7 reasons to invest for your retirement

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.

• ¹ Source: Statista
• ² Source: German Federal Statistical Office
• ³ Source: German Federal Statistical Office