Investing for Children – The Best Strategies for a Secure Future
Ensuring our children's financial security is a priority for all of us. Given rising living costs and growing pension gaps, it is becoming increasingly important to start planning for our children's future early on.
But what investment strategies really make sense for a household with children to ensure a secure future? In this article, we explore the importance of saving for children and present various options and tips for building wealth for your children, to give you a comprehensive overview to help you make informed decisions.
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- €25,703 more per child, thanks to our modern ETF strategy
- Find the perfect ETF investment for your child in a 30-minute video call from the comfort of your own home
- Sit back and watch your child’s wealth grow—our experts will take care of the rest
Why saving is important for children
Children enrich our lives in many ways, but they also come with financial responsibilities. According to recent data, parents in Germany spend an average of 763 euros per month on their children.
Interestingly, these expenses increase as children get older: The Federal Statistical Office calculated average monthly expenses of 679 euros for children up to age six in single-child households, while costs rise to 953 euros per month for 12- to 17-year-olds. These figures highlight how important it is to build up financial reserves early on in order to meet children’s growing needs.
It's never too early to start building wealth
Saving early pays off. As children get older, their needs and desires grow—whether it’s a trip abroad, a driver’s license, their first car, or college, including a year abroad. By saving consistently, parents, grandparents, and godparents can provide financial security for their children’s future.
The power of compound interest plays a crucial role here: the sooner you start saving, the more your savings benefit from interest on interest, leading to significant capital growth over the long term.
The pension gap is growing wider and wider: Private retirement planning is essential
In an era when the government pension alone is often no longer enough to maintain one’s standard of living in old age, private retirement planning is becoming increasingly important. By saving for your children early on, you lay the foundation for their financial independence and protect them from future gaps in their retirement income. A well-thought-out investment strategy can help ensure that your children won’t have to rely solely on government benefits later in life.
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What should be included in a wealth-building plan for children?
Effective wealth-building for children should take several key factors into account:
- Free consultation: Expert advice can help you develop the best investment strategy for your child. Experts can analyze individual needs and suggest suitable solutions.
- Tax exemption: In Germany, investment gains are subject to a 25% capital gains tax. However, certain types of investments can allow these gains to remain tax-free, giving your child more money to spend.
- Right of disposal: It’s important to maintain control over your child’s finances to ensure that the money saved isn’t spent on impulsive purchases. Some investment options allow you to retain control even after your child turns 18.
- Flexibility: Life is dynamic, and financial circumstances can change. Flexible savings plans allow you to adjust your savings rates and contributions to fit your life situation.
- Saving conditions: Ensure your investment remains financially stable to avoid risks associated with future changes, such as tax reforms or interest rate fluctuations. Some investment products offer protection against such uncertainties.
- Transparency: A transparent investment allows you to track the performance of your investment at any time and ensure that there are no hidden costs.
Building wealth for children – here are your options
There are various ways to save for your child’s future. Below, we’ll introduce you to some of the most common investment options for your child(ren) so you can make an informed decision.
The classic savings account
Both the Children's Savings Account For a long time, savings accounts and time deposit accounts were considered the traditional way to save money in a child’s name. These investments offer a high degree of security, as the deposited capital or various monetary gifts are not subject to fluctuations in the capital markets.
However, both the interest rates on savings accounts and the returns offered on fixed-term deposits are extremely low these days and often even fall below the inflation rate, which means that the money loses purchasing power. In addition, flexibility is limited, and there are often restrictions on when the money can be accessed. Given these drawbacks and shortcomings, traditional children’s accounts have become less attractive compared to more modern solutions.
Mutual Fund Savings
With a fund savings plan, you make regular investments in mutual funds, which invest the money in various securities. This allows for a certain degree of diversification and offers the potential for higher returns than a savings account.
However, these financial products, when combined with a junior brokerage account, often come with high management fees, and their performance can vary significantly. Furthermore, there is often a lack of transparency regarding which specific securities are held in the fund. Compared to other solutions, investing in funds through a savings plan can therefore be disadvantageous.
