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How do Germans save for retirement?
Old 12-12-2008, 07:41 PM   #1
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How do Germans save for retirement?

I was listening to Democracy Now on NPR a week or so ago and Amy Goodman was interviewing the publisher of der Spiegel, a German weekly. In the course of the interview he mentioned that the equity market meltdown hasn't affected most Germans because they don't own equities -- he said fewer than 10% of Germans own stocks.

So I wondered -- how do Germans save for retirement?

Google turned up this article, which says that on average Germans save 11% of their pay in savings accounts (in, basically, local credit unions) and that about 5.4% of them own stocks. They also tend to hate debt.

I'm assuming that the erosive power of inflation applies in Germany same as here, and it's about 3% there this year. How do they save enough for retirement? We're not hearing about lots of German retirees going without, and while I'll give some of that up to the fact that there's some healthcare subsidy and pensions -- does that account for all of it?

I'm curious, basically, about how non-US folks save for retirement. We're so focused on owning stocks / bonds, and I'm wondering what other systems are out there and effective. Anybody have more information?
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Old 12-12-2008, 07:47 PM   #2
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Maybe their healthcare is much cheaper than ours? More SS/pension coming in when they retire? Housing cheaper?? Their wages are so high that 11% of the total wage can sustain them through the golden years??

Hmm...
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Old 12-12-2008, 08:00 PM   #3
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My wife has family in Germany, and I have a few friends with close relatives there. The German equivalent of Social Security pays recipients at a higher rate than SS in the US does. This article says that it replaces 72% of pre-retirement income, for an "average" worker (whatever that might mean).

The Germans I know don't utilize credit at anywhere near the rate that we do in North America, even for houses. Of the families that I know, there also seems to be a pay-it-forward attitude, where parents were helped by their parents for those large purchases, and in turn help their kids. They fully expect that their kids will help their own children when the time comes. From what I gather, that seems to be the case in a lot of Western Europe.
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Old 12-12-2008, 09:40 PM   #4
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reply to ProspectiveBum "The German equivalent of Social Security pays recipients at a higher rate than SS in the US does."

While it is true that the German equivalent of Social Security (Rentenversicherun) pays at a higher rate than the U.S. Social Security one has to remember that the monthly deductions from your paycheck while working are higher too. The current rate is 19.9% of gross pay, with the employer picking up half the tab. The current U.S. rate for Social Security is only 12.4% with the employer paying half. There is an upper ceiling to this tax (similar to our "Maximum taxable earnings)" of currently Euro 5200 monthly.
The system has advantages for consum challenged people since it basically forces you to save more for an annuity.
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Old 12-12-2008, 09:45 PM   #5
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With all that we talk about mutual funds and stocks that is not where most people outside the USA put there money nor when they do; do they invest it in individual stocks or by themselves. I've learned this from working in Asia and England.

In a way there are tiers:
Working class - savings accounts
Middle class - bank type mutual funds
Upper Class - bank or independent investment advisers - usually put together a portfolio of mutual funds - you need a minimum amount of $
Rich - adviser - individual stocks
The above all have up front fees and other fees that we used to pay here in the USA - I think even Vanguard in Europe has much higher fees than here.

China/Hong Kong is a bit different - individuals do invest in individual stock
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Old 12-13-2008, 07:05 AM   #6
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The German lifestyle is very different from the US one - for example, they tend to shop for food once a week or so - they have more traditional family roles- mom stays home to take care of the kids. They don't have as much income disparity as we do in the US - i.e. most are in the middle class range. The stores are not open on Sunday and only lately have been staying open until 2000 or so during the week and on Saturday. They have 'sales' on items only two times a year - most Germans wait to purchase until then.

The above is slowly changing to a more US type model, but it is very slow. Additionally, they use a Euro Card - this is the equivalent of a debit card for us. Also, to pay their bills (electric, other), you must have a German bank account from which the company 'pulls' the bill amount monthly. There are good and bad aspects to all of this.

