How to Retire Early in Germany: Key Insights into Financial Independence (FIRE)
Photo by Mathias Konrath on Unsplash. Neuschwanstein castle, Germany.
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Disclaimer: I am not a financial adviser, and this content is for informational and educational purposes only. Please consult a qualified financial adviser for personalized advice tailored to your situation.
Your Path to Financial Independence: Start Your FIRE Journey Here
This personal finance blog aims to increase your financial literacy and guide you on the path to achieving financial independence. Achieving financial independence (FI) involves building a solid savings plan and making strategic investments that allow you to create a sustainable income and break free from traditional employment. For many, financial independence is typically achieved at traditional retirement age, allowing them to live off a combination of pensions, savings, and investments. However, with strategic planning, financial independence can be achieved much earlier.
To be clear, in this blog we don’t advocate for early retirement as a form of escapism. Instead, we focus on meaningful societal contributions. As Vicky Robin eloquently wrote, when we stop working for money, we may be out of a job, but we will never be out of work. There are countless ways to meaningfully contribute to society outside the structures of paid employment. Similarly, as advocated by the ancient Greeks, enjoying a healthy amount of leisure is essential for a well-rounded life, allowing for intellectual and cultural pursuits that are integral to personal and societal development.
This post explores how living in Germany can help or hinder your journey to financial independence, providing actionable insights into salaries, taxes, and costs. In a previous post, we covered whether it is possible to pursue FIRE with kids (Financial Independence, Retire Early) and shared a few insights related to living in Germany. However, that post was narrowly focused on the topic of raising a family. In today’s post, we will build and expand substantially on this and cover different aspects that are material to considering whether Germany is a good location to pursue financial independence. Alright, let’s jump right into it!
FIRE in Germany: Challenges, Opportunities, and What You Need to Know
Pursuing financial independence in Germany presents a unique mix of opportunities and challenges. With a culture that embraces frugality, robust public services, and a solid work-life balance, Germany offers fertile ground for those committed to achieving financial independence and stepping fully or partially away from the working grind. However, it’s also important to consider potential drawbacks, such as the burdensome tax system and significant social charges. In this post, we’ll dive into the German context of FIRE, exploring salaries, cost of living, cultural attitudes toward money, and other key considerations. Whether you’re a local or a potential expat, this post provides an overview and actionable insights to help you thrive on your FI journey in Germany.
I see this post as a living document, and will update it accordingly as I think of further relevant points or receive feedback. Please share with us in the comments section below your own experiences pursuing FI in Germany, any questions you’d like me to address, or how the FI journey compares in to your home country.
Photo by André Fuck on Unsplash. Brandenburg Gate, Berlin.
German Frugality: Cultural Insights for Your FIRE Journey
Germans have a reputation for being frugal and thrifty, at least in the eyes of other Europeans. As we saw in a previous post, Germany has the third highest savings rate of the EU. Furthermore, at a broader country level, Germany is known for its cautious approach to national debt, setting it apart from neighboring countries that often rely on high levels of debt to fund expenditures. You would expect that this thriftiness mentality of not living above your means would automatically align with the idea of pursuing financial independence. Well, yes and no.
On the one hand, it is true that being frugal to pursue financial independence will fit in very nicely in Germany’s culture. Here, we don’t suffer so much from the “keeping up with the Joneses” syndrome that other countries suffer from–most notably in the US. I’m grateful that nobody blinks an eye when I tell them I don’t own a car or that we buy all our children’s clothes and gadgets second-hand. I think this would raise a lot more eyebrows in some southern European countries. Germans (especially in the north) are considered frugal due to a combination of cultural, historical, and economic factors. Some of these roots lie in the Protestant work ethic, which emphasizes hard work, modesty, and saving over indulgence. But also consider Germany’s history of economic hardship, including hyperinflation in the 1920s and the post-WWII rebuilding period, which reinforced at the societal level the value of saving and financial security.
On the other hand, a low willingness to invest and high taxes represent strong brakes for Germans’ path to FI. Of course, readers of this blog would not have an issue with the investment part, as it is fairly easy to access low cost ETFs that track internationally diversified index funds. I mentioned it because I notice many of my friends and colleagues simply don’t invest. This hesitation often stems not from risk aversion but rather from a lack of financial literacy, which limits investment opportunities. As we will see further below in more detail, investing is simply not encouraged, and analogous instruments to a 401K or other tax-advantaged instruments that our US friends enjoy simply do not exist. And I’m afraid they are nowhere on the horizon.
Another curious fact is that Germans are very open to discussing money. They are generally known to be direct and open in their demeanour (some might say blunt), and this translates also to money. For example, during our first conversation with neighbors in Germany, they asked openly about our rent within minutes—a level of transparency uncommon in many other countries. This of course easily extends to your group of friends: asking about your friend’s rent or income is fairly normal, whereas it is a taboo topic in many European countries. So, I think most FI-minded people may truly appreciate this cultural openness.
