7 reasons to invest for your retirement

May 28, 2024  |  Manuela Rabener
7 Gründe, jetzt mit der Altersvorsorge zu beginnen
Rising life expectancy, lower expected state pension and higher costs in old age are leading to an increased need for retirement provision. Inflation erodes the value of money over time, so to counteract one has to put their money to work. The good news is that the earlier you start, the easier it will be to build up sufficient assets for retirement thanks to compound interest.

The next holiday, a better car, the upcoming pay rise - there are an almost unlimited number of reasons to postpone saving and retirement planning. But there are compelling reasons to start as early as possible, even if it's only a small monthly savings amount to begin with. Here are the seven most important arguments in favour of continuously building up wealth:

1. Longer life expectancy

We tend to get older and healthier. While life expectancy in Europe was 63 years in 1950, it has risen to 74 years by 2022 and forecasts predict an age of 84 years by 20501. In order to enjoy these extra years, it’s important not to run out of financial resources.

2. Rising healthcare expenses

Healthcare expenses have risen continuously in Germany in recent years. In 2000, it amounted to 2,660 euros per capita2. Today, according to the Federal Statistical Office, it amounts to over 5,900 euros per capita3. These expenses continue to rise, especially in old age, so you need to be able to afford an adequate insurance policy.

3. Pension gap

The state pension provides Germans with basic security in old age, but there can be a large gap between what you need and what you get. If you want to maintain your standard of living in old age, you need to make private provisions.

4. Depreciation due to inflation

Inflation returned in recent years and the result has been felt widely with the erosion of our purchasing power. Even with moderate inflation back at 2 per cent (long term target for the ECB), 3,000 euros today will only have a purchasing power of 2,019 euros in 20 years. This means that the money under your pillow or in a bank account with little or low interest only loses value in real terms in the form of a loss of purchasing power, in this example almost 1,000 euros. This loss must be compensated for by making appropriate retirement provisions

5. Savings duration

If you start earlier, you only need to put aside smaller amounts per month in order to be secure in old age. This is due to the fact that it makes a considerable difference whether you save for 35 or just 15 years. If you save 150 euros a month for 15 years, you will only save 27,000 euros – without interest – whereas if you save for 35 years, you will save 63,000 euros.

6. Compound interest effect

The compound interest effect ensures that you benefit from a longer time horizon. This is because it leads to exponential growth of your investment if your returns are continuously reinvested. The longer you invest and the higher the return, the greater the exponential effect.

7. Less emotional stress

If you start early with retirement planning, you take a lot of pressure off yourself. You don’t have to constantly achieve new salary increases during the course of your career, or stay in a job that is not really fun or fulfilling, or have to work longer to create the financial reserves for your pension.

To summarise, it’s clear that private pension provision is becoming increasingly important in order to be able to maintain your standard of living in old age. The earlier you start, the easier and less stressful it is to create a sufficient financial cushion for your retirement.

This article was initially published on July 8, 2016 and has been updated.

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Manuela Rabener
Manuela brings both financial market expertise and several years of experience in founding and developing e-commerce start-ups. As founder and CEO of Westwing.ru, she built the site into the market leader in the home & living sector in Russia & Kazakhstan in 3 years. Prior to that, she worked for over 7 years at McKinsey & Company in New York, Dubai, Munich and Cologne, where she advised clients in the private equity and consumer goods sectors on strategic issues, as well as banks on risk management. Manuela studied business administration at the Universities of Frankfurt and Lyon, specialising in banking and financial derivatives. She also holds a doctorate in economics from the European Business School in Oestrich-Winkel.