Navigating Early Retirement: Essential Tips for a Smooth Transition
Early Retirement Strategies Revealed: Unveiling Tips to Quit Work Sooner - "Accelerated Retirement – Strategies That Get Results"
By Frank Donovitz
The ongoing concern over labor shortages in numerous sectors hasn't deterred some companies from opting for early retirement of their older employees, especially in heavily digitized industries. However, this turn of events can present an opportunity for employees aiming to retire earlier, rather than a negative outcome.
Retirement at 62: Disability Benefits and Pension
For employees with a disability rating (GdB) of 50% or higher, retirement can start at 62 instead of the minimum age of 63. Regular old-age pension would start at 65. The penalty for early retirement amounts to a maximum of 10.8% of the regular amount. Without a disability, the deduction is up to 14.4%. The decisive factor is the disability rating granted at the retirement date—not before or after.
A disability rating of 50% or more is assessed by local social welfare offices upon application and can include conditions such as severe bronchial asthma, allergies, chronic pain, heart diseases, cancer, and stroke. A list of these conditions can be found on the website of the MyHandicap foundation, among others.
Switching to Retirement at 61: Unemployment Benefits and Mini-Jobs
Under specific circumstances, job termination at the age of 61 can be financially manageable, if not appealing. Those aged 58 and older may receive two years of unemployment benefits if they were insured for at least 12 months (either compulsorily or voluntarily) within the previous 30 months upon registering with the employment agency.
The amount of unemployment benefits depends on the gross income in the 12 months preceding job loss. The employment agency calculates a benefit amount, 60% of which is the daily payment for the unemployed. This percentage increases to 67% for those with dependent children. The Federal Employment Agency's online calculator can help determine this individually as a monthly amount.
For instance, for the average annual gross salary of around 53,000 euros in full-time employment, the monthly unemployment benefit would be approximately 1,700 euros (for tax classes I or IV, without children). For married couples in tax class III, approximately 1,900 euros would be paid. The unemployed can earn an additional 165 euros per month for a small mini-job. Any earnings above this limit are deducted from the unemployment benefit. A maximum of 15 hours per week is allowed for a mini-job.
Terminated employees at 61 should also receive a severance package. Legally, this is based on half a month's gross salary per year of employment, equating to around 22,000 euros for ten years of service with the last employer. If unemployment lasts until age 63, this would amount to around 900 euros per month from the severance (taxes and interest credits, such as time deposit, are not included). This results in a monthly available sum of up to 2,765 euros for tax classes I or IV. Importantly, unemployment insurance continues to contribute to the pension scheme for up to two years for 61-year-olds, enabling the earliest possible start of old-age pension.
Potential hurdles in this approach include the need for a proper termination by the employer—without mutual agreement, the employment agency may withhold unemployment benefit payments for up to three months. The employment agency also requires the cooperation of job seekers beyond searching for a mini-job. Being unemployed doesn't automatically equate to early retirement, and the pension itself is slightly lower as unemployment insurance generally pays lower contributions than during employment.
Exit at 60: Partial Retirement and Side Jobs
Partial retirement, or "ATZ," provides employees aged 57 and above with the opportunity to step out of full-time employment even at 60. With a contract of up to six years, employers and employees can agree on a plan where the active phase allows continued work as usual for the first three years, followed by a three-year passive phase during which employees are essentially retired.
Partial retirement comes with costs for both parties, as a new reduced salary is calculated for the entire period. The basic formula for the salary is: last salary divided by two, plus 20 percent of that as a top-up amount. Additionally, the employer continues to pay social security contributions. Well-structured partial retirement contracts can offer employees a higher top-up, resulting in an ATZ salary of 80 to 90 percent of pre-retirement income. However, the reduced salary can decrease the future old-age pension and may require additional pension deductions of up to 14.4 percent if retirement starts before the regular retirement age, for example, at 63.
ATZ employees are generally permitted to take on secondary activities, subject to the company's approval rules. The combined hours of the main and secondary activities should not exceed 48 per week, with no distinction made during the passive phase. It's crucial to note that passive ATZ employees can't be temporarily employed by the company for projects. There is no limit on the additional income from the approved secondary activity since 2023, provided it remains relevant for income tax declaration.
Impact on Pension, Retirement, and Unemployment Benefits
The German system for partial retirement at age 60 affects pension, retirement benefits, and unemployment insurance in several ways. For example, the retirement age increases with birth year, with a general minimum age of 67 for those born after 1964. In some special cases, partial or early retirement might be possible from age 60, although pension payments will be reduced if withdrawn before reaching the statutory retirement age.
Partial retirement enables a phased transition into retirement, allowing pension rights to accrue during the reduced work hours. The pension reduction for early withdrawal applies in the case of partial retirement if it occurs before the statutory retirement age, resulting in lower monthly pension payments after retirement. Additionally, the German government offers incentives to continue working beyond retirement age by offering partial tax exemptions on additional earnings up to €2,000, encouraging continued employment even after claiming partial or full pension benefits.
In cases of unemployment during partial retirement, regulations may enable claiming unemployment benefits if social security contributions are adequate. However, partial retirement is generally structured to avoid full unemployment. The pension contribution continues during partial retirement, which helps maintain or increase pension rights.
In summary, partial retirement at 60 offers a smoother exit from full-time employment, enabling some pension benefits to start at an earlier age while maintaining eligibility for pension accrual and potential unemployment benefits under certain conditions. The system provides a balance between early retirement flexibility and incentives to remain active longer for financial sustainability.
In the context of early retirement, employees with a disability rating of 50% or higher can retire at 62, while regular old-age pension starts at 65. For those without a disability, the penalty for early retirement could be as much as 14.4%.
In certain circumstances, job termination at 61 might be financially manageable, with the possibility of receiving two years of unemployment benefits if the individual was insured for at least 12 months within the previous 30 months upon registration with the employment agency. Unemployed individuals can earn an additional 165 euros per month for a mini-job, and any earnings above this limit are deducted from the unemployment benefit.
