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Financial Planning Germany financial products Pension Schemes Post

What is Rürup or Basis Rente?

Basis Rente

I am kicking off a new series on financial topics used in Germany. The first financial product that I would like to talk about is Rürup or Basis Rente (Rente in German means pension). We also explore common terms and their meaning to build up the concept of Rürup.

Concept #1: What is altersvorsorge and Gesetzliche rentenversicherung?

Altervorsorge (old age provision) is a general term used to describe various products and options which are available to support you for your old age. These are usually described into three pillars (or categories):

  • Basisvorsorge (basic provision) : This includes statutory pension insurance (also called gesetzliche rentenversicherung) scheme from the German state, and other products like Rürup . The products are usually tax efficient and are design to work as a pension should.
  • Privat vorsorge (private provision) : This is a private measure, people can use products in this category to top-up their Basic provision. This will include products like Employer pension, Reisterrente or Directfonds. There is usually some subsidy available.
  • Ungeförderte Private Vorsorge (unsubsidized prevention) : This is also a private measure usually focused on Lebensversicherung (Life insurance) products. It can also include products which offer pension with a life insurance.

Now, this post only focuses on Rürup , and I reserve some of the other topics for more posts in this series.

The question of Rürup Rente. Where does it fit in retirement planning

Rürup is a self invested pension scheme, this is well positioned for freelancers who may not be invested in the statutory pension program. At the same time it is also a choice for those who have statutory pension but want to top that with additional pension.

Rürup pension is named after Bert Rürup who is an economist and a politician. His focus was on pension reform and this pension scheme was launched in 2005 named after him. It is also often referred as Basis Rente

Why is this relevant as a top-up? The simple answer is that statutory pension payouts may not be sufficient to help you survive in old age. It is predicted that only around 48% of your last paid income will be your statutory pension (*the actual calculation is more complex). So Rürup is a way to supplement your pension and avoid

Key features of a Rürup pension program

  • Behaves like a pension, you cannot withdraw this in advance and it is only paid as a pension after retirement. You cannot exit a Rürup but stop paying into it.
  • There is no minimum contribution limit. Contributions can be stopped, this is helpful for freelancers.
  • As it is a pure pension plan, it also gives you tax benefits. Upto 24,900 EUR investment are tax free.
  • It cannot be transferred to another person, loaned against or inherited. It can be setup to get paid to your immediate dependent (spouse) or children if <25 years upon death.
  • It is designed to save taxes if you have a lot of tax liability, upto 100% tax rebate during accumulation from 2025
  • Pension will be taxable as per prevailing rules in future.
  • It is possible usually to change providers, but there can be fees.
  • Two versions usually exist: Fixed classic pension and Unit linked Pension
  • Fixed Classic pension has returns around 1.25%, while Unit Linked is linked to market performance.
  • Expense costs are high, between 3-6% annually.

Should I take a Rürup / Basis Rente?

This is a very debatable topic. Lets make it clear, if you are an immigrant and may move out of Germany, you will still get paid out but will need forwarding address. It might just add more hassle.

Having said that, many complain (and rightfully so), that Rürup has very small returns and when costs are considered the value of tax benefits is only realized when you are 70+ or something.

At the same time, you can think of Rürup as a bond investment, which is about capital preservation and not exactly about big returns. This is at the cost of losing access to capital, low returns and potentially high maintenance expenses.

Will Mr A invest in this?

No, I think I can potentially get better returns with index funds/ETFs and lower costs. I might think of it during the consolidation phase of retirement planning when capital protection is a goal.

Categories
Coronavirus in Germany Financial Planning Post Rant

Surviving Job loss in Germany : Read this!

Arbeitslosigkeit durch Corona by Zeit.

It is all very convenient to write as a blogger to invest the dips, and I did this too last week! Lets get real, we are facing a very high chance of recession and job loss soon. Thus surviving job loss is a very real theme for so many of us.

Why talking about surviving job loss and income loss is important, now?

As Germany crossed 10,000 Coronavirus cases this morning, we are heading for a complete shut down.

The fact is that retail shops, travel agents, salespersons, cooks, restaurants, waiters, their suppliers, airports, airlines, ground staff, freelancers, event management companies, movie theaters, arts and many more are at severe risk of losing their jobs. Globally the picture is no different and its already starting to get ugly for some.

We are going to face millions of job losses, crushed busines demand, and misery.

