Coming soon to a broker near you:

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We're not quite there yet

This post is a follow-up on a previous post which looked at the new proposed "Riester 2.0", or Altersvorsorgedepot. Since then there's been some updates to the draft so I'm revisiting this topic with updated calculations. You know how sometimes in blogs the writer tells you you should read another post before reading this one? and it's all a bit tiring? not today! here's the original post AND everything that's changed, all in one. exciting, I know.

What's changed?

The general idea

Savers will be able to open a designated trading account at one of several approved providers and deposit into that account as they want. Additionally, the state will add incentives on top of deposited amount, and will grant savers certain tax benefits. The costs of this plan are regulated, but providers are allowed to ̶c̶h̶a̶r̶g̶e̶ ̶u̶p̶ ̶t̶o̶ ̶1̶̶̶.̶̶̶5̶̶̶%̶̶̶ ̶p̶e̶r̶ ̶y̶e̶a̶r̶ ̶i̶n̶ ̶f̶e̶e̶s̶.̶ This is probably the biggest change: the maximum allowed fee has been lowered to 1% instead of the previously proposed 1.5%. Doesn't sound like much? see the comparison table below - it makes quite a difference.

How much can you get? Up to 1,200€/year, you'll get 30 Cents for every Euro. If you invest 1,200€, you get 360€ as a bonus (In 2029 this amount should increase to 35 Cents per Euro). For the next 600€ Euro, from 1,201€ up to 1,800€, you get 20 cents per Euro, so that's another 120€ Euro. In total, if you invest the maximal amount of 1,800€, you'll get a total of 480€ on top of that, making the grand total 2,280 Euro per year.

The specifics of the incentive mechanism also changed. The total maximum incentivized amount and the total possible incentive are unchanged, but the calculation behind it did, and it's now more attractive to low-earners, which presumably will invest less. Why? because the first tier gives you higher incentives than before, and the 2nd tier gives you lower ones;

Old incentive mechanism:

	Invested Amount	For every 1€ Invested , you get:	Maximal Incentive
1st Tier	Up to 1,200€	0.3€	360€
2nd Tier	1,201-1,800€	0.2€	120€
Maximal incentive			480€

New incentive mechanism:

		For every 1€ Invested , you get:	Maximal Incentive
1st Tier	Up to 360€	0.5€	180€
2nd Tier	361-1,800€	0.2€	360€
Maximal incentive			540€

As you can clearly see above, there's a more aggressive on the first 360€ you invest, and now the same lower 2nd-tier incentive is applies to a larger part of the total investment up to 1,800€ per year. In total, the maximum achievable amount increased from 480€ to 540€.

But wait, there's more: for every child of yours, who's eligible for Child allowance (Kindergeld), you'll get an additional bonus of 300€/year.

The total incentive per child (Kinderzuschlag) stayed the same, but it's now dependant on your own investment: the state will match your investment, 1:1, up to 300€ per year, for every child that's assigned to your portfolio. Same as before, the child has to be eligible for Kindergeld.

Additional tax benefits

On top of the incentives, the total invested amounts (your own investments and the state incentives) will be considered as a deductible costs for tax purposes and can be used to reduce your overall tax burden.

If at this point it feels like it's a bit too good to be true, well - listen to your heart. Some hard truths are coming...

The Saving Phase

Let’s compare investors saving 1,000€/month over 30 years at a 7% return.

Some points worth mentioning:

• ̶I̶ ̶i̶n̶d̶e̶e̶d̶ ̶a̶s̶s̶u̶m̶e̶d̶ ̶t̶h̶a̶t̶ ̶f̶r̶o̶m̶ ̶2̶0̶2̶9̶,̶ ̶t̶h̶e̶ ̶b̶a̶s̶e̶ ̶i̶n̶c̶e̶n̶t̶i̶v̶e̶ ̶j̶u̶m̶p̶s̶ ̶f̶r̶o̶m̶ ̶3̶0̶c̶ ̶t̶o̶ ̶3̶5̶c̶ ̶p̶e̶r̶ ̶€̶1̶ ̶(̶b̶r̶i̶n̶g̶i̶n̶g̶ ̶t̶h̶e̶ ̶m̶a̶x̶i̶m̶u̶m̶ ̶t̶o̶ ̶€̶4̶2̶0̶)̶.̶ This is no longer relevant

• Child Cap: The €300/child bonus is a great "instant return," but the maximum duration for a child to receive child allowance is 24 years (might be less but I wanted to be optimistic in terms of benefits and incentives). In our 30-year example, I've assume two kids are born in Year 1. You get the bonus for 24 years, then it vanishes.

• Effective Tax Shield: If you are a high earner (42% bracket), your tax deduction is worth ~€957. BUT: Since the €480 bonus you already received, is deducted from that amount, you're left with an effective tax shield of €477. In the calculation below, this amount is reinvested back into the pot. The numbers changed a bit but the principle remained the same. It's now a potential tax shield of ~€983, from which we deduct the maximal amount of €540, and we're left with an overall similar €433 effective tax shield.

• Fees: as mentioned above, providers will be allowed to charge "up to" 1.5%. This is pretty much like telling a T-rex it can eat "up to" the 10 sheep. I wouldn't expect it to spare any sheep out of kindness, so we have to assume a 1.5% annual fee.

I've looked at few different alternatives:

• DIY: You invest the entire 1,000€ into a low-cost ETFs portfolio

• Riester 2.0: you go all-in on the new Riester plan

• Hybrid: you deposit into the Riester 2.0 plan the maximum amount that is incentivized, to maximize benefits, and the rest goes into a low-cost ETFs portfolio.

