How to use index funds (etf) to build my retirement savings

The pension system hasn't been what it used to be for layers. Savings accounts, time deposits and overnight accounts are barely earning interest and more and more consumers are considering ways to build up money for retirement. For this reason, numerous small investors invest their money in shares or index funds, in order to enjoy financial freedom in old age and to be able to live carefree. If you, too, are still looking for an appropriate retirement plan, we explain why ETFs are a good choice for building wealth for retirement. Furthermore, we enumerate the pros and cons of investing in ETFs to give you a better overview and make it easier for you to decide which investment is right for you.

What are ETFs (index funds)?

ETFs (Exchange Traded Funds) are exchange-traded index funds that offer several advantages. ETFs allow you to invest in entire markets with just one security. Which means that you can practically get by with just a single MSCI World ETF at around 1.600 companies spread around the world. Other advantages are that trading as well as holding ETFs is inexpensive. Many providers charge no money for the purchase of ETFs, others only one euro per purchase. In addition, exchange traded funds are transparent and are traded on European stock exchanges.

Here's how you can use ETFs to build your wealth

Starting to buy ETFs early can build wealth for retirement. If you look at the MSCI World, for example, a very popular ETF among consumers, the return has been growing for years now. This also means that the value in your portfolio increases.

Thereby ETF have many advantages for consumers, which should not be disregarded, if one decides for the whole at the stock exchange.

1. Diversification: with an ETF, you are betting on many companies with just one security. This significantly reduces the risk compared to a share, as the opportunities and risks are spread over several shoulders.
2. Cost: The cost is very reasonable. Many online brokers offer a free purchase of ETFs. With others there is the possibility to buy the securities for only a few euros. Also, custodial accounts are often free or have very low fees.
3. Buy and Hold: With ETFs, a long holding period is the decisive point. For those who want to invest for the long term, ETFs are an excellent way to actually increase their assets. Therefore one should also invest regularly, also in bad stock exchange times. Thus, the cost-average effect is created, as they can benefit from the average cost effect. With a sum that you use every month to buy ETF, you get less shares in good stock market times, but more in bad times. Thus, the cost-average effect comes into play.
4. Security: ETF are much safer, because you get securitized fund shares, which are therefore protected from the insolvency of market participants.
5. Investment in kind: If you invest in equity ETFs, this means that you invest in global companies that have the goal of generating profit.

Based on these short advantages of ETF you have already got a rough overview. But if you're still critical of this investment, here's an example of how the very popular MSCI World ETF has performed over the past 30 years.

Anyone who has regularly paid in EUR 300 per month over the last 30 years has saved around EUR 108 in this time.000 EUR is invested in his securities account. However, the value of the MSCI World ETF shares is over 400.000 EUR. This means that over those 30 years, you can expect a return of around 300.have generated EUR 000 (as of May 2022).

Index funds – No time commitment

Another big advantage is that there is no time commitment. Of course, you should be aware that the money must be invested for the long term, so that you earn such high returns. With most investments, on the other hand, you do not have the freedom to withdraw money from the investment. However, this is guaranteed when investing your own money.

But withdrawing money from the ETF also has a catch. Because this only works well if the entire assets are not liquidated in one fell swoop. You can see the disadvantages of this here:

1. If the dissolution takes place in a bad capital market phase, you lose a lot of money and it is quite possible to lose half of the saved value.
2. As soon as you sell your ETF shares, you become liable for taxes. This means that if you get a large return, you will also have to pay a high tax rate. In addition, there is also the soli.
3. If you then move the assets to a call money account, your laboriously saved money is lost in the event of a bank failure from 100.000 euros only insufficiently protected. With ETFs, however, the situation is different. Because a securities account is your property and therefore may not become part of the insolvency estate in the event of bankruptcy. The opposite is even the case. The insolvent bank must transfer the securities to another bank without incurring losses.
4. If you dissolve the ETFs completely, the assets must of course be reinvested in order to increase them further. If you then use other investment options, there are often high gesture and transaction costs associated with them. In addition, you still have to pay taxes on the ETF income and thus have particularly high costs that do not pay off.

Even consumer centers recommend investing in ETFs

 

 

It also shows that not only young people, but also the older generation increasingly relies on ETF savings plans. Within three years, the number of savings plans with index funds (ETF) has almost tripled. Above all, it is important to remember that consumer advice centers rarely recommend investments or financial products. This is probably also because it doesn't require high-priced fund management, as it tracks the index. Thus, costs are saved and the return is also significantly higher.

Naturally, banks tend to hold back on ETF savings plans, as there are no high commissions to be paid out of the customer's pocket. In addition, banks have long since lost their reputation, which is why more and more bank customers are investing their assets on their own initiative.

Overview of advantages and disadvantages of ETF savings plans

To give you a better overview, here are the most important advantages and disadvantages once again:

Advantages	Disadvantages
Opportunities for returns are high due to diversification and long-term investment	There is no capital guarantee
The costs are low because there are no advisors	Own initiative is required
You have full flexibility without additional costs	Discipline is a prerequisite
Even in a payout phase, a return is still generated	The capital stock is finite
ETF custody account can be inherited	The assets in the custody account are not protected from seizure
There are no tax disadvantages	You save the taxed income

Conclusion on index funds

If you also want to invest a retirement savings with small amounts, ETFs are ideal. Because online brokers in particular do not usually charge custody account fees. On the other hand, the purchase is often free of charge or only very low fees are charged. Probably the biggest advantage, in terms of cost, is that there are no advisors, who usually receive high commissions and thus the investment is further diminished.

Of course you have to do something for your happiness and your assets. Because only if you pay in regularly and hold the ETF shares for a long time, then you can build up a handsome fortune for your old age. In addition, the risk of a loss is reduced if the stock market weakens. The motto here is to persevere, so that provision is also made for old age.