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Welcome to Part 2 of our interview with the esteemed (and VERY German) Ms. Maxi. Today, we’re talking about how to achieve Financial Independence in Germany. If you missed out, check out Part 1 here.
So to recap, we were last talking to Ms. Maxi about how the health care system works in Germany. So is health insurance run by the government?
Actually no, it’s private.
Oh. Wow. So Germany has a private health insurance system like the US?
Well, yes it’s private but it’s not like the US in that it’s heavily controlled by the government. For example, I have to pay 15% of my salary post-tax towards health insurance premiums.
That’s different. In that the government regulates that insurance premiums must be matched to income. The Americans didn’t have that until recently with Obamacare (and they’re even trying to undo that!)
Yes, and the government also regulates that insurance costs can only go up a certain amount each year.
That’s a BIG difference. How much are they allowed to raise it by per year?
A maximum of 0.9%, I believe.
Uhhhhh…OK then! I’ll let our American readers chime in below about how that compares to their experience.
And if they do raise premiums you’re allowed to leave your insurance company and find another one who maybe didn’t raise theirs. That keeps insurance from going up too much, and pretty much everybody’s insured in Germany.
Wow. That’s…actually pretty shocking.
Coming from my background in North America, health care divides up into two camps. If it’s run by the government, everybody’s covered and health care isn’t too expensive like in Canada. And if it’s run by private companies, people fall through the cracks and it gets hella expensive like in the US. Now it looks like in Germany, we have a model where it’s run by private companies, the government regulates it, and you still have near-universal coverage and costs don’t run away. I may have to dive deeper into that in a future article, because I’m pretty surprised to hear that.
But to summarize a little bit, in Germany it looks like your taxes are higher than the US, but somewhat comparable to Canada. For your ETF’s, would you say that’s about the same in terms of MERs (called TERs for them)?
Um…it’s 0.15% to 0.5%.
So yeah, comparable to Canada. What about taxes. Specifically, what do taxes look like in retirement for you?
I think it’s like you guys. I get taxed the most when I’m working, but if I were to quit (or lose my job) then my tax rate would go to 0% even for taxes on dividends or capital gains.
Right. We were talking about this at the Chautauqua because in Germany there is a flat 25% tax rate on all income from capital gains or dividends called the Abgeltungsteuer, but it looks like this goes away if your income drops in retirement below the 25% tax bracket.
Yes. I’m quite happy about that.
I’m curious, would you say there are a lot of people trying to achieve Financial Independence in Germany?
Mmmm, I don’t think so. I think in Germany, people don’t really invest in the stock market.
Really?
It’s not something that German people do. And they don’t put it into a savings account either, because of how bad they are.
So if I were to open up a savings account, what interest rate would I get?
Zero.
Zero? Really?
Yes. I get zero. Maybe 0.5%, if I’m really lucky.
So if they don’t put it into savings accounts, and they don’t buy stocks or bonds with it, what do they do?
When they have money, they tend to just put it into real estate.
Now THAT definitely sounds Canadian.
In Hanover, for a 90 square-meter flat, it’s like 800k Euros!
Holy shit. Wait, we were just in Germany. Rent was ridiculously cheap in Berlin! I was able to find a 1BR flat with pool/gym for 800-1000 Euros!
I know! But it is getting more expensive because of real estate prices. I think it’s going up 4-6% a year in certain cities.
Does Germany have rent controls?
Oh, yes. If you’re already living there you can only raise it by inflation.
Oh so they can’t kick you out and raise the rent?
No, you’re not allowed to kick people out. It’s very renter-friendly here.
OK so despite all that, do you think that real estate is a more popular retirement vehicle for people in Germany?
There is one lady in Germany who became Financially Independent using real estate, but she has to use more of a 2% SWR instead of a 4% SWR because of exactly this reason. I think she’s going to have to sell those properties as she gets older because she won’t be able to keep taking care of those properties for much longer. It’s not passive.
Yeah, that’s what everyone keeps forgetting about real estate investments. Stocks are passive but real estate is actually a LOT of work.
Yeah, that’s true. But I think there are a lot of people here who invest in real estate just because they don’t know what else to do with their money. So now they have no money, but they have a flat. Yay?
Yeah, gee, that DEFINITELY sounds familiar. So it sounds like the idea of using stocks and index investing isn’t as popular in Germany. Is the idea of Early Retirement popular in Germany?
I don’t think it is.
Well, I just don’t see the situation being that different from us in Canada. I mean, yeah you have a high tax burden and a bunch of Home-Boners running around buying up real estate, but you have a good health care system, the same access to the low-cost Index-hugging ETFs that we do, plus renter-friendly price controls that we didn’t even have (until recently).
You know, when we were trying to hit FI, they told us that what we were trying to do in Canada “only works in the US” too, but we proved them wrong. And from what I can tell, early retirement seems just as doable in Germany as it is in Canada.
Maybe. But I was talking to another blogger here, a minimalist blogger, and her attitude is that it’s not possible in Germany. Maybe in the US, yeah, but not in Germany.