Houses are usually purchased carefully and for life - it costs between $3K-$5K to get a driver's license and gas is 4X the price of the US, so car ownership isn't as ubiquitous as in the US. Mass transit abounds and works well in Germany (not so in Italy, Spain or France - especially on the more local levels) - however, keep in mind the country of Germany is about the size of AZ or TX and is mostly developed - the Germans tend to live in small villages that surround larger cities/industrial area. There are still significant rural areas and family farms.

I currently live on the economy in Germany - this is the second time. My neighbors are Germans - he works for Bosch as an engineer and lived for 3 years in the States (South Carolina). He told me the bank owns his house (i.e. he has a mortgage).

One other thing - the Germans don't look at their careers from a portability aspect like we do in the US - if they get a good job with a company, they are more likely to stay with that company until retirement - my former landlord had worked for Opel and been with Opel the whole time - I have colleagues who work for Philips in Boblingen and they will be staying there - my current neighbor isn't planning on leaving Bosch. It's a combination of community, roots and incentivization for them to stay put.

I suspect that one would find a similar circumstance in Japan - perhaps it paid to be the former enemy of the US.....
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Old 12-13-2008, 07:05 AM   #7
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The Germans still maintain some financial discipline unlike the Americans, British etc. They experienced the Weimar republic and Hyper- inflation. Their inflation rate has been low.I bet many wish they still had their own currency. The British are in the process of destroying the Pound with deficit spending and the Euro will probably eventually follow.Since the dollar is the reserve currency it may take longer to collapse.If you polled the german public I believe they would choose a deflationary depression over a hyperinflationary depression if they had only those two choices.
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Old 12-13-2008, 08:17 AM   #8
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I would argue that the equity market has affected Germans, perhaps not as directly as us in the states.

Germans (and Europeans in general) are bigger consumers of bank and insurance products that Americans are.
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Old 12-13-2008, 09:35 AM   #9
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I would argue that the equity market has affected Germans, perhaps not as directly as us in the states.
I tend to suspect that Americans are (as a group) much more directly dependent on stocks for their retirement than Europeans -- in the same sense that we're more dependent today than, say, in the 1973-74 crash.

In reality, even if indirectly or abstractly, an equity crash affects just about everyone -- but when you live in a roll-your-own-retirement society where the only way most of us can get enough growth to attain retirement is through equities, it makes dealing with a market crash much tougher for society at large. And I would suspect, for that reason, the current crash is weighing much heavier on the psyche than the 1973-74 crash did.
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Old 12-13-2008, 10:53 AM   #10
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I lived in Germany for 4 years, albeit long ago, and really liked it. Maybe I should take (what's left of) my net worth and move to Germany. Interesting thread...
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Old 12-13-2008, 11:05 AM   #11
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The German lifestyle is very different from the US one - for example, they tend to shop for food once a week or so .
This caught my eye. Is this more or less frequent than US shoppers shop for food?

I have always shopped frequently, now about every other day, but sometimes daily or even more often. I like to run a just-in-time refrigerator. This is easy for me and in fact gets me a little exercise, since I almost always walk to get my food.

Ha
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Old 12-13-2008, 11:36 AM   #12
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Originally Posted by dex View Post
With all that we talk about mutual funds and stocks that is not where most people outside the USA put there money nor when they do; do they invest it in individual stocks or by themselves. I've learned this from working in Asia and England.

In a way there are tiers:
Working class - savings accounts
Middle class - bank type mutual funds
Upper Class - bank or independent investment advisers - usually put together a portfolio of mutual funds - you need a minimum amount of $
Rich - adviser - individual stocks
The above all have up front fees and other fees that we used to pay here in the USA - I think even Vanguard in Europe has much higher fees than here
Good summary.

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This caught my eye. Is this more or less frequent than US shoppers shop for food?

I have always shopped frequently, now about every other day, but sometimes daily or even more often. I like to run a just-in-time refrigerator.
We used to do 1 big shop a week when we lived in England and carried on that practice in the USA. With gas prices 4x higher than here we avoided unnecessary journeys as much as possible.

