Here's what you need to know about retirement planning

To maintain your current standard of living after your working life, you need adequate retirement provision—but this isn’t guaranteed. This article explains why retirement planning is such an important topic and what options are available for supplementing state pensions.

What you should know

  • In Germany, there are three pillars of retirement provision: statutory pensions, company pensions, and private pensions.
  • Most employees in Germany are covered by statutory pensions, but not everyone. For self-employed individuals and certain professional groups, there are similar options for retirement planning. As the pension level (the ratio between average income and pensions) continues to decline, additional provision is advisable.
  • An additional provision is the company pension scheme, which is concluded through the employer.
  • Another path is private retirement provision, either state-subsidized or not. The best option depends on personal circumstances. In addition to the first two pillars, due to its flexibility, returns, and relative safety, long-term passive investing in equity ETFs is recommended, at least as a supplement.

How to proceed

  • It’s helpful to know the expected pension amount and the pension gap of the statutory pension to decide on further retirement planning options. For this, you can use our pension calculator and our pension points calculator.
  • Personal circumstances also play an important role: self-employed individuals prepare differently than an employed worker or someone planning to buy a house.
  • If you decide on additional retirement provision, calculate whether the costs are worth it considering the amount of the later pension. Also, consider the taxes
  • A cost-effective, flexible way to provide for the future is investing through a savings plan in stock ETFs.

Why is retirement provision important?

Retirement may seem far off, yet retirement planning demands attention as early as possible. Because the pensions, as known from parents and grandparents, will not suffice for many younger generations to maintain their standard of living.


The amount of money needed for retirement naturally depends on personal circumstances. However, it is generally calculated at about 70% of the last net income. Today’s statutory pension is already significantly below this: an average earner who paid full pension contributions for 45 years and retired in 2020 receives about 47.6% of their income as a pension.

This is due to the declining pension level, the ratio between the height of a pension and the average income of an employee. By 2030, the pension level is expected to drop to around 44.3%, says the German Pension Insurance (DRV).

The reason is the pay-as-you-go system on which statutory pension provision is based. Those who pay in today finance the pensions of today’s retirees. Due to higher life expectancy, the baby boom generations of 1946 to 1964, and a declining birth rate, more retirees are facing fewer contributors. It is not yet precisely calculated how the pension level will develop after 2030, but it is clear: it will continue to decline.

But how much money will you actually need monthly as a retiree? This is not an easy question, but the answer is probably: More! Roughly calculated with 70% of the last net salary, but this can of course vary individually. You can orient yourself to your current fixed costs such as rent, electricity, and food. Then add the expenses you realistically expect for your life in old age: vacations, restaurant visits, concerts, etc.

How Much Statutory pension will you get?

If you receive a statutory pension, you can calculate today how high the monthly payments are likely to be and when you can retire regularly.
For this, you can ask the German Pension Insurance (DRV) for your pension information. You receive a pension information sheet annually if you are at least 27 years old and have worked and paid into the pension fund for at least 5 years. It states how high the expected pension will be later if you continue to pay in as before. Three numbers are particularly important:

The amount of disability pension at the current status

The pension entitlement acquired so far (how much you have paid in so far and would receive monthly as a pension)

The expected amount of old-age pension (if you continue to pay in as you have averaged over the past five years)

Now you must also remember that you must pay taxes on your later pension. Since 2005, the taxable portion of the pension has been rising. For those who retired in 2021, the portion is 81%. In 2040, you will have to tax your pension completely.

For many, this is incomprehensible, having paid faithfully for their pension for years. A small consolation: Income as a retiree is expected to be lower than today, reducing your personal tax rate.

What types of retirement provision are there?

In Germany, there are three pillars of retirement provision, which differ mainly in their contributions to tax. The 2nd and 3rd pillars are meant to complement the 1st pillar of basic provision

Basic provision

The 1st and most important pillar is basic provision. This includes the statutory pension, civil service provision, and for some professional groups, pensions from professional pension schemes.

Company pension schemes

The 2nd pillar consists of company pension schemes, meant to supplement the statutory pension. Therefore, it is mainly aimed at employees.