Our Own Investments
A Kids' Account allows you to invest in stocks or other securities on your own. However, without professional advice, there is a high risk of making poor decisions that could lead to losses.
Even the use of robo-advisors—automated investment advisors—cannot always guarantee optimal results and carries the risk of losses. Therefore, without the necessary expertise and guidance, a children’s account is often less advantageous than other solutions.
ETF Savings Plan
An ETF (Exchange Traded Fund) is a fund traded on a stock exchange that tracks an index such as the DAX or the MSCI World. An ETF savings plan allows you to invest regularly in such ETFs.
This offers the advantage of low costs, since ETFs are passively managed, and broad diversification, as the portfolio thus contains many different securities. However, ETFs are subject to fluctuations in the capital markets, which can lead to losses in value. Nevertheless, they are a popular and often sensible investment option for long-term wealth accumulation.
ETF Pension Plan for Children and Grandchildren
The ETF pension plan in your own name combines the benefits of the capital market with those of a pension plan. It allows you to save for your child over the long term and earn returns by investing in low-cost, broadly diversified equity funds.
A major advantage over most other investment options is the average annual return of about 6 percent, which is higher than that of money market accounts or certificates of deposit. In addition, ETF insurance offers tax advantages, as the gains are tax-advantaged under certain conditions. The flexibility to adjust the savings rate and the ability to retain control over the investment even after your child turns 18 make this investment option particularly attractive.
We'll help you find the right investment for your child!
- €25,703 more per child, thanks to our modern ETF strategy
- Find the perfect ETF investment for your child in a 30-minute video call from the comfort of your own home
- Sit back and watch your child’s wealth grow—our experts will take care of the rest
Advantages of ETF insurance:
- Tax benefits: Income is generally taxed only upon distribution, often at a lower tax rate, which increases the net return.
- Flexibility: Modern ETF insurance policies allow for flexible adjustments to premiums and provide transparency regarding the investment’s performance.
- Right of disposal: You retain control over your child’s investment, even after they reach the age of majority, and can ensure that the funds are used in accordance with the original goals.
- Safety: Thanks to the insurance coverage, ETF insurance policies protect against certain risks and provide an additional layer of security for your child's investment.
This combination of potential returns, tax advantages, and security makes the ETF pension insurance plan one of the best solutions for long-term wealth accumulation for children.
Tip: It’s important to compare the specific terms and costs of different providers to find the best ETF insurance for your needs.
Comparing ETF Savings Plans and ETF Insurance
Both ETF savings plans and ETF insurance offer attractive options for building wealth. However, it’s important to understand the differences so you can make the right choice for you.
Differences between an ETF savings plan and ETF insurance:
- Contracting party: With an ETF savings plan, you enter into a contract with a bank or a broker, whereas an ETF insurance policy is provided by an insurance company.
- Tax treatment: ETF insurance policies benefit from tax advantages such as deferred taxation and potential partial exemptions, whereas with an ETF savings plan, a 25% withholding tax on income and church tax are levied during the accumulation phase.
- Cost structure: ETF savings plans are often more cost-effective in terms of management fees, while ETF insurance policies include additional costs associated with the insurance coverage, which may, however, be justified by tax advantages and additional benefits.
- Flexibility: Modern ETF insurance plans have become more flexible in recent years and now offer benefits similar to those of ETF savings plans, including online transparency and easy adjustments to contribution amounts.
Advantages of the ETF savings plan:
- Lower costs: ETF savings plans generally have lower management fees because they do not include an insurance wrapper.
- High flexibility: Contributions can be structured flexibly and adjusted or paused as needed.
- Transparency: You can view your investment performance at any time, and there are no hidden fees.
Disadvantages of the ETF savings plan:
- Tax burden: During the savings phase, returns are subject to withholding tax, which can reduce the effect of compound interest.
- No lifetime pension: Unlike ETF insurance, the ETF savings plan does not offer the option of a lifetime annuity.
