A friend of mine now works as a personal finance advisory with “tecis” and has suggested me to plan for my retirement. I am 25, so I have quite a long time still to invest money for retirement. The earlier I start, the more compound interest can work for me.
One plan I already have is a so-called “Riester” plan where the German goverment gives you some amount of money and it is deductible up to a certain point. I want to max this out eventually, that is around 2000 EUR/yr I would invest. Up to 30% of the money can be extracted before retirement, the remainder must then be monthly pension.
Then another thing that I'd like to get is a so called “Flex” plan where you invest money and can choose what to do with it. One extract money all the time (although then taxes are due), one can extract (some) money before retirement (no taxes due then) and have the remainder converted into a monthly pension. The premium is not deductible, but you have to pay less taxes on the interest gained. Also you don't have to have a guarantee on premiums, this means it can be invested more aggressively in stocks. If I have money to spare, it supposedly makes more sense to put into a “Flex” plan than into a “Riester” plan.
Now I have two offers which are supposed to be the best offers one can get on the German market:
The “Stuttgarter” offers a plan which has lower fees and a broader spectrum of funds to choose from. According to him that is worth money as one can choose better funds. If you want to extract all money at some point before turning 85, this is the best offer. In case one wants a monthly pension (guaranteed for 20 years, so it can be handed down to relatives), they guarantee that for every 10,000 EUR in the fund you get 24.46 EUR/month in pension. That number is called “pension factor” in German.
However, they offer that if the market is like it is now, they offer 30.75 EUR/month. This does not sound bad compared to other companies. However, the hard guarantee is only 24.46 EUR/month. There is no way of foreseeing how much above the guarantee it will be.
Paying 25 EUR/month, increasing by 5%/year and assuming that the funds give 6% each year (which apparently is not unreasonable) I would have 104,058 EUR saved when I turn like 67.
The “Continentale” offers the same thing. Here the guaranteed factor is 28.96 EUR/month which already better. The money in the fund would only be 100,930 EUR (assuming everything else equal) because they have higher fees in the process. Still, I would have a pension of 292 EUR/month guaranteed from this.
The pension does not come with a single option but has two distinct ways to pay out:
One starts with the guaranteed rate. In case interest on savings are good, my pension might increase over the time. They would only increase if they could finance it for the rest of my life. That would by 292 EUR/month and then increasing in an unforeseeable way.
Let them invest it a less conservatively. Then they pay me what makes sense. In the written offer that I have, they state 391 EUR/month. But that can fluctuate and also go down or even use all the money in the fund and stop.
I don't have to choose the option now, I only have to when I convert the money that I did not cash out into a pension.
If I was sure now that in 40 years I would have enough monthly pension from the government and the “Riester” plan, I'd go with the “Stuttgarter” offer and cash it out in my sixties or seventies to buy a condo, go on lots of travel or something like that. If one just starts retirement, one probably has lots of ideas and is healthy enough to travel around.
I consider having the option of converting the money into a monthly rent such that I can be sure that I will never have to make due with less money. This of course ignores the inflation and is perhaps dangerous in its own right. The option 1 from the “Continentale” is higher than the guarantee from the “Stuttgarter” but would only increase slowly, if ever. The offer from the “Stuttgarter” seems to have at least a chance of beating option 1. The option 2 seems a bit dangerous. Sure, I'll might get a higher pension but that might be over at some point. Then option 1 or the “Stuttgarter” might pay more.
Another option would be to take the “Stuttgarter”, cash it out and put the money into funds again. Then I have my own control over the money but would have to pay fees in the funds again. If I was going to do this, the “Continentale” option 2 would probably be better.
My main problem is that I don't know what will be in 40 years. The insurance companies at least have a lot of statistics to work with, I cannot do that. I see that the “Continentale” guarantees 18% more pension but has 3% less money in the funds because of higher fees. The “Continentale” also offers less funds which supposedly means that I could not take the best funds that “tecis” has on their recommendation list. This would skew it towards the “Stuttgarter”.
Yet neither of the two options for retirement of the “Continentale” resonante with me. If the “Stuttgarter” would not offer more than the guranteed minimum, the “Continentale” option 1 would be better. But taking the monthly pension to have financial predictability and then using option 2 seems strange to me. And if the “Stuttgarter” would be above their guaranteed minimum, it would be the more stable solution I think.
I have two good offers which will both likely get me 100,000 EUR by paying 40,000 EUR over the years. By starting larger premiums earlier, the compound interest will make it even better. So all in all neither offer is a bad one.
The two options from the “Continentale” make it hard to compare the offers with each other. What could I do to make a decision? Am I missing an angle to see more clearly which one is the right plan for me?