Private provision

The 3rd pillar includes private provision. This includes unfunded private provision such as investments in real estate, stocks, or ETFs, but also state-subsidized provisions like the Riester pension and Rürup pension as well as private insurance policies.

Statutory provision (First Pillar)


In the statutory pension insurance, almost all employees are insured. Federal civil servants and judges are generally insured through the civil service provision. Self-employed individuals can also voluntarily insure themselves in the statutory system.

You receive a statutory pension if you have reached the minimum insurance time (5 years). This includes contributions from employment as well as private extra contributions, child-rearing time, and time spent caring for someone at home. How high your pension will be depends on the amount of your contributions and how long you have paid into the statutory pension insurance.

The German Pension Insurance offers several services

Old-age pension

This is the most important pillar of retirement provision. You are entitled to the regular old-age pension if you have been insured in the statutory pension insurance for at least 5 years and have reached the age limit. This has been gradually rising since 2012 from 65 to 67 years depending on the year of birth. People born in 1964 will be the first with the age limit of 67 years. Their regular pension starts then in 2031.

Disability pension

This is available if you can no longer work for health reasons and have not yet reached the age limits for the regular old-age pension. Of course, you also have to meet the contribution conditions. Unlike occupational disability, you receive a disability pension only if you can no longer work more than 3 hours a day in any profession. However, disability insurance kicks in even if you can no longer work in your previous profession due to health reasons. More about the disability pension can be found in our article on disability insurance.

Survivors' pension

In the event of a death, such as your (spouse) partner, your parents or a parent, you can receive a survivors’ pension. This also includes widow’s and orphan’s pensions.
For this, the deceased person must have met the minimum insurance time of at least 5 years or have died as a result of an accident. Whether you actually have a claim to it depends on various factors, for example, how long you were married.

Retirement provision for family work

The time you have children and raise them is partially credited to you by the German Pension Insurance as child-rearing time and thus as contribution time in the statutory pension insurance. Currently, the DRV covers your monthly contributions for 3 years per child, even if you are still working part-time. However, child-rearing is always credited to one parent only and must be applied for by you. There is also child consideration time. This is intended to count the time used for raising children during which one cannot work full time. It applies until the child’s 10th birthday and also helps meet the conditions of the statutory pension, such as pension entitlement and waiting period

Professional pension schemes

If you work in a freelance chamber profession, you are compulsorily insured in your professional pension scheme. This applies, for example, to doctors, psychotherapists, tax consultants, and pharmacists.
Unlike the statutory pension, professional pension schemes put back the contributions of their members, invest them in the capital market, and earn interest on them. Therefore, the pensions are usually higher than the statutory pension.

Company pension scheme (Second Pillar)


The company pension scheme (bAV) is one of the subsidized private provisions of the 2nd pillar. This way, you can later supplement your statutory pension with an additional company pension.


For this, a monthly amount of your gross income is transferred by your employer into a bAV contract. In some cases, your employer adds something or takes over the contribution completely. The employee’s share is paid from the gross salary through salary conversion. This means you pay part of this gross salary into a pension scheme. This naturally reduces your gross salary and you pay less tax and social security contributions on it.

Important: As an employee, you have a legal right to a company pension and since 2019 your employer must subsidize your company pension by at least 15% of your converted salary. For old contracts, this applies from 2022.

Also important to know: Your employer selects the contract for your bAV. There are six different implementation paths:

Direct commitment

The money paid in is invested outside the company and the contributions are also guaranteed to be paid out as a pension later. Contributions are unlimitedly tax-free.

Pension fund

Your employer determines the pension fund and pays in for you. You can also pay in from your gross salary.

Pension fund

Unlike the pension fund, the contributions paid into the pension fund are invested with greater risk in stocks and funds.

Contributions to company pension schemes are subject to social security contributions and taxes. Excluded from this are support funds and direct commitments: They are unlimitedly tax-free. For the other options, there are tax exemptions.

