Retirement account calculator

The calculations presented here require numerous assumptions, which may vary from person to person. Our main goal is to make you aware of the factors you need to consider when deciding between a retirement account and a regular brokerage account. Here are the assumptions we have used for the calculation:

General assumptions:

• Inflation: Inflation is not taken into account in the calculation. Inflation reduces the future purchasing power of the capital saved, but this applies to both account types (retirement account and normal brokerage account).
• Dividends: It is assumed that investments are made in an accumulating product and, accordingly, no dividends are paid. If dividends are paid, they are not taxed in a retirement account during the accumulation phase, whereas they are taxed immediately in a regular brokerage account and offset against the Vorabpauschale at the end of the year. If you invest in a distributing product, the effect of compound interest – and consequently the return on investment during the accumulation phase – is generally lower, particularly if the distributions are not immediately reinvested. This applies to both types of investment accounts.
• Payout flexibility assumption: For the entire payout phase, our calculation model assumes constant annual gross payouts that exceed the annual capital growth of the remaining portfolio. This assumption is necessary in order to be able to illustrate a time-limited payout phase with constant payouts. For the retirement account, we assume that the possibility to withdraw distributions, as well as the option to withdraw up to 30% of the capital outside of the usual monthly payouts at the end of the accumulation phase, may be utilised to enable such constant annual payouts.

Retirement account:

• Timing of inflows and outflows: In the accumulation phase, any subsidies and tax benefits earned in a given year are added to the account at the end of the following year. Other inflows (contributions) are also treated as end-of-year transactions (conservative assumption). During the payout phase, the full gross pension amount for the year is assumed to be liquidated at the beginning of the year and will not yield returns for that year. Returns are calculated based on the previous year’s ending balance.
• Taxation: No tax is deducted during the accumulation phase. During the payout phase, taxation depends on the type of contribution: The subsidised contributions (up to 1,800 € plus the associated subsidies) is fully subject to income tax, which we calculate based on the selected marginal tax rate (model input parameters). For this component, the entire payout is subject to taxation, not just the earnings. For the non-subsidised component, the half-income method (Halbeinkünfteverfahren) is applied to capital gains on overpayments if the contract duration exceeds 12 years and the payout starts only after the policyholder has reached the age of 62. If these conditions are met (which is assumed here), only 50 % of the realised profits are taxed upon payout; the remaining 50% are tax-free. For the calculation, we assume that the tax rate in retirement is 10 percentage points lower than the marginal tax rate selected above. Note: We assume this relatively small reduction of 10 percentage points because the marginal tax rate in retirement rises as the payout increases. This assumption has no general validity. If the difference is less (more) than 10 percentage points, this reduces (increases) the net pension associated with the retirement account.
• Reinvestment assumptions: Additional tax benefits are reinvested into the retirement account up to the yearly maximum limit. For the purposes of emulation, investment amounts exceeding the yearly limit are treated as if they were invested in a regular brokerage account. This applies to tax refunds received from investments equal to the maximum possible investment in the retirement account.

Normal brokerage account:

• Taxation in general: For the regular brokerage account, a Teilfreistellung (partial exemption) of 30 % (in reality, this applies only to eligible products, e.g. to most equity ETFs), an annual Vorabpauschale (advance lump sum) of 0,5 % (paid at the end of each year, with the first payment being made at the end of the first year) and an Abgeltungsteuer (capital gains tax) of 26.375 % are applied. During the payout phase, shares are sold from the brokerage account, with any realised earnings being subject to the capital gains tax (any advance lump-sum payments already made are taken into account and reduce the tax liability).
• FIFO logic: It is assumed that the sales of shares during the payout phase follows the FIFO (first in, first out) logic. This means that the oldest shares are sold and the associated gains are taxed first, taking into account the specific acquisition costs and any advance lump-sum payments made previously. (Note: The FIFO logic is typically applied in practice, but can be circumvented through strategic sales, thereby achieving a tax deferral effect and amplifying the compound interest effect. In this case, the return on a regular brokerage account may be higher than the one shown in our calculator.)
• Saver’s tax-free allowance: The Sparerpauschbetrag (Saver’s tax-free allowance) is the amount of investment earnings on which no capital gains tax is due. The saver’s allowance is currently 1,000 € for individuals and 2,000 € for married couples (both per year). If the saver’s allowance is not (fully) taken advantage of in a given year, the (remaining) amount is forfeited; it cannot be carried forward to subsequent years. The saver’s allowance may be applied to all forms of income from capital assets, such as interest on savings accounts, dividends or realised capital gains on securities. In our calculation, we assume that the saver’s allowance has already been fully claimed elsewhere and is therefore no longer available for the brokerage account. It is therefore not taken into account when calculating taxes for the normal account. If this is not the case, the tax burden on the regular brokerage account becomes lower, making it more beneficial.