In principle, ETFs are very suitable for building wealth, even in old age. Provided you choose the right ones and inform yourself in advance about how they work, the opportunities and the risks.
The term ETF (Exchange-Traded Fund) directly translates to exchange-traded funds, but it always means exchange-traded index funds. ETFs are funds with two special features: you can buy and sell them on the stock exchange, and their investment strategy is to replicate a specific stock market index, such as the DAX or the MSCI World.
In contrast to traditional funds that are sold for commissions, ETFs offer two key advantages.
- Risk diversification: If you buy an ETF on the MSCI All Country World Index (information about the index) or on the FTSE All-World (information about the index), you get the performance of around 3,000 to 4,000 stocks from around the world.
- Low costs: This increases returns for investors.
ETF savings plans with monthly savings rates usually starting from 25 euros are currently primarily offered by direct banks. You can find an offer comparison at Finanztest. These savings plans can be changed flexibly at any time, without any extra costs. If money is tight, you can suspend the monthly payments.
If you invest in the stock market with ETFs, you should be aware of one thing: the stock market is fickle. It's a constant up and down, even if there has been a clear upward trend so far in the long term. You have to be able to endure it. The value of ETFs can halve in the event of a stock market crisis. Anyone who had the composure to sit it out could also take part in the recovery phase that follows every crash. It's best to find out about the opportunities and risks on the stock market in advance using our return calculator.
You can read how to invest in the stock market with one or more ETFs in the linked article. You can also find out which selection criteria you should pay attention to in a separate article.
Robo advisors are digital investment applications based on algorithms. There is no advice or sales conversation with a human counterpart; instead, you just have to answer a few questions in an app or online in order to invest money with the help of a robo advisor. As an alternative to a very inexpensive ETF savings plan, the running costs are around 0.2 percent per year, you can also leave the selection of ETFs to a robo advisor.
These usually come with supposedly scientific investment principles, but do not always offer a well-diversified, cost-effective and reliably functioning (buy and hold) investment strategy. They also come at a price, which reduces the return. This is convenient, but definitely more expensive than a simple ETF savings plan with additional ongoing costs of around 0.7 percent per year.
No. If a quick route to great wealth is advertised on the Internet, it is most likely a scam. Criminals use social media because they are particularly suitable for targeting financially inexperienced people.
As a rule, you will not get any money back that you have deposited into dubious trading portals and investment clubs. And no investment seminar can seriously promise you how you can achieve above-average returns by trading on the stock market.
Probably not. Today, no one can reliably predict whether cryptocurrencies will become established as an alternative to conventional monetary systems in the medium term. The development in recent years has increasingly moved away from the idea of an alternative means of payment and towards an object of speculation.
Cryptocurrencies are not recommended as investments due to the risks involved – from massive price fluctuations to total loss – and the lack of security systems. The fear of a global financial collapse is currently unfounded. If you are skeptical, you can also invest a small part of your money in one of humanity's oldest currencies: gold.
For many people, owning their own home is a lifelong dream and therefore a central part of their private retirement provision. Profitability is less of a priority with such an investment. Rather, it is about a hoped for higher quality of life. If you later want to purchase a home as a retirement provision, you should take this into account today when selecting products to build wealth. Ultimately, equity should be available when you have found your dream property.
After buying a property, it makes sense to use the previous savings rate to build up assets and pay off expensive debts. Daily deposits and fixed-term deposits are suitable for this purpose as safe and, if necessary, flexible forms of investment.
More profitable investments such as ETFs may also be an option, provided you still have enough time to ride out periods of losses. Private pension insurance is unsuitable due to high costs and limited flexibility. Building savings contracts are also not the first choice.
Not necessarily. A common selling point for Riester contracts is government funding. This consists of basic and child allowances that flow into the contract, as well as possible tax advantages that are reimbursed via the income tax assessment. However, anyone who takes advantage of this funding must tax the future pension in full. A high level of funding today will be at least partially offset by the tax burden later.
The consumer advice centers have recalculated this. For a young average earner in his mid-20s without children, the following picture emerges: The return on the savings contract would only increase by around 0.3 percentage points per year as a result of the support. With two children, the allowances make things more interesting, but even then the additional return is only 0.7 percentage points.
