Paving the Way to Early Retirement: Some Clever Tricks
- by Frank Donovitz
- 4 Min.
Early Retirement Made Practical: Discover Smart Strategies to Achieve Financial Freedom Faster - Accelerate Your Retirement - Proven Strategies That Work
Facing an increasingly competitive job market, especially in tech-dominated industries, employers often prefer to let go of older workers to make space for younger ones. Don't let this become a setback; analyze it as an opportunity to explore early retirement options.
Retiring Early: The Disability Pension and Old-Age Benefit Route
Obtaining a disability rating (GdB) of 50% or more enables you to retire at 62 instead of the usual 63. Your regular old-age pension begins at 65. Retiring at 62 comes with a penalty that reduces the regular amount by 10.8%. Without a disability, the reduction can be as high as 14.4%. Your disability rating at the time of retirement is crucial; it is determined by the regional pension office at the time of application. Common disabilities include severe bronchial asthma, severe allergies, chronic pain, heart diseases, circulatory diseases, cancer, and stroke. You can find a list of potential disabilities on the MyHandicap foundation's website.
Adjusting at 61: Unemployment Benefits and Mini-Jobs
Losing a job at 61, even due to appraisal by the employer, can be manageable from a financial perspective. If you are 58 or older, you are entitled to two years of unemployment benefits if you have been insured for at least 12 months in the preceding 30 months. This is an insurance benefit funded by contributions from both employees and employers.
The amount of unemployment benefit depends on your gross income in the 12 months before unemployment began. The employment agency calculates a performance remuneration. Sixty percent of this sum is paid to you daily. If you have dependent children, 67% is paid. You can easily calculate your individual monthly amount using the Federal Employment Agency's online calculator.
For example, for an average annual gross salary of around 53,000 euros, your monthly unemployment benefit would be about 1,700 euros (for single individuals in tax class I or IV, without children). For married couples in tax class III, about 1,900 euros would be paid. Unemployed individuals can earn an additional 165 euros per month, allowing for a small mini-job. Additional earnings can be offset against the unemployment benefit, with a maximum of 15 hours per week allowed.
Termination at 61 should also result in a severance package. Legally, this is based on half of the monthly gross salary per year of employment, averaging around 22,000 euros for ten years of service at the last employer. If your unemployment lasts until the age of 63, this equates to around 900 euros per month from the severance package; taxes and interest credits are not included. This brings the monthly available sum to up to 2,765 euros for tax classes I or IV in the calculation example. Importantly, unemployment insurance continues to contribute to the pension insurance for up to two years, meaning that 61-year-olds continue to receive pension contributions until the earliest possible start of old-age pension.
Headaches: Without a proper termination by the employer, the employment agency can withhold the payment of unemployment benefits for up to three months if there is mutual agreement regarding the termination. Additionally, the employment agency expects cooperation from job seekers even when it comes to finding a mini-job. Being unemployed does not equate to early retirement. The pension itself is slightly lower since unemployment insurance generally pays lower contributions than during employment.
The Verdict: Whether a switch at 61 towards retirement at 63 is practical depends on the individual circumstances of those involved. The path is possible but challenging.
Exiting at 60: Partial Retirement and Side Jobs
Germany's partial retirement, or "ATZ" for short, enables employees who are 57 or older to step out of the workforce grid at 60. By signing a contract lasting up to six years with their employer, they can break free from the so-called hamster wheel.
Here's how it works: the first three years involve regular work. The following three years, employees are released, effectively retiring early. Employees starting such a contract at 57 are out of the workplace by 60, allowing them to enter old-age retirement at 63. Apart from the "block model," other variants are also possible. The start, end, and total duration of a partial retirement can be freely negotiated by companies and employees; this can occur as a company agreement, a works agreement, or individually. There is no entitlement to partial retirement agreements for either party involved.
Partial retirement comes at a cost. Both employers and employees must contribute. For the entire partial retirement period, a new, reduced salary is calculated. The basic formula is: last salary divided by two, plus 20% of that as a top-up amount. Additionally, the employer continues to pay social security contributions. Fair partial retirement contracts can offer employees a higher top-up, ensuring that the ATZ salary is 80-90% of the previous income. This is because the reduced salary decreases the future old-age pension. If the start is prior to the regular entry, for example at 63, there are still pension reductions of up to 14.4%.
To supplement the reduced salary, ATZ employees are generally allowed to take on a secondary activity, subject to their company's approval rules. The combined weekly hours of the main and secondary activities must not exceed 48 hours. Note that this also applies during the passive phase. Employers should not engage passive ATZ employees in projects for the company again. As of 2023, there is no limit to the additional income from an approved secondary activity, which is only relevant for income tax declarations.
- Retirement
- Partial Retirement
- Early Retirement
- Unemployment Insurance
- In the pursuit of early retirement, one option to consider for individuals seeking to retire at 62 instead of the usual 63 is obtaining a disability rating (GdB) of 50% or more, which might involve disabilities like severe bronchial asthma, chronic pain, or heart diseases.
- For those opting for partial retirement (ATZ) at 60, it is essential to note that even with a reduced salary during the partial retirement period, it is generally allowed for ATZ employees to take on a secondary activity, subject to their company's approval rules, to help supplement their income.
