Closing the Pension Gap: Strategies

What Is the Pension Gap?

The pension gap (also called the benefit gap) is the difference between your last income and your expected statutory pension. It shows how much money you'll be missing in retirement to maintain your current standard of living.

The pension-level problem

The pension level – the ratio of the standard pension to average income – currently stands at around 48%. The trend: falling. This means:

• Today: after 45 years of contributions, an average earner receives about €1,500 in pension (gross!)
• 2040: the pension level could fall to 43%
• Reality: most people don't have 45 years of contributions and don't always earn the average income

Why the gap ends up bigger than expected

• Studying/training: fewer years of contributions
• Parental leave: reduced contributions
• Unemployment: lower contributions
• Taxes: pensions are taxable!
• Health insurance: about 11% goes toward health and long-term care insurance

Calculating Your Pension Gap

To work out your personal pension gap, you need two figures: your desired income in retirement and your expected statutory pension.

Step 1: Set your desired income

Rule of thumb: in retirement you'll need about 70-80% of your last net income. Some costs disappear (commuting, work clothes), while others rise (health, leisure).

Step 2: Determine your expected pension

Your pension statement from the German Statutory Pension Insurance shows your projected pension. Watch out: that's the gross amount! Deduct another 15-20% or so for net (taxes plus social security contributions).

Step 3: Calculate the difference

Desired income minus expected net pension equals your monthly pension gap. Multiply that by your expected retirement duration (about 20-25 years) to get the capital you'll need.

Example calculation

• Last net income: €2,800
• Desired income (80%): €2,240
• Expected net pension: €1,400
• Monthly gap: €840
• Capital required (25 years, 3% withdrawal rate): approx. €336,000

Private Provision: Your Options

There are many ways to close the pension gap. Each has pros and cons. Here's an overview:

1. Unsubsidized private provision

• ETF savings plan: flexible, low-cost, good returns
• Stocks/funds: more control, more effort
• Savings/fixed deposits: safe, but barely any return
• Private pension insurance: guaranteed pension, often high costs

2. Government-subsidized provision

• Riester pension: allowances + tax benefits, for employees
• Rürup pension: tax benefits, for the self-employed
• Company pension (bAV): employer top-up

3. Real estate

• Owner-occupied home: rent-free living in old age
• Rented-out property: passive rental income

Recommendation: a mix of different building blocks is usually smarter than putting all your eggs in one basket.

ETF Savings Plan: The Flexible Solution

For many people, an ETF savings plan is the best route to private retirement provision. It combines good returns with low costs and maximum flexibility.

Why ETFs?

• Diversification: a single ETF holds hundreds or thousands of stocks
• Low costs: TER often below 0.2% a year
• Good returns: 7-8% p.a. on average over the long term
• Flexibility: adjust or cash out at any time
• Simplicity: no active management needed

How much you need to save

To close the €840 monthly pension gap (see the example above), you need about €336,000 in capital. Depending on your investment horizon:

• 40 years to retirement: about €100/month
• 30 years to retirement: about €230/month
• 20 years to retirement: about €500/month
• 10 years to retirement: about €1,300/month

The compound interest effect: starting early means paying in less overall than someone who starts later. Time is your biggest lever!

The simple ETF strategy

1. Open a brokerage account with a low-cost broker
2. Choose a global equity ETF (e.g. MSCI World or FTSE All-World)
3. Set up a savings plan (automatic monthly contributions)
4. Don't sell, even during market downturns
5. From 10 years before retirement: gradually reduce risk

Riester and Rürup: Government-Subsidized

The government subsidizes private retirement provision with allowances and tax benefits. Whether it's worth it for you depends on your situation.

Riester pension

Who it's for: employees subject to mandatory pension insurance, civil servants, recipients of unemployment benefit

• Base allowance: €175 per year
• Child allowance: €185 (born before 2008) or €300 (born from 2008)
• Personal contribution: 4% of gross income minus allowances
• Tax treatment: contributions are deductible as special expenses

Riester is especially worthwhile if you have: a low income with the full subsidy rate, several children (high allowances), or a high marginal tax rate (tax savings)

Rürup pension (basic pension)

Who it's for: the self-employed, freelancers, high earners

• Tax benefit: in 2026, 100% is deductible (up to €29,344/year, €58,688 for married couples)
• No allowances: but substantial tax savings on a good income
• Protected from seizure: especially relevant for the self-employed

Caution: both products have drawbacks – limited flexibility, often high costs, restricted inheritance. Check the details carefully before signing up!

Company Pension (bAV)

The company pension is often underrated. Since 2019, employers have had to contribute a top-up of at least 15% – that's free money!

How the company pension works

You give up part of your gross salary, which flows into a pension plan instead. This saves you tax and social security contributions – and your employer adds 15% on top.

Advantages

• Employer top-up: at least 15%, often more
• Tax/social security savings: contributions are partly exempt from deductions
• No effort: your employer handles it
• Automatic: the money never even hits your bank account

Disadvantages

• Lower statutory pension: due to a lower gross salary
• Taxed in retirement: the full pension is taxable
• Limited products: only what your employer offers
• Changing jobs: transferring the plan can be complicated

Rule of thumb: if your employer contributes 20% or more, a company pension is almost always worth it. At just 15%, run the numbers carefully.

Property as Retirement Provision

Many Germans rely on owning property as retirement provision. That can work – but there are important caveats.

Owner-occupied home: living rent-free

• Advantage: no rent in old age (often saving €800-1,500/month)
• Advantage: inflation protection – property values tend to rise
• Disadvantage: capital is tied up, not flexible
• Disadvantage: maintenance costs in old age

Rented-out property: passive income

• Advantage: regular rental income
• Advantage: value appreciation plus rent increases
• Disadvantage: management effort, tenant risk
• Disadvantage: concentration risk – a lot of capital in a single asset

Important: paid off before retirement!

Property only works as retirement provision if it's paid off before you retire. Otherwise you'll have loan installments to pay in old age – which widens the pension gap instead of closing it.

Planning the Withdrawal Phase

Saving up is only half the job. Just as important is the question: how do you withdraw the money in retirement?

The safe withdrawal rate

The classic recommendation: withdraw a maximum of 4% of your assets per year. On €300,000, that's €12,000 a year or €1,000 a month. For extra safety (a longer retirement, less risk): 3-3.5%.

Withdrawal strategies

• Fixed withdrawal: the same amount every year (inflation-adjusted)
• Variable withdrawal: a % of current assets – more flexible, but fluctuates
• Bucket strategy: money split into buckets for the short term (cash), medium term (bonds), and long term (stocks)

Risk in the early years

The biggest risk: a stock market crash right after you retire. If you have to sell then, your assets shrink fast. Countermeasure: keep 2-3 years of expenses parked in safe assets (savings accounts, bonds).

Frequently Asked Questions About the Pension Gap