Even if this virus goes away as trillion dollars pump into the market, funding for dying companies, it will take years to recover. The Dow Jones has plumetted 2000 points today(had to change this while writing!) 33% less than all time high a month ago! A MONTH AGO!

All this, within 20 working days!

Surviving job loss: Emergency fund.

Every FI blogger has talked about it. For some of us, this is already too late. If you have already lost your job, income and do not have enough to cover then you must reach out for benefits.

If you are still in your job, fear the reduction of pay or job loss, this is the time to tighten your belt. However, If you are confident to ride through, go read another post.

  • Save everything you can, be super frugal, avoid any unnecessary purchases.
  • If you can save 6 months of expenses, try 8 months, if you can do 8 months, try 10 months.
  • Were you planning a apartment purchase? Delay it.
  • If you were planning to get a car, even an old one, delay that!
  • Do not invest in the market, stay away and hold cash

Surviving job loss: Arbeitslosgeld

There is no shame in this, you have been paying into the social security for times like these. As things escalate, more people will seek this and there will be delays in handling all the capacity.

Please visit the Arbeitsagentur website (in English too). You must immediately inform them of a job loss as soon as you know have a confirmation from your employer. You can also call at +49 (0)800 4 5555 00

Please make copies of your payslips, bank statement, resume and existing job contract ready. You will need those.

Surviving job loss: Fix your living situation

The next advice is not for all, neither is something I prefer. If push comes to a shove, find a room-mate to share rent, or move in with your family.

There is a moratorium on evacuation in various states, read this!

Surviving job loss: German Governments loan scheme

Over 2.3 million people work as self employed, they are at significant risk. There is a high chance there will be a scheme to help them through a 0% loan or more.

If you are a small business or freelancer, you can get a credit loan from the German Government, you can also get tax breaks and subsidies for loss of business. Please click here to read the official guidelines.

Categories
Financial Planning Progress Report

Investing is complicated. Read this if you agree.

When there are dozens of books and hundreds of blogs offering great advice, why do it still feel that investing is complicated?

I hold a business degree, and have studied a little bit of accounting, cost accounting, financial management and economics. I have also been interested in economics for a while, and yet I felt investing is complicated. The result was a slow start and missed opportunities.

Mr A’s investment growth over the years. Very slow to start.

I opened my Depot account (investment account) with Comdirect in 2015, and was in my baby steps. By 2017 I had really gotten on-board with the whole FI theme and investments as the essential thing to do for the long term financial independence.

If you look at the chart, the timeline doesn’t match the dates I just mentioned! I was investing no more than 28 EURs a month in 2015, and could grow it to 400 per month in 2017, later dipped to 330 per month in 2018. Why did I need 24 months to grow from 28 to 330 EUR of investments per month? I had all the cash lying around anyhow!

Investing is complicated because doing something is different from knowing it.

Last year I was listening to this podcast, where they discussed why home improvement or DIY Youtube videos are so addictive and yet they do not result in us picking any new hobbies. This is after watching all those videos which teach us how to do the stuff! The same principle applies to investing as well, just knowing it often doesn’t translate into doing it.

The barriers which affect your ability to invest are Time, Fear and Uncertainty of outcomes.

  • Time: I felt that I need to spend a few hours each month to manage my savings, and its time away from other things in life. Solution: Automate your investments every month, you can even buy stocks in part each month.
  • Fear: I am putting money into a fund or stock, its like putting into someone else’s pocket not knowing if it returns? Solution: Understand your relationship with money and why do you think so. Understand that this is not a lottery but you are buying a piece of different functioning businesses.
  • Uncertainty: There is no guarantee that my investments will give me decent returns, its all far to risky and unsafe. Solution: True, there is uncertainty, but if you aim for the average returns in the long term, the chance of failing is quite low.

I had the very same fears, and thus I started super slow. We do not get physical certificates for stocks to serve as a proof, neither are there any guarantees. Yet, the day I looked at the stocks which simply had grown 50% in 2 years while I had purchased too few of them, I realized that I had made a mistake of not doing it earlier when they were cheaper. No volume of reading blogs could get me there.

Investing is complicated because there are so many complex concepts to understand

Not really, if you focus on a set of handpicked index funds(or ETFs), all you need to worry is about their expense ratio (money you need to pay them each year to maintain the fund) and brokerage/commission charges from your investment account. Everything else is noise pushed by the finance press.

Sure there is more to talk of when you think of taxes, but that is not a topic to worry even before you start off!

