Simplicity— Solutions for Money and Life
Today, my husband and I pondered retirement savings products available in Germany. The topic came up because there are a couple of tax advantages if you use certain types of retirement saving products. I won't bore you with the details, the question we wanted to answer was "is it worth having a tax-advantaged German retirement product while he is here to make up for not paying into the American 401k".
We currently don't believe that we will retire in Germany or that we will be here for longer than the next ten years.
We did some maths on the whole situation and even with the cheapest, most flexible solution available on the German market, it would not out-perform simply taking money post-tax and putting it into a low-cost ETF.
The performance of an ETF vs. a pension insurance product is just about even. The ETF is pretty flexible. If our plans change, we can use the money any time without having to wait to reach a certain age.
The pension insurance product has very little flexibility, but there are certain guarantees. You can’t take the money out early and you can’t take a lump sum. In return, you're guaranteed the money you put in and a little bit on top. If the insurance company manages the money well, you might get more.
That guarantee costs a lot of money in fees, though. And to be honest, I doubt that an insurance company can outperform the market.
In the end, we decided we'd rather pay taxes and then invest the money ourselves. We don’t want to lock up the money for 30 years. The simplest solution seems to be the best for us, both in terms of flexibility and outcomes.
I think that the simplest solution is very often also the best—both in money and in life. If a solution is very complex, it becomes hard to understand. Over time, it can even become fraudulent and deceptive. The solution may have been well-intended in the beginning, but it is easier to hide things in complexity than in simplicity.
There is a reason “legalese” is a term. Sure, it is about precision. But it is also about hiding pitfalls.
It’s probably not an accident that financial products and the tax code are as complex as they are.
With complexity, the lengths you have to go to fully understand a solution increases. In a way, this means that your risk also increases. A simple solution has far fewer “and this is where it goes sideways” scenarios. What’s more, you can probably see the ways it could go wrong and hedge against them.
A complex solution, in turn, has many more places where things can go haywire. Half of the places, you had to dig up by meticulously reading the fine print, the other half is still buried somewhere between pages 2947 and 3957.
Understanding it fully can take a lot more time and expertise than you might have.
So, if you are looking at solutions for a problem, err on the side of simplicity.
I’d rather pick a simple solution that I have control over than a complex one that I need professionals to manage. Perhaps, I have control issues. But maybe, the upside is just not truly there.
