

The current problem: Income from private retirement plans such as Riester pensions is fully credited towards basic old-age security. This allows the state to top up low pensions if someone would otherwise be below the social assistance level. However, lawmakers are likely planning to soon increase the allowances for this credit, so that retirement planning is also worthwhile for low-income earners. The general rule is: Even people with low incomes should set aside money for retirement whenever possible. This can be in a call money account. However, for long savings periods, low-income earners can also choose a riskier product to achieve higher returns. There are savings plans for equity ETFs starting at just €25 a month or €50 a quarter. And you can interrupt payments at any time if money is tight.

Stephanie Heise is Head of Consumer Finance and Member of the Management Board at the Consumer Advice Center NRW

This is the advice of the Düsseldorf Chamber of Crafts

What are the three biggest mistakes in retirement planning?

1. We're currently observing that younger people in particular—both employees and the self-employed—are very keen to postpone retirement. They want to have their income now, live off it now, and fulfill their dreams. Retirement is still so far away. And who can promise that the money saved today will still be worth anything in the distant future?
2. Due to the current low interest rates, the advice to plan for retirement early is often dismissed, thereby missing out on all the benefits of long-term mortgages.
3. In the first few years of self-employment, young entrepreneurs want to use every euro of liquidity to build their business. This is understandable and certainly fine in the early stages. However, it is all the more important that self-employed people factor the costs of their personal insurance into their pricing from the outset. Unfortunately, many solo entrepreneurs, in particular, forgo this profit component in order to secure their position in the market by charging the lowest possible hourly rates. This then harms themselves twice over.

What are the three best tips for retirement planning?

1. The topic of retirement planning is fraught with uncertainty. How do you do it right? What's most beneficial? What's the safest option? Only one thing helps: information and advice from experts. It's important not only to hear one opinion, but also to consult neutral contacts if possible.
2. Additionally, you shouldn't rely on just one product. If you have the opportunity to save in different ways, you should do so.
3. Perseverance is equally important. The conditions under which I make retirement planning decisions are based on the time, my current life circumstances, and the assumptions I make today about the future. But this changes over the years and decades leading up to retirement age. So we certainly need to adjust our retirement planning from time to time.

And if there isn't enough money?

I hope that it is and will be possible for every working person to save at least a small amount regularly and consistently.

Claudia Schulte is Head of Business Consulting at the Düsseldorf Chamber of Crafts

This is the advice of the Central Association of German Skilled Crafts

What advice do you give tradespeople regarding retirement planning?

Additional retirement provision—complementing statutory pension insurance—is becoming increasingly important for employees. And it is supported by the government: for example, through the Riester pension and company pension plans (especially salary conversion). There are also other forms of savings for retirement, such as life insurance or home ownership. The latter, known as "Wohn-Riester," is also supported under the Riester pension scheme.

Employees must decide for themselves which path they choose. They should therefore seek comprehensive advice – for example, from pension funds for the skilled trades – and carefully consider their preferences, for example, how much risk they are willing to take with their pension provision and whether they need additional coverage, such as survivorship or occupational disability insurance. Everyone should also decide on supplementary pension provision as early as possible in their working life, because the longer contributions are paid, the more it generally pays off in the end. A special feature applies to many self-employed skilled tradespeople: Under certain conditions, they are legally required to participate in the statutory pension insurance scheme (craftsmen's pension insurance). However, they can apply for exemption from compulsory insurance if they have paid compulsory contributions to the statutory pension insurance scheme for at least 18 years (216 calendar months). However, exemption from compulsory pension insurance should be carefully considered, as it could result in the loss of entitlement to Riester subsidies, disability pensions, or rehabilitation benefits. Advice is also recommended here.

Jörg Hagedorn is Head of the Social Security Department at the ZDH