Investing is complicated because we are human

Evolution, we as humans are simply not programmed to plan and act for the long term. We are good at short term stimuli.

  • This is the reason its hard for us to imagine how life will be when we are say 60 years old and not working, specially when we are earning today.
  • This is also one of the reasons why we say, will take care of it later
  • Also the reason behind lack of discipline, and not able to retain weight loss over longer periods.

So, is there a solution to this?

There is no silver bullet here, apart from making yourself aware of the two problems you can fall into:

  • Unable to start investing: This is by far the serious one, not starting means you have simply paralyzed yourself. The loss is all the compounding. So get shit done! There is no other way.
  • Investing too little: Well done on starting, but are you at the optimal level? You should understand the costs of not doing so, use a compounding calculator and find out how much you’d lose for every $$ not invested. Once at optimal level, simply Automate and do not bother looking into it each month.

Did you ever feel that investing is complicated? Please share your experiences with us.

Categories
Post Progress Report Series

Savings Update – October 2019

money jar
Another Money Jar!

Its that time of the month again, when we share our savings update! Last month we posted a savings rate of 45.7%, but as I had mentioned our savings rate is not as high in most months.

Our savings update for our individual savings this month were:

EarnerSavings Rate
Mr A21.1%
Mrs A46%

Our combined savings rate after combining our incomes is

28.7%

So, what went different this time and what is new?

Forced discomfort of upfront savings

My usual approach to savings has been to save a portion at the beginning of the month and then later towards to end of it. I felt that maybe I can push myself more and be upfront in savings.

This time I wanted to try to saving a 1000 EUR, and I transferred this to my savings only account within a week of getting the salary. It seems to have been okay, but a little uncomfortable in spending.

I will continue this for at-least 2 more months and check back if it is really makes me save better.

Higher than usual expenses in September and October

September is also the month when my toddler and I have our birthdays, we did spend some on celebrating and buying gifts. We did optimize on celebrating my toddlers birthday at home instead of booking a place like earlier.

Additionally, we had two Indian festivals this period and spent more on gift giving. This will continue for the next month as well, but then it will taper off and is expected at this time of the year.

Our Big Failure of the month

With all the extra new spend we delayed our remittance to folks back home. While there is no urgency to it, delaying it was not ideal and I need to fix this.

Outlook for the next savings update?

The outlook looks fine, we hope to go back up in the 30s next month as we expect our expenses to stabilize. I do foresee a repair expense of around 150+ EURs in the next week but that is unavoidable. I also expect some work expenses being paid out to top things off.

PS: October 31 is World Savings Day!

Categories
Financial Planning Germany financial products Index Funds and Stocks Post

What is a Sparplan? What is Mr A really doing with his Sparplan?

Sparplan (I am so tempted to add a meme on this is SPARtaa..) is the way out of automatically managing your investments each month. It is an equivalent of a SIP (Systematic Investment Plan) if you are an Indian investor.

….when I login to my bank account, I notice two options, geldsparplan and wertpapiersparplan. What is the difference?

I use comdirect, and they have these two options, the main difference is:

  • geldsparplan – This savings plan simply takes money from your account and deposits into a Tagesgeld account which earns a whopping 0.01% interest (as of this morning) p.a. In other words, not worth it.
  • wertpapiersparplan – This savings plan is the one we need, we can setup a monthly investment amount and usually declare ETFs or even stocks to invest in each month.

….how much do I invest in a Sparplan? How much does Mr A invest each month?

As of this morning, I am investing 1098 EUR into my sparplan each month. This is mostly focused on diversified ETFs and 1 tiny piece of Amazon stock. I will write more about this in Portfolio page soon.

Let my number not scare you, I started really slow. I was investing less than 300 EUR/month an year ago and less than 200 EUR/month 18 months ago (2018).

As I have mentioned before and might do so again, we have to start with small steps and get comfortable. It took me a while to get comfortable with the idea of investing, and I started really slowly. I had never invested in Germany and had been programmed to be more cautious.

Can’t guarantee the numbers, but you catch the drift!

You can start with even 25 EURs/month, then and grow from there.

….what do I invest in? What are the pitfalls?

Picking your investments is a massive undertaking, but has been extensively covered in reddit.com/r/finanzen or on frugalisten.de forums.

The key pitfalls are, all investments carry risk, transaction costs charged by your depot account per transaction and TER (annual expenses) must be considered very carefully. I am personally a big fan of Index funds, which are lower in costs and deliver average returns.

