Do you really have to work until 67?

Overall, almost 58 percent retire from the job before the regular retirement age, including a good 23 percent with deductions. In Berlin and Brandenburg in 2021, every third old-age pension approved by the German pension insurance was a pension from the age of 63 without deductions. However, it is also clear that those who want to retire earlier will in many cases have to reckon with financial losses on their pension account. However, the deficit can be compensated, whether by making additional payments to the pension account or by making private savings in good time.

Early pension only after 35 years of contributions

Overall, there is an iron rule to which there are only a few exceptions: as a rule, you cannot retire from working life more than four years earlier as a person with statutory health insurance. Even an early pension is only paid to those who have at least 35 years of contributions and are at least 63 years old. If you want to get out at the age of 58, for example, you can of course do so, but you will not receive any money from the pension insurance system until you reach the minimum retirement age.

Exceptions apply, among other things, to severely disabled people or career soldiers. But even at the age of 63, the state still takes a decent chunk out of the pension: 0.3 percent for each month.

For example, a person born in 1964 who would actually have to work until the age of 67 and thus until 2031, but would like to retire in 2027 at the age of 63, will have to reckon with a 14.4 percent deduction. This deduction then applies not only until you reach the regular retirement age, but for life. A lot of money can therefore be lost over the entire pension period.

Since the retirement age is gradually being raised to 67, the year of birth is crucial. Anyone born in 1959 who turns 63 that year and could retire early (if he or she has 35 years of contributions) only faces a 11.4 percent reduction as the regular retirement age for those born in 1959 falls in the would start in 2025.

Those born in 1961 have to live with a minus of 12.6 percent if they want to retire at the age of 63, i.e. in 2024 (with 35 years of contributions), although they actually have to work until 2028. For those born in 1963 (regular retirement in 2030, earlier retirement in 2026) it is already 13.8 percent.

The state grants a special bonus to people who have had a very long professional life and have worked for 45 years. You can currently retire before the age of 65 – without any deductions. Here, too, the limit increases, namely by 2 months per year of birth: from the year of birth 1963, people with particularly long insurance of at least four and a half decades only receive the full pension from the age of 65.

Those born in 1958 cannot retire without deductions until this year, i.e. at the age of 64. The contribution times include not only the job, but also sometimes periods of upbringing, caring for relatives, studying, short-term unemployment, etc.

How to balance the discounts

It becomes particularly expensive if you want to retire much earlier: for example, if you want to put your feet up at the age of 58 and thus no longer pay contributions to the pension insurance, you will have to reckon with high losses.

The German pension insurance calculates: if you have always received an average salary for 35 years, you have earned a pension of 1197 euros at the age of 58. Up to 63 it would have been 1368 euros. For the pension from 63, a further 10.8 percent of 1197 euros, i.e. 129 euros, would then have to be deducted, according to the spokesman for the pension insurance company, Dirk von der Heide.

Instead of 1368 euros, the state only transfers 1068 euros every month, and this for life. But there are ways to compensate for the minus. Dirk von der Heide: “If the deductions are to be compensated, contributions can be paid in from the age of 50”.

The future pensioner would have to transfer an additional total of 30,700 euros to the pension fund for 13 years – and in return would receive a pension of 1,197 instead of 1,068 euros per month. In purely arithmetical terms, the retiree will pre-finance those 129 euros more per month for 20 years.

However: if the pensioner simply keeps the sum of 30,700 euros in his own account, lets it work with interest and regularly withdraws money to top up the pension, he could possibly be better off. With two percent interest and a monthly withdrawal of 129 euros, the money will last a good 26 years, i.e. until your 84th birthday.

If the missing contribution years from the 58th to the 63rd birthday are to be compensated, an additional 7,236 euros would have to be transferred to the statutory pension insurance every year, i.e. a total of 36,180 euros within five years.

However, this also has a disadvantage: Because with the higher pension entitlement of 1368 euros, the deductions of 10.8 percent for the earlier pension from 63 also increase: not 129, but 148 euros are then deducted. In order to compensate for this deduction, not 30,700, but 35,100 euros must be transferred to the pension account.

Anyone who thinks about their own age in good time can, depending on their savings behavior and options, close pension gaps and at the same time retire earlier. However, it is necessary to invest money in high-yield forms of investment at an early stage. If a 50-year-old is planning to retire earlier at 63 and not to downsize after leaving the job, but to enjoy life and travel a lot, it is important to plan ahead.

About 80 percent of the last net wage is required

A rule of thumb says that many people need less money when they retire. About 80 percent of the last net is usually enough: the apartment or house has been paid off, the children are able to stand on their own two feet, and there is no longer a daily commute to work. In most cases, however, the statutory pension cannot cope with this – especially not if an employee retires earlier.

Anyone who receives the average German salary of EUR 40,551 gross per year will, according to the current status, receive a monthly pension of an estimated EUR 1,430 after 40 years of work and regular retirement at the age of 67, even based on today’s purchasing power. If he retires at the age of 63, it is just over 1100 euros.

That’s not 80, but a little under 50 percent of the expected last net wage. It is true that these calculations are subject to many uncertainties. For example, it is completely unclear by what percentage pensions will increase in the coming decades.

So far, according to Dirk von der Heide, people with statutory health insurance can count on a return of around two to three percent on their contributions. In the past, this was not much more than compensation for inflation. If you want to get out of the job earlier and at the same time want to neutralize future pension gaps, you have to start putting money aside early on for a high return.

For example, if a 50-year-old plans to retire at 63, she still has 13 years to strengthen her financial cushion. She could do it like this, for example: she invests 20,000 euros and saves an additional 250 euros every month, using the capital markets, which have yielded between seven and nine percent each year on a long-term average in the past. With a seven percent return, she would have a sum of around 111,000 euros in her account at 63.

The sum would be enough – with the same return – to have around 600 euros more in the account every month for 31 years. At 800 euros, the withdrawal time is reduced to around 18 years before the capital is gone. Capital gains taxes are already included in this calculation. If long-term saving on the capital markets to improve your own pension were made more attractive from a tax point of view, i.e. no taxes were deducted, the pensioner could even withdraw 700 euros every month for 31 years – or 880 euros for 18 years. Even with a conservative calculation with a return of 5 percent per year, the savings would bring a pension plus of 708 euros every month – after taxes.

A third option is to have more money in your account every month despite an earlier pension and perhaps be able to afford a longer trip to the sun, a mobile home or a nice present for your grandchildren: continue to work a little on the side. In principle, pensioners who have already ended their normal working life before the regular limit are allowed to earn 6,300 euros on the side without their pension being reduced.

In 2022, due to the corona pandemic, it will even be 46,060 euros, with which the federal government wants to lure retired medical staff back to work. From 2023, the limit should drop again to 6300 euros. 40 percent of the money in excess of this is taken into account and reduces the pension. However: If you are in regular retirement, you can earn (and pay taxes) as much as you want without reducing your pension.

In any case, if you want to know exactly what pension entitlements he or she has according to the current status, what losses an earlier departure from working life brings and how it can be compensated for by additional payments, this can be clarified down to the last penny with the German pension insurance. A rough calculator that spits out the cuts in the event of early retirement depending on the year of birth and working life can be found on the website of Stiftung Warentest and the German pension insurance.

This text first appeared in the Tagesspiegel.

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