How much money will you really be short of in retirement? The pension gap sounds abstract, but in the end it's a single subtraction. Here you get the formula, a worked example and a free calculator that does the work for you.
The short answer. Pension gap = your needs in retirement minus your expected statutory pension minus the private provision you already have. As your needs, reckon with around 80 percent of your current net income. The result is the amount you're short every month for as long as you change nothing. With the free pension gap calculator, you'll have your number in two minutes.
The formula: three numbers, one subtraction
For the calculation you only need three numbers:
- Your needs in retirement. As a rule of thumb, reckon with around 80 percent of your current net income. Rent, health and leisure stay; only commuting costs and pension contributions fall away.
- Your expected statutory pension. The figure is in your annual pension statement from the Deutsche Rentenversicherung (German statutory pension insurance). Self-employed and without statutory entitlements? Then put 0 here.
- Your existing private provision. What your current contracts are likely to pay out monthly in retirement. Not sure? Leave the figure out and calculate conservatively.
That gives you: pension gap = needs in retirement minus statutory pension minus private provision. That's all the math there is.
An example to check for yourself
Take Lisa, 35, employed, with 2.400 euros net a month. Her calculation looks like this:
- Needs in retirement: 80 percent of 2.400 euros is 1.920 euros a month
- Expected statutory pension per her pension statement: 1.250 euros
- Existing private provision from an old contract: 150 euros
1.920 minus 1.250 minus 150 gives a pension gap of 520 euros a month. Over a 25-year retirement, that adds up to more than 150.000 euros, without counting inflation. These figures are a sample calculation, not a forecast, but they show the order of magnitude at stake.
Why the simple formula is on the friendly side
Three things usually make the real gap bigger, not smaller. First, the figure in your pension statement is a gross value, from which tax and contributions to health and long-term care insurance are still deducted. Second, your needs rise with inflation, while the formula reckons with today's prices. What rising prices do to savings, I worked through in the article money in your account loses value. Third, many underestimate how long retirement lasts: 25 years and more is no exception.
So take your first number as a lower bound. It's valuable precisely for that reason, because it turns a vague feeling into a concrete figure you can plan with.
What to do with your number
The point of the calculation isn't to scare you. It's so you can steer against it early enough. Three steps have proven themselves:
- Start early. Time is your biggest lever, because compound interest works over decades. Every year earlier counts.
- Mix the building blocks to fit. How retirement provision in Germany is structured is shown by the overview of Germany's three-pillar pension system. The self-employed find their roadmap in the article retirement planning for the self-employed.
- Recalculate regularly. Once a year is enough, for example when the new pension statement arrives.
The pension gap is a snapshot built on assumptions. Salary, family, interest rates: everything can change. Better to reckon with an honest estimate today than with a perfect number someday. Adjusting as you go is part of it.
Frequently asked questions about the pension gap
How do I calculate my pension gap?
Needs in retirement minus your expected statutory pension minus your existing private provision. As your needs, use around 80 percent of your current net income. You'll find the pension figure in your annual pension statement, and the provision figures in your contract documents.
What percentage of my net income do I need in retirement?
As a rule of thumb, around 80 percent of your last net income. Rent, health and leisure carry on; only work-related costs and pension contributions fall away. If you rent or have special plans, you should aim higher.
Where do I find my expected statutory pension?
In the pension statement from the Deutsche Rentenversicherung. It's sent automatically once a year by post to everyone who is at least 27 years old and has five contribution years. It shows the monthly pension you can expect at the current status.
What do I do if the pension gap is large?
Don't panic, start instead. The earlier you begin, the smaller the monthly amount that closes the gap, because compound interest works for you. Which building blocks make sense depends on your income, tax situation and time horizon, and should be worked through individually.
Your next step
Work out your own number. The pension gap calculator needs three inputs and two minutes, free of charge and without sign-up. Once you know your number and want to know how to close the gap in concrete terms: I'm Eduard Strekert, financial advisor for Deutsche Vermögensberatung AG (DVAG), tied agent, based in Lüdenscheid, and I work it through together with you in an initial consultation.
Related reading:
- Calculate your pension gap in 2 minutes: the free calculator
- Retirement planning: Germany's three-pillar pension system explained simply
- Retirement planning for the self-employed: how to build it without an employer
Eduard Strekert is a financial advisor for Deutsche Vermögensberatung AG (DVAG), tied agent. This article is general information and does not replace personal advice. It does not constitute investment or tax advice.