The tax exemption for taxes is up to 8% of the current contribution assessment ceiling of the statutory pension insurance. For social security contributions, it is 4%. The contribution assessment limit increases annually: in 2021, it is €85,200 (Western Germany) or €80,400 (Eastern Germany).
When you receive your company pension, you have to pay full taxes on the entire amount. Contributions for statutory health insurance are due from a monthly company pension of €164.50 (2021).

You can later decide whether you want a monthly lifelong pension or whether you want to have the amount paid out in one go. The third option is a one-time payment of up to 30%, with the remaining amount being paid out as a monthly pension.

Is a company pension scheme worth it?

Whether it makes sense or not cannot be answered in general. It is best to first ask your employer which company pension scheme he supports. If your employer alone pays into a company pension scheme for you, it is obviously worthwhile because you are essentially getting free money. To really be worthwhile, the employee’s share should be at least 20%, but preferably higher. If you want to contribute yourself, pay attention to the conditions. This is sometimes difficult because the employer usually chooses the contract. Therefore, you should request written information before signing and recalculate whether the costs, fees, and taxes are really worth it in view of the later pension payments. Often it turns out: You would have to live very long to really benefit from the company pension.
It also becomes difficult when changing jobs: it is not always possible to take the company pension with you to the next employer or to continue it privately.

Private (subsidized) provision (third pillar)

Anyone can choose private retirement provision to supplement their own pension. This only means that you pay the amounts yourself and mostly from your net income. There are also private pension provisions that are state-subsidized.

State-Subsidized Private Retirement Provision

In private and state-subsidized retirement provision, there is a distinction between Rürup and Riester pensions. Both options can be concluded through insurance companies and banks and provide a lifelong pension.

Riester pension

  • Riester contracts are available as savings plans, home pension (Wohn-Riester), and also combined with company pension provision. However, it can only be concluded by those who also pay into the statutory pension insurance or are married to a person who is insured under the statutory pension scheme.
  • There are two options for state funding: Either the state subsidizes with an annual basic allowance of €175 if you pay in at least 4% of your previous year’s gross income. And you get €300 per child per year. Or you get a tax advantage and can deduct an annual contribution of up to €2,100 from taxes. Which option applies is determined by the profitability test.
  • There is a contribution guarantee: so you get at least as much pension as you paid in. The disadvantage is that only very safe investments with usually very low interest rates are made. The return is therefore rather modest.
  • You can cancel a Riester pension during the contract term and have the invested portion paid out, minus costs, but the state subsidies and tax advantages must then also be repaid.
  • You can calculate how much Riester pension you would get with our Riester calculator.

Rürup pension

  • Also called the basic pension and was intended as an option for the self-employed and people with high incomes who do not pay into the statutory pension insurance. Basically, however, anyone can take out a Rürup pension.
  • Contributions up to the maximum limit of €25,787 per year (2021) can be deducted from tax. Therefore, such contracts are especially worthwhile if you earn a lot and pay high taxes. This also naturally reduces the tax burden on today’s salary.
  • The later pension is currently partially taxable, but by 2040 at the latest, it will be fully taxable.
  • There is a distinction between classic pension insurance with a guaranteed pension and fund-linked contracts or fund savings plans, where there is not always a guarantee.
  • You cannot cancel a Rürup pension, but only make it contribution-free. Once paid-in capital is not returned before retirement.
  • Due to high costs and severely limited flexibility, Rürup contracts are not always a good choice per se. The individual case decides.
    If you still decide on this type of pension, you should perform a Rürup pension comparison.

The tax advantages and state subsidies seem tempting at first in state-subsidized products. But due to the contract conditions, you lose flexibility. With the Rürup pension, you only see the invested capital again when you turn 62 or retire—before that, it is not accessible. On the other hand, you cannot cancel a Rürup pension, but you can at least make it contribution-free.

The return on the Riester pension is rather very low due to the contribution guarantee and low interest rates. In the worst case, the costs for managing the contracts even exceed the return.



State-subsidized products mean a waiver of flexibility. Moreover, the chances of returns due to low interest are low and can exceed the costs of the contracts.