Here are the older calculations, based on the previous assumptions:

Let's see what you'd get in each scenario:

Total amount accumulated at the end of the 30-Year period:

Strategy	Total Value	vs. Pure ETF
100% DIY ETF (0.2% fee)	€1,207,000
100% Riester 2.0 - No kids (1.5% fee)	€918,000	-€289,000
100% Riester 2.0 - 2 Kids (1.5% fee)	€982,000	-€225,000
Hybrid - Single, No kids	€1,170,000	-€37,000
Hybrid - 2 Kids (Smart Move)	€1,250,000	+€43,000

Hybrid Strategy: Investing only up to the subsidized limit (~€1,800 + bonuses) in the Depot; the rest in a low-cost broker.

And, here are the updated ones:

Strategy	Total Value	vs. Pure ETF
100% DIY ETF (0.2% fee)	€1,207,000
100% Riester 2.0 - Single (1.0% fee)	€1,021,000	-€186,000
100% Riester 2.0 - 2 Kids (1.0% fee)	€1,085,000	-€122,000
Hybrid - Single, no kids	€1,185,000	-€22,000
Hybrid - 2 Kids (Smart Move)	€1,288,000	+€81,000

As you can see, the overall picture stayed pretty much the same, but the gap definitely closed a bit. In other words, the new Riester 2.0 is still inferior in most cases, it's just not as bad as before.

Here are the old results in a chart:

For a single with no kids, investing into the Riester 2.0 plan basically means paying almost 300,000€ in fees over the entire period

And the new ones:

The Real Tax Benefit (and why it’s a loan, not a gift)

Like every other private long-term saving product in Germany, one of its key selling points is tax savings in one way or another. Here as well, if you're earning well, you'll love the Sonderausgabenabzug (special expense deduction). This is how it works:

As already mentioned above, the real tax saving is not 983€, but rather 983-540=433. However, never forget: this is a tax-deferred product. You save taxes at 42% today, but you will pay your full personal income tax rate on every single Euro (principal + all gains) when you withdraw it. In a private ETF, you only pay 18.46% tax on the gains.

The Payout Phase: Freedom vs. "The Factor"

Accumulating the money is only half the battle. The real "hidden fee" appears when you try to spend it.

The DIY ETF Portfolio (The "3.5% Rule")

• Withdrawal: In my calculation, I assumed you can withdraw 3.5% of your total portfolio value in the first year and then adjust it for inflation. It's basically a more conservative version of the more well-known 4% rule. In our case, you withdraw €40,075 before tax.

• Taxation: You pay a flat 18.46% effective tax on profits only.

• Flexibility and full control: You own the shares. You decide. If you want to increase/decrease the withdrawals, permanently or just once, you can. If you pass away, your family inherits the full balance.
  

The Altersvorsorgedepot (The "Rentenfaktor" Trap)

• The Factor: Providers use a Rentenfaktor to calculate your monthly payout. Because they have to insure themselves against you living to 120, they often pay out the equivalent of only 2.5% to 3% (or lower), significantly lower than the DIY rate.

• Full Taxation: Your monthly allowance is taxed as full income. If you have a decent state pension, rental income or any other income source, your tax rate on these withdrawals will be much higher than 18.46%.

• The "Exit" Tax: While not all details have been finalized, looking at other similar incentives, it's safe to assume that If you move outside the EU (USA, UK, Switzerland), you are usually required to repay all bonuses and tax breaks in one lump sum.
  

Final Verdict

When comparing the new Riester 2.0 to a simple, low-cost ETF portfolio, we did see one scenario where this would make sense; the Hybrid Strategy. Even then, that is only true if:

1. You are a parent (the child bonus is the only thing that beats the 1.5% fee).

2. You stop exactly at the cap. Investing anything above the incentivized amount into a product with a 1.5% fee simply doesn't make sense.

3. You are staying in Germany. Plans change, life happens. To be heavily "fined" for moving away is not something anyone would choose to add to the mix.

Although better than before, the final verdict is the same: at 1% annual fees, this product is only superior to an individual ETF portfolio in very specific scenarios.

And so we end up with a product which, the best that can be said about it is that, under certain circumstance, it's not terrible

What would have made it great? First and foremost, lower fees. Simple as that. 1.5% is A LOT. In the last year of our example, if all your investment goes into the Riester plan, the fee can be over 12,000€. It almost eliminates your deposits in that year. 12,000€, for "managing" a simple ETF portfolio.

But to me, there's a bigger question: Is the proposed Riester 2.0 a real change in the German pension landscape? Unfortunately, my answer would be no. It's not.

The only case where it makes clear sense is in combination with a simple, independent investment into a low-cost ETF portfolio. But for anyone who's capable of doing that, this doesn't solve any real problem. It simply ties them down to an expensive product, which serves more as a "loyalty program" to Germany itself, than a real, tax-optimized, simplified long-term investing product.

And another thing: it's nice to compare scenarios and run calculations, but zoom-out for a moment and consider the actual amounts: the fully incentivized amount is 1,800€ PER YEAR. With the added incentives, even with 3 kids, we're still in the 3,000 region. This is a very low amount. Alone, this amount will not solve anyone's pension problem.

A real change in the system, a true revolution, will only come when the default plan is built so that in most reasonable scenarios it can provide a good standard of living for a person who worked their entire life and contributed into the system. Riester 2.0 is very, very far away from that.