Calculating an ETF savings plan: understanding returns, costs, taxes and inflation
How do I correctly calculate an ETF savings plan covering returns, costs, taxes and inflation?
An ETF savings plan is often reduced to a single figure: the expected return. A dependable result, however, requires several layers to come together — how much is paid in, which ongoing costs apply, how gains are taxed and what the final amount means in today's purchasing power. This article separates these layers and shows which quantities are fixed and which remain pure assumptions.
The levers: starting capital, contribution and time
Three inputs form the backbone of every projection: the starting capital, the regular contribution and the term. Reinvested gains generate further gains in the following years — this compounding effect makes the increase in value grow disproportionately over time and can account for the largest part of the final amount over long terms.
An annual increase of the contribution, often called a dynamic step-up, pushes the result higher still, because later contributions also keep growing. Someone who invests 200 euros every month for 30 years pays in 72,000 euros in total; how much this becomes is decided above all by the assumed return and by the time compounding has to work.
Costs: the ongoing TER and fees per execution
The ongoing fund costs are stated as a total expense ratio (TER) in percent per year and reduce the performance continuously; put simply, the net return is the gross return minus this cost ratio. Because the TER applies each year to an already larger portfolio, its absolute effect grows over the term — even a difference of a few tenths of a percentage point can cost a considerable amount over decades.
On top of this come fixed or percentage-based fees per plan execution. They weigh more heavily on small contributions, because a fixed fee eats up a larger share of a small contribution than of a large one. Entering both cost types separately shows how strongly favourable conditions lift the final result.
Why long-term returns are only model assumptions
Every projection assumes a constant annual return. In reality, capital markets fluctuate from year to year, and past performance is no promise for the future. The percentage you enter is therefore an assumption, not a guarantee: it describes a smooth model path, while the real course mixes good and bad years.
It makes sense to deliberately calculate several scenarios — for example a cautious assumption of four percent and a more optimistic one of six percent — instead of committing to a single value. This reveals how sensitively the final amount reacts to the return assumption, and the result is read as a range rather than a seemingly certain forecast.
Inflation: from nominal amount to purchasing power
A final amount reached in many years sounds high, but is worth less in today's purchasing power because prices rise over time. To put results in context, the nominal amount can be discounted to today's purchasing power using an assumed rate of inflation. This real view prevents a large figure from disguising the actual gain in purchasing power.
The rate of inflation, too, remains an assumption and should — like the return — be considered in several variants. Placing the nominal and the real final value side by side immediately shows which part of the increase is a genuine gain in purchasing power and which merely follows higher prices.
Taxes: flat-rate withholding tax and partial exemption
In Germany, investment income is in principle subject to a separate tax rate of 25 percent, governed by Section 32d of the Income Tax Act, plus the solidarity surcharge and, where applicable, church tax. For investment funds, part of the income also remains tax-free: for equity funds held as private assets, Section 20 of the Investment Tax Act exempts 30 percent of the income from tax, and for mixed funds 15 percent.
The tax rate therefore only applies after deducting this partial exemption and the personal saver's allowance. Because allowances, church tax and the specific type of fund change the result, a tax estimate in the calculator is deliberately a switchable approximation and not a binding calculation — the exact burden always depends on personal circumstances.
Advance lump sum: why the base rate is not projected forward
Accumulating funds distribute nothing; so that ongoing gains are not deferred indefinitely, the advance lump sum (Vorabpauschale) applies. Its base yield is derived under Section 18 of the Investment Tax Act from the redemption price at the start of the year, multiplied by 70 percent of the base rate, and is capped at the actual increase in value during the year.
What matters for an honest projection is where the base rate comes from: the Deutsche Bundesbank determines it anew each year from the long-term attainable yield on public bonds, and the Federal Ministry of Finance then publishes it. It therefore changes annually — projecting it forward across the entire term with the value known today would feign a precision that does not exist. For a single year, the official base rate belongs in the calculation, not a blanket projection over decades.
A dependable ETF savings plan separates fixed quantities from assumptions: contribution, term and costs are plannable, return and inflation remain model assumptions, and the tax depends on the type of fund and personal allowances. Whoever calculates several scenarios and applies the advance lump sum only with the respective official base rate obtains an honest figure rather than a falsely precise one.