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.
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?
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!