Investments in stocks, funds, and ETFs

Life and pension insurance

Real estate

Non-Subsidized Private Retirement Provision

The third pillar includes retirement provisions that are not state-subsidized and you pay from your net salary. These include any type of private financial investment such as:

Taking out life or pension insurance today is not recommended due to low interest rates and the costs incurred for these contracts. Moreover, like Riester contracts, you cannot access the invested money until you meet the conditions of the payout phase. Cancellation is possible, but you usually make losses. However, it may be worthwhile to continue old contracts under certain conditions. Here too, you should recalculate once. Real estate ownership can also be private retirement provision. For example, you can live in it rent-free in old age. However, owning property—especially if rented out—also incurs costs.

Investing in the stock market is more flexible due to its liquidity and can yield a higher return. Even with smaller amounts, you can invest monthly in a fund or ETF savings plan. When investing in stocks, funds, and ETFs, make sure to diversify. The stocks or ETFs in the portfolio should therefore be based on different industries and include companies from various countries of the world, thus minimizing the investment risk. How to best passively invest, you can find out in our ETF handbook.

What is the best Retirement Provision for me?

To answer this question, you should first look at what pension you can expect later and how high it will be. Also consider what your life will look like in the coming years. For example, do you want to buy or build a house? Can you afford to divert a portion of your salary into further retirement provision each month or is that not possible right now because you need the money to live or for your self-employment? No matter which type of retirement provision you choose: always recalculate whether the conditions really pay off in terms of the later amount of the payout. Here, the focus is mainly on costs for administration, fees, and taxes. Also, note that contribution guarantees sound great but very often significantly limit your possible return.

Why you should provide for yourself privately

To close the pension gap largely, private provision is probably the most interesting option. If you invest your money in the stock market over a long period for retirement provision, you can achieve an attractive return. Private retirement provision is suitable, for example, investments in stocks, stock funds, or ETFs. At the same time, you remain flexible and can access your money if something unexpected happens.

You can also decide how much you want to deposit monthly and where you want to invest your money. A savings plan helps with long-term investing, and even career starters can invest money for later with smaller amounts. It is important here too to diversify your investments.
Those who take care of it themselves save on management costs but also bear the risk alone. Especially if you plan to buy a house, you should rather not invest your money in the stock market.

There are also tax advantages here: For stock funds and ETFs, a partial exemption applies under certain investment conditions. This means that dividends and sales profits are partially tax-free. In addition, there is a tax allowance on capital income.

Frequently Asked Questions

A retirement provision is a regular sum of money paid out after professional life to maintain one’s standard of living in old age. Previously, money was usually paid in for these pension benefits over many years.

Company pension provision (bAV) runs via the employer. Either only the employer pays, only the employee, or both contribute together. The employee pays the contributions through the conversion of their own gross wages. This saves taxes and social security contributions. Since 2019, employers must subsidize the bAV with at least 15 percent of the converted pay. For old contracts, this applies from 2022. The employer chooses the type of bAV. There is a distinction between direct commitment, pension fund, pension fund, support fund, and direct insurance. A Riester pension can also be concluded as bAV. The company pension is paid out later in addition to the statutory pension as a company pension from the age of
62. Taxes and social security contributions are due on the payments, but the health insurance contribution is waived for a monthly allowance of €164.50. You can choose whether you want a monthly lifelong pension or have the amount paid out in one go. The third option is a one-time payout of up to 30%, with the remaining amount being paid out as a monthly pension.
Private provision is voluntary and is usually financed from net income. However, there are also state-subsidized private provisions with tax advantages (Rürup pension) and state subsidies (Riester pension), which are paid from gross income. Non-state-subsidized private provisions can be life and pension insurance, but also investments in real estate and stocks, funds, and ETFs.
In Germany, three pillars of pensions are distinguished, the first of which consists of statutory pension insurance as basic provision. This also includes professional pension schemes and civil service provision. The second pillar includes company pension provision as supplementary provision to the statutory pension. The third pillar comprises private and state-subsidized supplementary provisions such as the Rürup and Riester pension and private provision without state subsidies, such as ETF savings plans or real estate.

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