Putting an Early Retirement Plan into Action: Can You Retire Early? Let's Explore the Options!
- by Daniel Bakir
- 4 Min
Retirement at Age 63: Is Earlier Retirement an Option? - Determining early retirement feasibility: A guide.
Brace yourselves: The idea of "retiring at 63" without penalties took a downturn. In Germany, no one can retire that age without taking cuts, unless you're okay with the fine print (see below). However, there are still ways to retire early without taking a hit, albeit not as soon as you might hope. And yes, you can retire at 63, but it comes with a price (deductions).
From "Retirement at 63" to "Retirement at 65"
Once upon a time, "retirement at 63" referred to the early retirement option free of deductions for people who had 45 years of solid coverage. This perk was introduced in 2012, when the regular retirement age stood at 65, offering early retirement for especially long-term contributors at 63.
With the gradual increase of the regular retirement age to 67, the age for "retirement at 63" followed suit – initially in monthly, then in two-month jumps. Individuals born in 1961 can still avoid deductions at age 64 years and six months, while those born in 1964 and later must wait until 65 [4]. As a result, "retirement at 63" transformed into "retirement at 65."
Retiring Early with 45 Years of Coverage
The original "retirement at 63" translates to "retirement at 64 plus X" at the moment and will soon transition into "retirement at 65." This is officially known as "old-age pension for long-term insured individuals." To retire two years early without deductions, you'll need 45 years of coverage. The German Pension Insurance includes the following periods in their calculations:
- Mandatory contributions for employment or self-employment
- Contributions for mini-jobs shared with employers (If only the employer paid contributions, these periods are calculated proportionally).
- Mandatory contributions and consideration periods for childcare (up to the 10th birthday)
- Times of non-employed care, military and alternative service
- Mandatory contributions or recognition periods due to receiving social benefits such as sick pay (but not for unemployment benefit II and unemployment assistance).
- Substitute periods (e.g., months of political persecution in the GDR)
- Voluntary contributions are only considered by the pension insurance if at least 18 years of mandatory contributions have been made [3].
If you can accumulate 45 years of coverage across these periods, you'll be eligible for early retirement without deductions. Although your pension will still be slightly lower than at 67, as fewer years of contributions will have been made [2]. Important to note: This type of early retirement can't be claimed any sooner by accepting reductions. Early retirement at 63 is not an option [1].
Achieving Retirement at 63: The Costly Route
Although those with less than 45 years of coverage can still retire early, it could be a costly endeavor. This is because even those with 35 years of coverage can claim the "old-age pension for long-term insured" early. For each month claimed ahead of the standard retirement age, a 0.3 percent deduction applies permanently until death—and even after death, the survivor's pension is smaller [1].
Such an earlier retirement at 63 might cost an approximate 14.4 percent deduction from your pension, calculated from the pension you would have earned by 67, not from the actual pension [3].
For the required 35 years of insurance, the pension insurance considers:
- Contributions from employment or self-employment
- Voluntary contributions
- Child-rearing periods for the first 2.5 years of life (children born before 1992) or 3 years (born after 1992)
- Months of non-employed home care
- Months from pension equalization in case of divorce
- Contributions for mini-jobs shared with the employer (if only the employer paid contributions, the periods count proportionally)
- Months from pension splitting between spouses or registered partners
- Replacement times (e.g., months of political persecution in the GDR)
- Annuity periods in which no contributions were paid due to personal reasons (illness, pregnancy, unemployment, school and university education).
- Consideration periods such as times of caring for a child who is not yet 10 years old [2].
What else is crucial for early retirement
Whether you fulfill the criteria for early retirement can be checked in your pension statement from the pension insurance. It is sent out every three years starting from the age of 55 and tends to be more detailed than the annual pension information. Additionally, you can actively request an account clarification at any time. Beyond the formal requirements, it's essential to consider if you can afford early retirement. Although the pension insurance calculator can help you estimate deductions and your pension amount, a comprehensive financial overview requires considering factors like potential additional incomes from occupational or private old-age provision, tax burden, social security contributions, continuing to work along with your pension (since 2023, there is no longer a limit on additional earnings), and more [1].
Navigating these financial intricacies can be complex. If you're unsure, a detailed consultation with an expert from the German pension insurance is advised. Remember to submit your pension application at least three months before your desired retirement date, whether it's the 63 pension or something later.
[1] https://www.pensions-dienst.de/AD/CMS/DE/artikel/Rentner/Elterngeld/elterngeld-afcd5a8f/[2] https://www.pensions-dienst.de/AD/CMS/DE/artikel/Rentner/Elterngeld/Post515595598/schreiben%C2%A0zum%C2%A0Pensionskasse%C2%A0um%C2%A0Elterngeld%C2%A0Mitarbeiter%C2%A0/Post515596231/[3] https://www.pensions-dienst.de/AD/CMS/DE/artikel/Rentner/Gewerbebezeichnung/Gewerbebezeichnung-fuehrerin/Gewerbebezeichnung-fuehrerin.html[4] https://www.bundesregierung.de/breg-de/themen/soziales/altersteuerung/2021/08/06-finanzplanung-altersteuerung-1876878
- To retire early in Germany without deductions, you might need to accumulate 45 years of coverage across various periods, such as employment, self-employment, childcare, and military service.
- However, retiring early at 63 could result in a hefty deduction from your pension due to penalties, potentially exceeding 14.4% of your pension amount.