….but can I not simply buy ETFs each month on the go and not bother with a sparplan?

Yes, of course you can, or you can automate it and forget about it. This is the whole premise of the famous book, The Automatic Millionaire. If you really look at it, it just makes sense, one automated step which simplifies your steps to your Financial Independence.

It makes it easier for me to plan it and worry about one less then thing to do each month.

Update: 22 June 2020

How do you open your Sparplan?

Comdirect:

Schritt für Schritt Anleitung für die Einrichtung eines ETF ...
If you have an account, get to the Wertpapiersparplan
  • Find your preferred ETFs on justETF and find its WKIN number.
  • Login to Comdirect> Geldanlage> Wertpapiersparplan
  • Click on Sparplan Einrichten
  • Enter your amount, minimum being 25 EUR. In the next screen you pick the funds.
  • Search for the WKIN which you had picked, add multiple funds if you nede.
  • Note the amount and the provision fees, i.e. 1.5% of the money invested goes into the fees.
  • In the next screen pick the frequency (monthly/once in 2 months/4 times a year), the date to buy and length of the plan.
  • Furnish your confirmation TAN and you are ready.

Quick questions on Tax and Residency

  • What is Capital gains taxes in Germany? The tax rate is 25% plus 5.5% solidarity surcharge, this should be paid at source. Some depots like Degiro do not offer this at source, and you need to take care of it in your returns.
  • Any tax exemptions on Capital gains? Capital gains of upto 801EUR are tax free, so for a family, this can be 1602 EUR.
  • Any special exemptions on Long term capital gains? Sadly, none.
  • Can I open a Depot account as a Work permit holder or PR holder? Yes, this is absolutely fine as you are tax resident of Germany.

If you have more questions on sparplan, then write into the comments section.

Categories
Post Progress Report

Savings Update – Sep 2019

Time for our first savings update, we had been trying to be more efficient for a few months now but it was to complicated too calculate for many reasons. As a result, its only in September that we are able to properly do it. One important rider, we weren’t super frugal, we still ate our and rented car for trips.

Money Jar
Not our money jar

We both have different payout dates, so I am trying to align our incomes in the same pay period and share the final percentages.

EarnerSavings Rate
Mr A35.1%
Mrs A 77%

As both are incomes are different and Mrs A is part-time at the moment, and thus when we do an actual calculation, we get to the below:

45.1 %

The month was an exception and I think our savings rate will average between 30-33% for an year.

So hang on for the next savings update. Next time I’d also share successes and mistakes of that month.

In other news, Germany’s Household Saving rate is 10.8% in 2019, which is a big ass number!

How much are you able to save now? What is your monthly goal?

Categories
My Money Mistakes Personal Post Series

My Money Mistakes – 2019 edition

While we are on the topic of my relationship with money, I would kick start the series of My Money Mistakes and make it an annual edition. The year is yet to close, but I think I have already done the worst ones.

Our Goa trip; can’t remember the taste anymore..

Each year I make stupid money mistakes, which I mentally tag into my stupid mistakes bucket. Small bad purchases or misses which result in this are allocated, and try not to beat myself over them. My Money Mistakes is not about those accidental events, but of seemingly deliberate stupid decisions I have made, and will make with money.

This year, I have two really good candidates,

  • Trip to India, to attend a destination wedding and never getting to meet my own immediate family. We planned months ahead, got tickets for the three of us, survived 13 hours of flights (and a bomb scare at the airport) with a toddler to attend a wedding and meet old friends for 10 days. We did take a few days off after the wedding to stay in a resort and enjoy Goa (look it up, nice place). Yet, if I add up the tickets+gifts+wedding wear+hassle we had to go through, the trip was just not worth it.

    Apart from a damage of over 3000 euros, we got sucked into showing off our well being (the indian way). We did enjoy meeting some family members and friends, but this could have been done differently at another time. Never again.
  • Investing in Cannabis stocks. You can already see where this is going, I bought into CGC and AC stocks, both of them tanked horribly. I had a stop loss and luckily only experimented with 300 bucks, but even with that a loss of 21% in value hurts. Clearly I was high without learning the specifics. Will-not-repeat.
    (Side Note: On the other had I sold off Shopify which I never trusted and still made a profit, it is still going upwards but I don’t buy it.)

Would you like to share a mistake you made with money in the past year? Maybe we learn from it