Calculating and Closing Your Pension Gap
The pension gap is the difference between the money you have available net today and what remains each month once your working life is over. For most people it runs into four figures, and it is routinely underestimated because two mistakes compound: people compare gross with gross, and they forget inflation.
The right benchmark
Always compare net with net. Taxes and all social insurance contributions come off your salary; health and care insurance plus tax come off your pension, but no pension or unemployment insurance any more. The deduction rates therefore differ substantially, and a gross comparison misleads systematically.
An example: someone earning €48,000 gross a year, or €4,000 a month, has roughly €2,550 net available in tax class I. After 45 contribution years at that salary, 41.58 pension points accumulate, which corresponds to a gross pension of €1,768. After deducting 8.75 per cent health insurance, 3.6 per cent care insurance and tax, roughly €1,512 net remains.
The gap in this case is around €1,038 a month, and the replacement rate is around 59 per cent. Anyone wanting to insert their own figures will find both values directly in the pension calculator; the current net income there is computed with the same engine as the salary calculator.
The second mistake: inflation
€1,512 net sounds bearable in today's prices. But if retirement lies 27 years in the future, those €1,512 are worth only about €886 in today's purchasing power at 2 per cent inflation; at 3 per cent inflation it would be just €681. Pensions are adjusted annually and broadly follow wage growth — which is exactly why it is cleaner to run the whole calculation in today's money and leave the nominal increases out of it entirely. The calculator shows both quantities side by side, and over long horizons the difference is larger than most people expect.
How large is the gap really?
A common rule of thumb says roughly 80 per cent of the final net income is needed in retirement to maintain your standard of living. Some costs disappear — commuting, unemployment insurance contributions, spending on children, often the mortgage instalment too. Others arrive, above all health and later care costs.
Work with 80 per cent of today's net as your target. In the example above that would be €2,040. With a net pension of €1,512 that leaves a gap of €528 a month to close — considerably less than the raw difference of €1,038, but still an amount that becomes a six-figure sum over twenty or more years of retirement.
What closing it costs
To withdraw €528 a month over 25 years of retirement you need capital of roughly €110,000 at a real return of 3 per cent. To close the full gap of €1,038 it is around €217,000. Those numbers look alarming — until you convert them into a monthly saving rate.
With 27 years of saving and an assumed return of 5 per cent a year, around €160 a month suffices for the €110,000 and about €320 for the €217,000. Someone starting at 50 with only 17 years left needs roughly €350 and €690 a month respectively for the same targets. Time is by far the most important factor — considerably more important than the choice of product. You can work it through in the ETF savings plan calculator.
Three levers that work alongside
First, the retirement date: one extra working year brings a 6 per cent bonus plus another pension point — in the example above roughly €148 more gross pension per month, without a single euro being saved. Second, the completeness of your insurance record: apply for a record clarification, because missing training, child-raising or care periods are more common than people think, and every period added raises the pension permanently. Third, occupational provision — salary conversion with an employer subsidy is free of tax and social contributions during the saving phase, while in the payout phase tax and full health insurance contributions fall due.
In the end the most important step is not choosing a product but knowing the number. Work out your likely net pension in the pension calculator, set it against your current net income and look at the purchasing power figure. Anyone who knows those three numbers makes better decisions in ten minutes than someone who spends years vaguely intending to "provide for retirement somehow".