Retire Early in Germany ( 7 Expert Tips )

If you want to Retire Early in Germany , then discovering the pension information documents from the German pension insurance can be quite an eye-opener. These documents are handed out to individuals who have reached the age of 27 and have at least 5 years of work experience. 

Sometimes, the news about retirement from these documents can be a bit disappointing. It might seem like you need to work more for a comfortable retirement. But don’t worry, we have some expert tips in today’s guide to help you retire early in Germany!

Is it possible to Retire Early in Germany?

Currently, the retirement age in Germany is set at 67 years. The earlier you wish to retire, the more expensive it becomes, as you’ll have to find a way to secure an earlier retirement.

There are three options to explore:

  1. Working for a longer period of time
  2. Investing more money
  3. Potentially accepting a lower pension amount.

However, given that the pension level is already relatively low which we will discuss later on, accepting a lower pension may not be feasible for most individuals.

Therefore, it becomes crucial to find ways to compensate for this shortfall. Let’s dive into the various possibilities available to make early retirement in Germany a reality!”

Retiring earlier with a pension deduction.

The earliest age you can claim the statutory pension in Germany is 63. But keep in mind that there will be a deduction on your pension amount. The future value of your pension depends on the number of pension points you have accumulated by the time you reach retirement age.

Pension Points in Germany

For each pension point you collect , you receive €37.6 per month. So, if you have 30 pension points, that amounts to €1,128 per month. To accumulate these 30 pension points, you need to have worked for over 30 years, consistently earning the national average income.

Simplifying it a bit, you earn one point for every year you earn above the average, and slightly less if you earn below the average.

Is Retiring Early at 63 possible in Germany?

Essentially Retiring at the age of 63 IS possible, but it comes with certain prerequisites. Fore Example, you need to have made at least 35 years of contributions to German pension insurance. However, there are exceptional situations where you can receive credits for these contribution years. 

For instance, longer periods of illness, occupational disability, maternity leave, pregnancy, unemployment, and even school and study time can be credited, but up to a maximum of 8 years between the ages of 17 and 25.

Reduced pension with Early Retirement

If you decide to retire earlier and meet the necessary conditions, there is a monthly penalty for doing so, amounting to 0.3%. Let me give you an example.

Imagine you have accumulated 30 pension points, which entitle you to €1,128 in pension. However, if you choose to retire one year earlier, you would face a penalty of 0.3% per month. 

That means your pension would decrease to €1,000.85 per month. The situation becomes even more striking if you decide to retire four years earlier at 63 instead of 67. In this case, you would have to accept a 14.3% penalty, resulting in a pension of €966 instead of 1128€ per month.

Buying pension points to Retire Early in Germany

The German pension insurance provides an option to purchase pension points, whether you plan to retire earlier or not. This opportunity was created specifically to offer those who wish to retire earlier a means to compensate for the pension loss they would incur.

Interestingly, you can also buy additional pension points even if you plan to retire at the standard retirement age of 67.

Requirements to buy German Pension Points

To be eligible for purchasing pension points, you need to meet certain requirements.

  1. You must be at least 50 years old, so this option is not available for younger individuals.
  2. You need to have the possibility, from a mathematical standpoint, to retire earlier, meaning you should have accumulated 35 full years of contributions by the time you turn 63.

How to Buy Pension Points in Germany

If you meet the above mentioned requirements, the process of buying pension points is relatively straightforward. You’ll need to fill out a form and submit it to the German Pension Insurance. They will calculate the maximum number of pension points you can buy, but you are not required to purchase the maximum. 

How much do the Pension points in Germany Cost?

You have the flexibility to buy as many pension points as you desire, up to that maximum limit. At the moment one pension point costs €8,024.

Is buying Pension Points in Germany worth it?

So is it really a good idea to buy pension points? To figure that out, we should understand the worth of each pension point. When you have one pension point, it means you get €37.60 every month.

If we calculate this for a whole year, it adds up to a return of 5.6% per year. That sounds pretty appealing, especially knowing that the German government supports it and it’s generally considered a safe choice. 

However, we have to keep in mind that this isn’t exactly like a typical investment. When you buy pension points, you’re paying money for them, but you won’t get that money back later on.

Buying Pension Points VS Investing in ETFs

To Retire Early in Germany Let’s compare two things to see which one is better: buying pension points or investing in an ETF portfolio.

Imagine we invest €8,000 in an ETF portfolio and withdraw €37.60 each month, which is similar to the amount received from pension points. For the ETF portfolio lets assume an average rate of return being 7% which is based on the returns from the S&P500 index adjusted for inflation . 

With these numbers, the ETF portfolio would last forever as the rate of return is higher than the rate of withdrawal when you retire early in Germany. However, we need to consider that these are ideal conditions, as the 7% is an average rate which can fluctuate drastically. For example if the rate of return decreases to 4%, now your ETF portfolio would last you only 21 years.

It’s important to know that we’re comparing two very different things. When you buy pension points, you get a guaranteed payout of 5.6%. On the other hand, the yield from an ETF portfolio can go up and down, and there’s a risk that you might lose money.

So, the decision of whether to buy pension points or invest in an ETF portfolio depends on your own situation. If you have enough money and don’t rely heavily on your pension, it might be better to invest and accept the risks that come with it. However the opposite would be true if you have a low pension income.

Retire Early in Germany with a Working time account

Imagine being able to work ahead and accumulate time to enjoy an earlier retirement. This can be made possible through a remarkable tool called the long-term work value account. It’s important to note that this is not a government-provided benefit but rather a solution that requires collaboration with your employer.

