Taxes & business banking for the self-employed


Should I save for retirement in 2 currencies?

Last updated on Feb 21, 2020

Mar 25, 2019

Becoming an adult happens in jolting increments. Perhaps it starts when you get to university and you suddenly realize that just because you can be drunk on a Tuesday afternoon, that this does not mean you should be. Then maybe you get your first job and you figure out that the recognition you used to receive at school for getting 90 % of a test correct does not come as easily in the professional world — if you complete just 90% of a task for your boss, she will fire you. And possibly the most bruising of revelations comes after you have mastered a 9-5 for a while, but you can’t even enjoy your new-found prosperity because now you need to start thinking about retirement.

That’s right, unless you have the stamina of a crazy military dictator, eventually you will need to retire. That means you need to earn money now to support your lifestyle later — after all, those senior citizen Kanye West tickets aren’t going to pay for themselves (note: in this thought experiment, Kanye will still be performing when you retire, which seems quite likely because he indeed does have the stamina of a crazy military dictator). But if you are an expat living in Berlin, you probably have roots in another country as well as in Germany, so it can be quite tricky to decide how to save for retirement. Which currency should you save in? Perhaps both? And what should you consider along the way?

First things first

Let’s start with the big question: Where are you going to be spending your retirement? If you are still in the middle of a torrid affair with a German you met at a goa party, maybe you don’t know the answer to that yet. Yes, you love him/her/them, but it’s also possible that your hatred of seven syllable German words eventually eclipses that love, forcing you to go back. The rest of this post will explore the various options associated with staying, leaving or some kind of compromise solution.

Option 1: Growing old and grumpy in Germany

If you are planning on retiring in Germany then the whole issue is a no-brainer: You should do all your saving right here, in the land flowing with beer and dozens (possibly hundreds) of flavors of paprika chips. The are two rock-solid reasons for this: The first comes down to something called “transfer costs” — the penalties involved in moving a sum of money between two (non-EU) countries. These can often be significant enough to deter one from having one’s piggy bank in other state. Even companies like moneycorp or transferwise that claim to allow you to transfer money between countries cheaply can be quite expensive . At the end of the day, they make their money by adding a commission to the conversion.

The second reason is currency fluctuation — the change in the exchange rate between the Euro and your home country. Sometimes you will win when a depreciation happens in your favor, but sometimes you will lose. It’s a gamble you probably don’t want to take with your old-age money (and future Kanye tickets).

And besides, with the globalized nature of the finance world today, you are able to invest in offshore funds and products while still remaining based in Germany, using a German account. If that is what you are looking for, then you should talk to a broker — Kennst du einen (in German only) is a site that rates various brokers who will be able to advise you on investment options outside Germany, while still keeping your money in Euro.

Option 2: Returning to the land of your birth

If you are sure you want to stagger back to your home country, things are not quite as simple. On the one hand there is an argument to be made for saving directly in that country because that is where you will be spending the money. But alas, the issue of transfer costs will soon rear its head again, as it will in many of the scenarios we consider. Because the mere act of getting the money to a foreign bank account incurs exchange fees etc. then you may be shooting yourself in the foot.

A smarter bet would be to have a German account denominated in another currency, a so-called Fremdwährungskonto (in case you’re wondering, that word is worth 93 points in scrabble). Many banks offer accounts in dollars, yen or pretty much whatever currency you would like. The advantage is that you do not pay transfer fees and you can protect yourself against fluctuations by locking the value of your money into present exchange rates.

Then again, this doesn’t quite solve the problem because getting the money in the appropriate currency is only half the battle. You want to get that cash into some kind of retirement/investment fund in the other country, which again exposes you to the insidious friction of transfer costs.

All things considered, it is probably still better to do your saving in Germany and then, only once you leave, go on to cash out your retirement savings and transfer them. That way you only pay exchange fees once, as opposed to if you had made regular pension contributions to an offshore account.

Note: The veto consideration in all this is if the Euro zone eventually buckles under the weight of Greek debt or some other problem arising from the increasingly unhappy marriage that is the EU. If the Euro does implode , then nothing matters anymore because the world economy is screwed. If that happens in the next while, print out this post, burn it and hope the fire catches the attention of aliens, because they’ll be the only ones who can save us at that point.

A double life

Of course there is the possibility that you don’t know where you are going to end up. In that case, does it make sense to save for your retirement in two currencies as a way to hedge your bets?

Again we must consider two distinct scenarios. The first is if your home country is one of the so-called emerging economies, which are relatively unstable. Examples would be Brazil, South Africa, Ecuador etc. These countries tend to boast higher interest rates on their bonds, for instance, but they’re also riskier.