So I guess you’ll just have to prove her wrong, then won’t you?
*Laughs* Yeah I guess so.
Well, it was great talking to you. Tell us about your blog and what you write about.
My name is Ms. Maxi and I write the blog www.msmaxi.com. I write (in German) about minimalism and simplicity. How to pare down, simplify your life, and invest your money.
Thanks Ms. Maxi. And if anyone has any questions for us, please include it in the comments below!
Continue onto the next article!
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Interesting stuff Wanderer! I really like this series on Financial Independence in Germany. (I’m curious about how things work in other countries) Are you looking to expand this to other countries?
I imagine there’s a number of places in the world where frugal people can retire early.
Nice to see a fellow German featured here! 🙂
I think FI is possible in Germany just, on average, a lot slower than in Canada or the US.
Which is why I have to rant about the injustices of the German tax system, sorry! 😉
If you want to invest pre-tax for retirement, you can do this but then the investment products are state-controlled and mostly benefit the banks / insurers who offer them. Also I don’t think you can withdraw from those before you’re 60+. The next thing is Germany is really good at taxing middle class incomes. Then everyone who is employed pays into a public retirement (and health care) fund which is immediately redistributed to retirees.
This is one of the reasons Germans are not big into early retirement, I assume. If you see a significant chunk of your salary automatically going into a retirement fund you are either confused thinking this is for your own retirement (it is not) or you count on this system working until you retire yourself (maybe it will).
FYI: Quebec has always had the kind of rent controls that Maxi describes. Rents can only go up a limited amount set by the government each year, usually around 2-3%, and even if you get a new renter you have to justify any large rent increases – if you renovated, etc, it can be accepted, but you can’t just jack up the rent for a new renter because you feel like it. You also can’t renovict; the only way to kick a renter out is if they’re acting illegally or if you plan to have a member of your immediate family move into the unit. In the latter case, you still have to wait until the end of the lease term, which usually gets renewed every year, and give (I think) 3 months’ notice. Even selling a property doesn’t give a new owner the right to evict the current tenants. Despite all this, real estate remains a decent investment, but it hasn’t turned into the unsustainable lottery that it’s been in Toronto and Vancouver the last decade.
I know that finance and real estate blogs tend to pretend that Quebec doesn’t exist despite the country’s second largest city and a fifth of its population being here, but politics and language aside, there are definitely some benefits to living here. After reading this interview, I’m reminded that it’s still somewhat European in mindset when compared with the rest of North America. That isn’t a bad thing.
I’d be curious to hear what Ms. Maxi thinks of the recent immigration in Germany and if it has had any effect on housing prices in particular? I know it’s a bit of a sensitive subject in Germany these days. A million people showing up in one year is a lot to handle.
Either way, Germany sounds a lot like most countries. Work, buy houses, retire old, die. Sad.
Welcome to Life, dude:
School, Work, Marriage+Kids, Retire, Death, Decay, Dust.
That’s the way it is everywhere since time immemorial.
Haha true, but you can at least change when it all happens, at least, that’s the purpose of FIRE.
Well, we did have another wave of immigrations (guest workers) from Italy and Turkey around 50 years ago. So it is not really new.
This is indeed a very sensitive subject. And one that was big during the recent election.
I would rather not go into political topics. I think it is not a black and white case.
I do not think that it has an imediate effect on housing prices, since the refugees live usually in camps.
And to be honest, the 800k Euro flat was the top which I just saw at a local bank. Usually a flat costs more like 250k. I think the increase in prices comes from the interest-politics of the European Central Bank (EZB). The interests are so low (somethimes even negative), that a lot of people are now buying houses and flats, which inflates the housing prices.
And yes, there is the option to retire early, for example when you turn 60. But then you get a penalty on the govt. pension plan. But otherwhise it is as you described. Sad indeed!
Here’s an interesting read on the Singaporean health care system:
http://tinyurl.com/yapldzny
Happy to do an interview on ER in the UK 🙂
Great two part series!
I had the pleasure of meeting and hanging out with Ms. Maxi at Chautauqua UK. She is every bit as engaging, insightful and fun in person!
Oh thank you so much Jim!
I appreciate that. I do miss the Chautauqua and of course all the people in it, including you and your wife! I hope we do meet again.
To say that the German health care system is private is very misleading. This makes it seem as through (1) the insurance companies are the winners and the insured people are the losers and (2) that having insurance is optional.
Both are simply not the case.
If you work, you and your company pay a very reasonable rate to gain full health coverage. It is deducted automatically from your pay check. Hmm kind of like a tax.
In the case of short term unemployment you pay a very low rate (or none at all) to maintain your coverage.
I have experienced both the German and Canadian health care system and in the end effect is the same. Universal and affordable coverage for everyone.
Could you do a post or a series of posts on FI strategy for UK? We also have some tricks with pension schemes where you are gonna be taxed if you take money out before you retire. So would be interesting to read what to do and how to invest in the UK.
Cheers! and keep up good work!
Thanks for the tradegate tip. Another good german blog is frugalisten.de