I always car-pooled with 3 others - that was normal. When we lived in Scotland I was not close to any others so used to cycle to work 5 miles each way, and there were plenty other cyclists / motor bike workers as well.
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Old 12-13-2008, 11:50 AM   #13
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Interesting thread. A number of my colleagues are German, and I have no trouble believing that they are thriftier and more prudent than Americans in financial matters.

Although I'm generally a beneficiary, I'm having definite doubts about our roll-your-own retirement system. I'm looking at the kind of income and fiscal savvy it takes to ensure a decent retirement here in the US, and I think it's unrealistic to expect the average worker to succeed without the majority of retirement income coming from a corporate pension or Uncle.

RE groceries, I managed to switch DW and myself from an every-other-day system, to once/week. The weekly trip is a bit arduous, but takes 2-3 hours total, as opposed to 4+ trips at 1 hr+ total. We always keep several weeks of food on hand for preparedness, so wouldn't want to be a day or two away from an empty fridge.
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The Germans invented SS
Old 12-13-2008, 12:08 PM   #14
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The Germans invented SS

At 72% they wouldn't have to save for retirement. Luxemberg does 100%. That is a bit too much for me since I would rather have the upside of equities. Perhaps it's my German background but I rarely shop more than once a week and normally carry a sizable inventory though if prices jump I cut back. I had room in the freezer this year for the first time in years. Even items like toiletries I normally buy in 2s and 4s to minimize the number of trips. The last thing I want is to do is run out and have to make a special trip. I would rather just add it to my next shopping list.
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Old 12-13-2008, 12:22 PM   #15
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Interesting thread. A number of my colleagues are German, and I have no trouble believing that they are thriftier and more prudent than Americans in financial matters.

Although I'm generally a beneficiary, I'm having definite doubts about our roll-your-own retirement system. I'm looking at the kind of income and fiscal savvy it takes to ensure a decent retirement here in the US, and I think it's unrealistic to expect the average worker to succeed without the majority of retirement income coming from a corporate pension or Uncle.
I think the unsustainable boom in the U.S. economy post-WW2 gave many Americans a sense of entitlement, that the gravy train would roll on forever. Wages outpaced inflation, jobs were more secure and wildly growing and profitable businesses could afford completely funding health insurance and employee pensions.

And we've spent the last 30 years or so in denial that those days are over -- with a hangover of debt (public AND private) and likely reduced corporate profitability for years to come in order to keep unsustainable promises already made to a fortunate generation or two.

You can do that for a while, but eventually the house of cards will collapse. That *may* be what we're seeing now, with a permanent "resetting" of what is reasonably expected from the economy, employers and government. The "deal" American workers were getting in the 1950s and 1960s is not possible to provide in the face of revived global competition that didn't exist for a couple decades after the war.

I suspect the two or three generations that benefitted most from the post-WW2 American economic bubble may be viewed in hindsight as the most financially fortunate generations in the nation's history.
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Old 12-13-2008, 01:32 PM   #16
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I worked in Germany a number of years. My impression was that the govt. sponsored plan wasn't a great deal, but that at least you had it.

More importantly Germans are very conservative. They pass wealth down through the family, particularly property. Germans only buy one house, rarely will they sell or a property will go out of the family.

Otherwise they're all extremely frugal, and don't have a lot of possession in their homes. I was talking about retirement to a colleague, and he mentioned that your average little old lady walking down the street with her grocery cart is probably a millionaire in property, bonds and what not.

I aspire to their sensibilities.
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Old 12-13-2008, 03:53 PM   #17
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I can only talk about the 2 Europeans countries I am intimately familiar with. But there are some very important differences from one country to the next.

Retirement is often a 3 legged stool (like it used to be in the US):
1) SS: mandatory contributions go to pay the current retirees' retirement benefits.
2) A kind a pension (often mandatory) which is usually not administered by your employer but rather by a third party. In some countries you can choose to either receive your pension as a lump sum or it can be annuitized upon retirement.
3) Personal savings.