They say you don't look a gift horse in the mouth. In this case you should do it. Because the reality on the Riester market is full of pitfalls. There is no independent advice on Riester pensions because the advisors pursue commission interests. The products they sell as retirement provision regularly have costs that are too high and returns that are too low.
But even if you are well informed about the (ever-shrinking) range of products, for example through Stiftung Warentest, or about options for swapping expensive funds for cheap ones in existing Riester pension insurance policies, you will hardly find offers that meet your needs. The return opportunities are not only manageable because of high costs and questionable investment concepts, but also because the providers have to promise that there will be no losses at the start of retirement. This guarantee reduces the earning potential.
Another disadvantage is the mandatory link to a lifelong pension payment. Private life insurers have to calculate carefully and of course also want to make profits. This means that they assume a life expectancy that is far higher than that published by the Federal Statistical Office. In addition, the assumed guaranteed interest rate is very low (maximum interest rate).
Even funding cannot begin to compensate for all of these disadvantages. What is much more important than the funding is what return the invested money will produce year after year over the next few decades and that the provision is tailored to needs. Here, a simple and flexible ETF savings plan based on a global stock index is clearly ahead due to its low costs and historically best returns.
Interesting alternatives to the Riester pension, especially for young people:
- Opportunity-oriented alternative: a broadly diversified investment in the stock market, for example with ETFs. This is much more flexible and profitable. The consumer advice centers have done the math: An ETF savings plan in which you would have paid in the maximum subsidized sums annually when you started the Riester pension in 2001 and with which you would have invested in a global ETF, such as MSCI All Country World, with an assumed cost of 0.5 percent. had invested, would have brought a good 10 percent return per year.
- Security-focused alternative: a combination of high-interest daily money and fixed-term deposit accounts at direct banks.
- Pay off debts: If you have more expensive debts due to a property you use yourself, you can check whether you can withdraw the capital from a Riester savings contract and use it to pay off debts. Under no circumstances should you choose this option without independent advice, as there are numerous pitfalls lurking.
No. Take a close look at your employer's offer. Some are very generous and even cover the entire contribution payment for their employees. Others simply offer deferred compensation and only promote it to the extent that they have to. What is much more important than the funding is that your money is invested widely, at low costs and profitably in the long term. After all, you can keep the money working for you for 40 years or more.
Rule of thumb for young people: A company pension plan can be worthwhile if your employer subsidizes your contributions with at least 60 percent. The reason for this is as follows: You need this minimum subsidy primarily to compensate for high product costs and social security disadvantages. And even this subsidy is not enough if the chosen investment strategy has too low a return potential.
You and your employer “save” social security contributions and taxes on the payment. But this also reduces your entitlement to sickness, parental or unemployment benefits and even disability pensions.
Another catch: In return, taxes and contributions to health and nursing care insurance must be deducted from company pensions at retirement age. You can read the pros and cons in the linked article.
Important: Young people need higher subsidies than older people to make it worthwhile, because for them the return on investment is more important than the funding.
Depending on the collective agreement, consumers are entitled to financial or pension benefits from their employer. The amount can be between 6 and 40 euros. The state encourages deposits with the Employee savings allowance. In addition, certain savings products are offered as part of the Housing bonus promoted. The funding is limited to deposits up to a certain amount and is only granted if certain income limits are not exceeded.
Young professionals should check whether they meet the funding requirements. You can find out more about funding and the products for capital-forming services in the linked article. You can also find further information about the housing construction bonus.
The most important rule: Avoid products with high closing costs and little flexibility! These include Rürup pensions, also known as basic pensions, capital-forming life insurance and private pension insurance, unit-linked insurance and building savings contracts. Also be careful of fee-based brokers who only arrange insurance with ETFs for fees that are far too high.
You can also save yourself unnecessary high costs for active fund management or for asset management and robo advisors, because you can achieve more returns with ETFs for the same risk.
Don't even try to make a profit by buying individual stocks through day trading or cryptocurrency trading. It's like in the casino: success is purely a matter of luck, the bank always wins, and the longer you play, the more money you lose.