The other scenario is if your country has a relatively stable, developed economy e.g. the US, UK, Canada (I will leave other EU countries out of the equation because the intra-EU free movement of capital makes the union pretty much like one big country).

If the first scenario is the case then it may be tempting to take advantage of the more attractive growth rates in those countries. According to the International Monetary Fund around 80 % of world growth in the next few years is going to come from emerging markets like India and China — those two will account for a whopping 40 % of the growth on their own. But our old friend uncertainty makes another appearance at this juncture. Though some of these countries are becoming economic powerhouses, there is a not insignificant historical risk associated with such investments as well — Argentina has gone bankrupt several times in recent years, for instance.

But even if you assume that the country’s economy continues to do well for your whole lifetime, which of is entirely plausible — the nation of Botswana has enjoyed consistent growth of around 7 % for close to 30 years — the currency fluctuation and transfer costs remain an issue. Which is to say: You are probably still better off investing in those countries through a German based fund/account and converting later. It is important to note that the Euro is very strong in relation to most of these currencies so chances are you will stand to win when you finally do convert your money into the local currency.

If your home nation has a similar level of stability and industrialization to Germany then the differences between the two countries are likely to be negligible. Take interest rates, for example. These have tended to be similar in Europe and the US over the last 50 years . Also, if one compares the stock exchanges indices of the various industrialized countries (e.g. Nasdaq, Dax, Nikkei), they tend to sync over time. If that situation continues, there would be little reason to weather the risk of currency swings or the drag of transfer costs by keeping your nest-egg somewhere else. Summary: You’d be more prosperous doing things from and through Germany.

Note: Though a once-off cash out and conversion may be preferable in general terms, it can have huge costs and should not be underestimated. If you are saving through an insurance company, it will of course deduct money for its costs which presumably include administration, office staff salaries and doggy day-care for the CEOs’ pets. These charges are not spread evenly across the entire duration of your policy, they are concentrated in the beginning. In fact, your payments garner almost no interest in the first few years, the bulk of the money goes to fees. Only later do you get the benefit of compound interest. So if you cash out the policy early you could find yourself getting much less than you actually put in. And don’t get me started on the cancellation fees involved.

It is an option to sell your policy on the open market such that someone else pays the premiums for you and you get the cash immediately. These deals can be difficult to find and negotiate however.

A word on tax

Did you know that more has been written about tax in German than in any other language? That’s not actually true, but the fact that you took it seriously says a lot about how closely Germany and bureaucracy are connected your mind. And that sentiment is justified. The truth is: German tax is very complicated. Things could get a whole lot more complicated if you are receiving an income (pension) from another country. You may be liable to pay tax both in the country in which you earned it as well as in the Germany. Generally EU residents are exempt from this because of the union’s double taxation relief scheme, but it is definitely something you should discuss with a financial advisor before you proceed.

Cashing an annuity out also has its own tax implications. If the policy was taken out before 2005 then the payout is tax-free. If however it was signed after 2005 then only half of the amount will first go through the tax man’s grubby hands. There are a few other requirements to meet, which in true tax law style, are as intricate as a Disney witch’s spell. I’ll spare you the details and simply recommend you memorize the following statement: Opting out of a retirement fund early really hurts. So if you even think that you may have to cash out early, don’t take one out. Instead put your money in a more liquid fund that gives you good interest but allows you to withdraw without penalties.

Aaron Schmitt, a financial advisor at Ergo, one of Germany’s big insurance companies, recommends ETFs (exchange traded funds) as a good in-between option. ETFs have grown in popularity over the last few years because they are low-cost investment products that are also diversified (they are often comprised of the most successful companies listed on a given country’s stock exchange). There are other good options on the market too but Schmidt cautions: “You should never put your money in things you do not understand.” ETFs are a comprehensible, transparent and low risk starting point for anyone looking to get into the investment world.

Bottom line

Whether you are planning on staying in Germany or moving back to your country of birth, there are many good arguments for simply beginning to save for your retirement in Germany (in Euros). Almost all the benefits of doing some of your pension saving in a country with higher interest rates may be wiped out by the two perennial problems plaguing cross border investment: currency fluctuation and transfer costs. Also, there are a multitude of ways to take advantage of the growth potential held in other countries while still keeping your money denominated in Euros to protect you against the above mentioned problems.

But regardless of your indecision about where you want to spend your golden years, make sure you start saving for retirement now. After all, if you’re reading this, you’re probably not Kanye West. If you are him, call me — I’d like to invest in your music career.