Advantages of ETF insurance:
- Tax benefits: Thanks to deferred taxation and potential partial exemptions, higher net returns can be achieved.
- Lifetime pension: The option to convert the accumulated capital into a lifetime annuity provides additional financial security.
- Protection from creditors: In certain cases, the insurance policy provides additional protection for the accumulated capital against creditors.
Challenges of ETF insurance:
- Higher costs: Additional fees associated with the insurance wrapper may increase the overall cost, but are generally more than offset by higher returns.
Tip:
If tax benefits and the option of a lifetime annuity are important to you, an ETF annuity plan may be the better choice. If, on the other hand, low costs and high flexibility are your top priorities, an ETF savings plan is an attractive option. It’s important to consider your individual goals and needs and, if necessary, seek professional advice—ideally at no cost.
Parents' experiences
Many parents have already had positive experiences with ETF pension insurance for their children. Here are a few testimonials:
- Anna M., 35 years old: “The ETF insurance plan for my daughter gives me peace of mind knowing I’m securing her future for the long term. The tax benefits and the option of receiving pension payments later on really won me over.”
- Markus K., 40 years old: “After doing a lot of research, I decided to go with ETF insurance. The combination of potential returns and security is ideal for me when it comes to providing for my children’s financial future.”
- Sophie L., 38 years old: “I was pleasantly surprised by how flexible the ETF insurance plan is. I can adjust the premiums to fit my financial situation and know that my children’s future is well secured.”
Which solution is best for your children or grandchildren?
Securing the financial future of your children or grandchildren requires careful planning and the selection of the right investment strategy. Factors such as your time horizon, savings goal, flexibility, transparency, and security play a crucial role in this process.
Keep the time frame in mind
The longer the investment period, the more your children will benefit from the power of compound interest. Long-term investments, particularly in ETF-based pension plans, offer the opportunity to offset market fluctuations and achieve higher returns. Starting early maximizes these benefits and lays the foundation for a solid financial future.
Setting the Right Savings Goal
The amount you plan to save influences the choice of the appropriate investment vehicle. For larger savings goals, such as financing a college education or buying an apartment, an ETF-based annuity can be particularly advantageous, as it combines attractive potential returns with tax benefits. Clearly defining your savings goal helps you develop the right strategy.
Not all models are flexible and transparent
According to Stiftung Warentest, some investment options—particularly those offered by traditional banks or brokers—may involve hidden costs. Or they may lack flexibility. In addition, tax issues and fees can reduce your net return. It is therefore essential to choose transparent products that provide clear information about costs and benefits and can be flexibly adapted to your life situation.
Safety is also a value
Protection against tax changes, legislative reforms, or fee increases is an important consideration when investing for children. ETF-linked annuity insurance policies often provide additional protection in this regard by ensuring stable conditions and guarantees. This minimizes risks and enables reliable financial planning.
Would you like to retain control over your child’s investments even after they turn 18?
With many types of investment accounts, such as children’s or junior accounts, the right to manage the account passes to the child upon reaching the age of majority. If you wish to retain control over the investment even after your child turns 18, an insurance solution allows you to continue exercising that right and ensures that the funds are used in accordance with the original goals.
We'll help you find the right investment for your child!
Conclusion
Financial planning for children requires careful consideration. An ETF savings plan allows you to save for your child over the long term with a focus on returns. Through regular contributions and a long-term investment horizon, a solid financial foundation can be established. In doing so, guardians should consider factors such as time horizon, savings goal, flexibility, transparency, and security in order to make the best decision for the future of your child or grandchildren.
Every family has unique needs and goals. That’s why it can be helpful to take advantage of a free consultation to develop the best strategy for your specific situation. This way, you can ensure that the investment you choose is perfectly tailored to your children’s future.
In this context, an ETF pension plan often proves to be a beneficial option. It combines the potential returns of the capital market with the security of a pension plan and offers tax advantages as well as flexibility in how contributions are structured. It also allows you to retain control over the investment even after your child turns 18.
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