How does the Working time account Function?

The working time account operates in two main phases: the accumulation phase and the payment phase. Think of it as a savings account where you can deposit surplus working time. For example, you can store your overtime hours or unused vacation days. It’s worth mentioning that only vacation days exceeding your legal entitlement can be included.

Moreover, some employers even allow you to convert additional benefits into this time value account. The time you contribute to the account is always converted into monetary value.

Instead of calculating in hours, it’s transformed into money, which also earns interest over time. Naturally, this account must be safeguarded against the risk of employer insolvency. It’s crucial to ensure that the amount deposited into the account does not exceed what can be withdrawn during the payout phase.

Working time account payout phase

During the payout phase, the salary is disbursed in the usual manner, with taxes and social charges applied accordingly. The only difference is that you no longer have to physically show up for work.

This enticing option provides an attractive way to accumulate both time and money on the side, whether it’s for retirement or other purposes. For instance, it could be an ideal solution for taking a well-deserved sabbatical to explore new adventures or pursue personal interests.

The working time account opens up a world of possibilities for individuals seeking greater flexibility and control over their careers and future. By strategically managing your time and resources, you can pave the way for a more fulfilling and well-balanced life, where retirement becomes a joyful reality rather than a distant dream.

Working time account Limitations

Most companies that offer a time account do not offer a long term account or even have limited hours that can be put into it. For example my company offers this flexible account but I can only put a maximum of 40 hours into it at a time. So talk to your employer and ask what they offer.

Partial retirement vs Retire Early in Germany

This concept is designed for people starting from the age of 55 and offers a unique way to transition into retirement. Here’s how it works:

You can reduce the hours that you work for half, your salary is halved due to the reduced hours. If your employer allows it, you can get an additional 20% salary on top of it. It’s worth noting that these additional earnings are exempt from taxes and social security contributions.

Partial Retirement in Germany (with the help of your Employer)

In the past, there used to be a government subsidy for this arrangement, but unfortunately, that is no longer available. However, your employer is still required to pay 90% of the contributions to your pension insurance. This ensures that, as an employee, you can maintain a relatively high pension even if you work part-time.

Of course, for this plan to work, your employer needs to agree to it. Initially, it may mean higher costs for them. However, it can be an appealing option for employers who are considering downsizing or bringing in new employees. By embracing this approach, they can keep experienced workers while also creating opportunities for fresh talent.

Partial retirement offers an attractive solution that minimizes the impact on your pension while giving you the flexibility to gradually transition into retirement. It’s a win-win situation, where you can enjoy a reduced workload and more free time, and your employer benefits from a smooth transition in their workforce.

Registering as unemployed to Retire Early

Before retiring or if you want to start your retired life earlier, you can sign up as unemployed. It may seem strange, but this choice has unique benefits that are worth considering.

Here’s how it works:

When you register as unemployed, you become eligible to receive a percentage of your average take-home salary from the past 12 months. Usually, this is about 60% of what you used to earn. However, if you have a child, the percentage goes up to 67%. This provides some financial support during your transition period.

The length of time you can receive unemployment benefits depends on your age. If you’re under 50 years old, you can get benefits for up to 12 months. But if you’re over 50, you might be eligible for benefits for up to 24 months. The duration changes gradually between the ages of 50 and 58.

Disadvantages of Registering as Umemployed to Retire Early in Germany

It’s important to know that if you decide to quit your job on your own instead of being let go, there will be a three-month waiting period. During this time, you won’t receive any unemployment benefits. You’ll need to find other ways to support yourself during this period. Keep in mind that this time without benefits also affects the amount of pension you’ll receive.

While you’re unemployed, the employment office pays your pension contributions. However, they only cover up to 80% of what you used to earn. It’s important to think about how this might affect your pension and plan accordingly.

Signing up as unemployed before retiring or as part of an early retirement plan can give you temporary financial help and support. It’s crucial to carefully consider your own situation and think about the advantages and disadvantages. This option creates a safety net during your transition time, so you can focus on planning and getting ready for your retired life.

Remember, it’s important to talk to the right authorities and financial advisors to understand the specific requirements and effects based on your own circumstances. So that you can make well-informed decisions that align with your financial goals and retirement dreams.

Building up your own wealth to Retire Early in Germany

Building wealth is not only essential for retirement, but it also has value earlier in life. Think about the possibility of having enough money and assets saved up so that you can either retire sooner or smoothly shift to part-time work as you approach retirement. 

Here’s an example: starting at 50 years old, you gradually reduce your working hours and use your own savings and investments to make up for the decrease in income. When the time comes to fully retire, you won’t have to rely as much on your savings because you’ll have a reliable pension to support you.

Let’s dive into a quick calculation example to illustrate this concept. Imagine you’re 50 years old, and you have accumulated €400,000 in assets. Your last net salary was €55,000, and now, as you shift to part-time work, you’ll earn €30,000. To compensate for the difference of €35000 from your portfolio. At this rate your total portfolio would last you an additional 20 years, even if you do not put a single cent into it.

That is why it is absolutely essential that you start building up your own wealth as soon as you can. You can learn all about investing and Getting started with investing in Germany with AhsanFinance!

Disclaimer: None of the content in this article is meant to be considered as investment advice, as I am not a financial expert and am only sharing my experience with stock investing. The information is based on my own research and is only accurate at the time of posting this article but may not be accurate at the time you are reading it.

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