Franziska Meyer is looking forward to her retirement. At last, she can go traveling with her husband and fulfill long-forgotten dreams. Luckily, her husband Kurt is retiring at almost the same time as her. They are currently debating whether to have their retirement assets paid out as a lump sum or whether to draw a pension. This decision is harder than they thought. How can we be sure that the money will last us for our whole life? Franziska and Kurt are uncertain which is why they are asking their friends for advice.
1. Pension for women, capital withdrawal for men?
Advice: Franziska's friends are definitely advising her to draw a pension. They point out that this is worthwhile for women regardless of conversion rate because women usually live longer than men. On the other hand, they recommend that Kurt has his capital paid out as a lump sum because he has earned and saved so much.
Franziska and Kurt: They take their friends' advice to heart, but their gut feeling doesn't match this. Franziska has already had her heart valve operated on twice in the last three years. Although she feels well after the second operation which provided her with a new heart valve, she is nowhere near as fit as she was five years ago. Kurt, on the other hand, is fit as a fiddle and feels great. It seems like to lie in the family. His father is now 96! Is there any chance that his lump sum would last until this age?
Our advice: Read the pension certificate very carefully
A pension is often better for women than for men. When reaching the retirement age of 64 years, their life expectancy is around 23.5 years; according to the Federal Office of Statistics, for men it is around 19.5. But there are other things apart from this fact to consider. What does a good state of health mean and what does it have to do with life expectancy? The final years of life are often the most expensive. The cost of long-term care at home or in a nursing home are not always fully covered by health insurance funds. To be sure that savings are not used up for personal nursing care, the preference should be for the security of a pension.
The decision also depends on other income sources such as property, life insurance and life annuity insurance, payment plans and on the level of retirement savings capital. It is all the more important to properly read the pension certificate and the consult the pension fund rules. The pension certificate contains valuable information which is very useful: Conversion rate, pension after retirement and the level of retirement savings capital.
2. Is it at all worthwhile drawing a pension in conjunction with a low conversion rate?
Advice: Your friends are warning that it is not worth drawing a pension in conjunction with a low conversion rate. They maintain that these days no conversion rate could be high enough to satisfy his retirement assets in the form of a pension.
Franziska and Kurt would never want either of their children to have to pay out when they need care in old age. At the same time, they are hoping for some financial freedom to organize their retirement as they see it. Should Kurt and Franziska draw on facts such as the conversion rate as a basis for making a decision or is it better for them to concentrate on their dreams?
Our advice: A secure plan is the most important
It can generally be said that the lower the conversion rate the more worthwhile a capital withdrawal. However, other factors also play an important part, for example the domestic circumstances. Kurt and Franziska live in a house that they own. It is important for them to ensure early on that the mortgage is still affordable for them after retirement. Banks often want to lower the mortgagee burden because the pension income turns out to be lower than the previous salary. In addition to this, many people want to transfer their property to their children while they are still alive. However, with right of residence, they would also like to stay in their familiar home as long as possible. In order to reconcile both of these wishes, before retiring, it is important to get information on the two options of "selling" and "inheriting". In so doing, Kurt and Franziska mustn't lose sight of the fact that the equity is tied up for as long as they remain in their property. Set enough free assets aside in order to fulfill other dreams. A sale should also be planned as early as possible. Generally speaking, a secure plan is preferable to a pension. However, a partial capital withdrawal can actually be beneficial if a mortgage needs to be repaid.
3. Kurt understands a lot about investing money. Would he be better off with a capital withdrawal?
Advice: Kurt is fit and a quick thinker, and he also understands quite a bit about investments. In the past, he has repeatedly managed to make gains by purchasing good shares. This is why his friends are advising him to withdraw the capital. After all, anyone who understands how to invest will know the best way to generate a good return from their lump sum.
Kurt and Franziska: Kurt and Franziska's thoughts go around in circles – they have a lot of unanswered questions. How likely is it really for them to generate a good return with their knowledge of investments? How long will Kurt be fit enough to be able to make investments himself? How long will their children be dependent on them? Moreover, they have no real idea of how they want to spend their sunset years. Sometimes they dream of doing nothing and other times they yearn for adventure.
Our advice: The gut feeling should also have a say
For some people, a capital withdrawal really is worthwhile. Especially if they are single with children. If they also know something about investing and have a lucky hand, then they can even generate a good return. On the other hand, people who are married, who are not particularly interested in money matters, and are fit and healthy are better off with a pension. However, they still need to be aware of one thing: if the insured person dies, the surviving partner receives the pension – normally 60 percent – but the grown-up children are generally left empty-handed.
The final decision is how to withdraw the retirement assets; this is something very personal and life plans and gut feeling are very important here. Many people look forward to a very exciting future, to new things and adventure, are open to risk, and are happy to take responsibility for it. Others have experienced enough, have already seen the world and are looking forward to peacefully sitting in their garden, hiking in the mountains, Sunday roasts with the children and grand-children. And one thing in particular that they no longer want to think about is money. For them, a secure income for the rest of their life is just what they want, and without the ifs and buts.
So, what is the right thing to do? Get competent advice
It is wise of Franziska and Kurt to spend time before reaching retirement age to think about how they would like to withdraw their retirement assets. For many couples, the best solution is to take a larger part of the joint assets in the form of an annuity and to have the remaining capital paid out as a lump sum. The annuity ensures you the income you require and you can fulfill a few long-cherished wishes with the freely available assets. However, the decision about pension or lump sum should not be made with friends. Although friends speak from the heart, it is from their own experience. They add their own wishes and fears, which can fudge one's judgment. An independent expert views the subject in a more matter-of-fact way and can give neutral advice. Ultimately, the decision has to be right for the retirees. Retirement is a very personal and individual matter.