Taxes are very high in Europe and that often is reflected in their investment preferences. Real estate has long been an investment staple for Europeans because it often benefits from generous tax breaks. Owning RE is also be a great tax avoidance tool. Insurance products are also very popular because, despite heavy fees, their tax advantaged status can save a lot of money in the long run (we have no widely available tax-sheltered retirement accounts in Europe and therefore insurance products are one of very few ways to shelter your money from taxes). They are also favorite because they allow you to pass on your estate to the next generation without having to pay the heavy estate tax. Third, many savings accounts (cash) offer tax breaks as well (the interests you earn are tax free on some accounts) which makes them popular as primary savings vehicles.

Contrast that with stocks. Stocks and mutual funds earnings (dividends and capital gains) are often taxed heavily as regular income. They are expensive to trade (most people go trough a broker or their local bank to buy equity investments) and mutual funds are loaded with high fees and commissions. And on average, Europeans don't trust the stock market. Same with bonds, except perhaps government bonds that older people still love.

As mentioned above, estates are passed from generation to generation. When my grand parents died, their house was passed down to my cousins. They now live in a house they own mortgage free (they are 35, 31 and 25 years old and divided the huge farm house into 3 large flats). My sister and I will receive very large inheritances composed of assets that my great grand parents started to accumulate back in the early 1900's. Each generation has added to the family treasure chest. I will too.

Europeans are very conservative with their money. Their first priority is often to pay off their home. Only then will they consider investing their money elsewhere.

My dad's example:
He was an executive for most of his life and SS will replace only a small fraction of his pre-retirement income. His retirement income (about half his pre-retirement income) will consist of SS (25%), an annuitized pension (50%) and personal savings (25%). He has very substantial assets which he could sell to live it up, but it would be unthinkable for him to sell family assets for the purpose of funding a grand lifestyle for himself.

My mom's income comes exclusively from SS + Pension.

Based on what I know this is how other family members have/had allocated their retirement savings: (when I say RE I mean investment RE, it doesn't include their home)
Grand parents: 90% RE, 10% cash
Aunt and Uncle: mostly RE (they cashed in their pension as a lump sum to buy rental properties from which they draw income)
Grand uncle: 50% RE, 50% cash
Mom: 100% cash
Dad: 70% RE, 20% cash, 10% stocks.

Very important to note that people will use only their cash or property income to fund their retiremement. Investment RE is rarely sold, it is passed on to the next generation instead.
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Old 12-13-2008, 04:00 PM   #18
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Good post from a denizen.

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I can only talk about the 2 Europeans countries I am intimately familiar with. But there are some very important differences from one country to the next.
Regarding passing real estate down the generations, the joke in Germany is that all the mail boxes say "Schmidt, Schmidt & Schmidt"!
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Old 12-13-2008, 04:14 PM   #19
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As for Germans paying off the house first ....

They can't even buy a house without first opening up a house savings account at a Hypothek or Sparkasse or other bank. It's like saving for a downpayment, but the downpayment is a large fraction of the home price. When I lived in Germany, folks were putting money into these accounts for 15 or more years before they could buy a house. And then they had to have their elderly parents go in with them on the house. I imagined that the mortgage banks were paying maybe 1% interest on these accounts while sticking it to their account holders.

But if you have cradle-to-grave social services and a state pension, there is not much else you need to save your money for except that house you are gonna be able to buy in 20 years, your cars and your vacations.
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Old 12-13-2008, 05:06 PM   #20
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Maybe their healthcare is much cheaper than ours? More SS/pension coming in when they retire? Housing cheaper?? Their wages are so high that 11% of the total wage can sustain them through the golden years??

Hmm...
Germans don't really have to worry too much about retirement because like most developed countries, they have a social safety net (so called cradle to grave society). They have access to excellent universal health care system, they are very frugal and most importantly they don't have to worry about eating dog food in old age like most Americans have to worry about.
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