Compound interest in the Altersvorsorgedepot: why starting early changes everything
Compound interest is the strongest argument for saving for retirement at a young age. In the Altersvorsorgedepot it works over decades, because all earnings stay in the securities account and earn returns themselves. If you start 10 years earlier, you often end up with twice as much.
What is compound interest?
Compound interest means: not only does the amount you put in generate earnings, but the earnings already generated produce earnings of their own. Albert Einstein is said to have called it the eighth wonder of the world . The principle is simple, but the effect over long periods is dramatic.
In the equity market the return fluctuates strongly from year to year; averaged over the past 100 years it was around 7% per year (MSCI World, roughly 5% adjusted for inflation). Anyone who consistently reinvests that return doubles their capital every 10 years.
How does compound interest work in the Altersvorsorgedepot?
With the Altersvorsorgedepot, all distributions (dividends, interest, price gains) are automatically reinvested in the securities account; this is called accumulation. You pay no tax on these earnings during the accumulation phase, which strengthens the compounding effect further.
The government allowances such as the basic allowance and child allowance earn returns directly as well. An allowance of €540 a year, paid in for 30 years and earning 6%, comes to over €42,000 on its own.
Why is time so decisive?
Starting at 25 instead of 35 often means twice as much in the end. Time is the most important factor.
Worked example: €50 per month, 6% return
| Investment period | Paid in | Final balance | of which interest |
|---|---|---|---|
| 10 years | €6,000 | €8,300 | €2,300 |
| 20 years | €12,000 | €23,200 | €11,200 |
| 30 years | €18,000 | €50,300 | €32,300 |
| 40 years | €24,000 | €99,700 | €75,700 |
Assumption: €50 per month, 6% performance per year, without taking subsidy and taxes into account.
After 40 years, compound interest accounts for around 76% of the final balance. The actual payments of €24,000 are only a small part of it. That is the lever of retirement provision.
What starting 10 years earlier achieves
| Start | Contribution | Paid in | Final balance at 65 |
|---|---|---|---|
| at 25 | €100/month | €48,000 | ~ €200,000 |
| at 35 | €100/month | €36,000 | ~ €102,000 |
| at 45 | €100/month | €24,000 | ~ €49,000 |
Assumption: 6% return per year, ending at 65.
The 10-year head start at 25 is worth almost half the final balance, even though only €12,000 more was paid in. If you start early, you let compound interest work for you.
Why costs kill compound interest
What works for compound interest also works in reverse: costs act exponentially. One percentage point more in Reduction in yield does not cut 1% off the final balance but often 20 to 30%.
| Reduction in yield | Final balance after 30 years | Loss through costs |
|---|---|---|
| 0.3% | ~ €100,000 | — |
| 1.0% | ~ €85,000 | ~ €15,000 |
| 1.8% | ~ €72,000 | ~ €28,000 |
Assumption: €100/month, 6% gross return, 30 years.
That is why low-cost ETFs in the Altersvorsorgedepot are almost always the better choice than expensive actively managed funds.
Frequently asked questions about compound interest
Do I need high contributions for compound interest to pay off?
No. Even €25 to €50 a month is enough if the investment horizon is long enough. What matters is time, not the absolute amount.
Does compound interest work with guarantee products too?
Yes, but more weakly. The contribution guarantee forces the provider to put part of the capital into low-interest bonds. The gross return falls from a typical 6% to 3 to 4%, which almost halves the compounding effect.
What is the rule of 72?
A rule of thumb: 72 divided by the return gives the doubling time. At a 6% return your capital doubles every 12 years, at 8% every 9 years.
Does compound interest work in the decumulation phase too?
Yes, if you opt for a drawdown plan to age 85 . The remaining capital in the securities account stays invested and generates earnings until the account has been paid out in full.
Where can I see how much compound interest I give up by starting later?
In our AVD calculator you can work through different starting ages and see the difference directly.
What happens in a bad market phase?
Over short periods, markets fluctuate strongly. Over 30+ years the fluctuations even out and the compounding effect prevails. Historically there has not yet been a 30-year period in which a broadly diversified world ETF made a loss.
Do the allowances earn returns as well?
Allowances and the bonus earn returns too: a €200 career starter bonus becomes around €2,000 over 40 years.
Keep calculating and reading
Altersvorsorgedepot calculator Plus — calculate the subsidy, tax advantage and final balance for your own situation.
Related content: Altersvorsorgedepot for young people.
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