How Salaries in Germany Impact Your FIRE Strategy
The gross median salary in Germany is €3,646 per month (approximately €44,000 or $46,000 annually), according to recent Stepstone data. This means that 50% of people in Germany earn less, while the other half earn more than this amount. However, there are significant differences across states (i.e., Lander) as observed in Figure 1 below: we can see quite clearly that, with the exception of Hamburg–the top performing state in this metric–southern regions enjoy significantly higher salaries. It is also evident that, with the exception of Berlin, there is still a wide gap with eastern–formerly communist–German states.
Figure 1. Median salary by region. Source: Stepstone
Amongst graduates with a degree, medical doctors enjoy by far some of the highest median salaries (94,750 €), followed by banking and insurance professionals (€65.500), engineers (€63,000), and consultants (€58,000). We will explore further below the cost of living, so we can bring these salaries into context.
Attempting to accelerate your path to FI by overworking—as is sometimes observed in other countries—is simply not possible in Germany. The Working Hours Act (Arbeitszeitgesetz) sets the standard maximum working time at 48 hours per week, typically spread over 6 working days (8 hours per day). This limit can be extended to 60 hours per week on a temporary basis, provided the average working time over a 6-month period does not exceed 48 hours per week. If you hold multiple jobs, the combined working hours across all employments must adhere to these legal thresholds, and all employers are responsible for ensuring compliance. This only applies to employees, not to self-employed workers pursuing their own business.
The flip side to this is that work-life balance in Germany is excellent compared to other EU countries. As observed in Figure 2 below, Germany enjoys some of the shortest working week in the EU. In addition, or as a partially enabling factor, it is fairly common to find part-time working arrangements with your employer–28.5% of Germans work part time, the third highest rate in the EU (see Figure 3). For anyone wishing to take the foot off the gas–including parents–the ability to work part-time can be a blessing.
Figure 2. Average number of actual weekly hours of work in main job in 2023(aged 20 to 64). Source: Eurostat
Figure 3: Part-time employment country and sex, 2023 (age group 20-64, percentage of total employment in each sex category). Source: Eurostat.
If unchanged, Germany’s public pension may be a further source of income in retirement after age 65 (or 62 with deductions). This source is based on a points system, which ultimately depends on the income you generated throughout your career and the amount of years you worked. You can explore roughly how much you can expect by entering some examples here, although I’m sure there must be more detailed tools out there. In any case, for people wishing to retire early, expect the amount of public pension income to be a very modest. I prefer to exclude Germany’s public pension from early retirement planning as a conservative approach.
Is Germany Affordable for FIRE? Exploring Cost of Living
Despite the recent period of inflation, the cost of living remains, in my view, fairly affordable for those earning around the median salary or higher (see previous section on salaries). Of course, this will be a fairly subjective assessment depending on your household income, but, in my experience the ratio salary-to-expenses is fairly good when compared to other countries. For example, the cost of living in Madrid or Rome is, according to Numbeo, 11.9% and 13.9% lower than Berlin, respectively, yet the net average salary in the German capital is almost 40% and 75% higher than in Madrid and Rome, respectively.
These are back-of-the-envelope estimates, but are sufficient to get across the point that in most cases it will be easier to save aggressively and pursue financial independence in Germany than it will be in Spain or Italy. In a future post, I will try to map out where these largest differences lie across a larger set of European cities.
Germany’s affordable health insurance system, split between employers and employees, ensures accessible care for all residents. In practice you can expect to pay about 7% of your monthly gross income. It is not only affordable, but in my decade of experience here–ranging from colds and minor injuries to the birth of our children–I’ve only had positive experiences interacting with the health care system.
As we covered in detail in a previous post, the cost of raising kids is particularly favourable in Germany: we enjoy high quality public schools for free; kindergartens until age 6 are heavily subsidized (you will pay a maximum of around €250 per month per kid); and everyone receives Kindergeld, a child benefit provided by the German government to help cover the costs of raising children. Families in Germany receive approximately €250 per child monthly through Kindergeld benefits, continuing until adulthood or the end of their education.
Similar to most European countries, property prices in big cities are sky high. In a previous post, we assessed the decision to buy vs to rent in the context of pursuing financial independence. For most, renting is a faster and more practical route to financial independence in Germany unless you earn a top salary or receive a significant windfall. In the figure below you can observe the price variation per region.
Figure 4. Property prices in Germany per square meter. Source: Value Markdaten
Taxes in Germany: Insights for Achieving FIRE
Most Germans would say they have high taxes. And while it is true that their taxes rates are certainly not low (see Figure 5 below), there are 11 countries in the EU with higher top tax brackets ahead of Germany. However, understanding Germany’s tax system requires nuance for accurate comparisons with other countries.
Figure 5: tax brackets in Germany (2024). Source: PwC
It is important to note that pension contributions, unemployment insurance, health insurance, and care insurance are not covered within these taxes, but “added on top”. This is a reason why it is difficult to compare taxes across countries; in many countries the health care component would already be included. In Figure 6 below, you can observe a breakdown example of what would be your net take home pay for a €80,000 salary. In this example, taxes and social charges represent, respectively 21% and 18% of your gross salary. In other words, you are left over with 59% of your gross salary.
Figure 6: Breakdown of taxes and social charges of a €80,000 gross salary in Germany.
Capital gains from long term financial investments are subject to a flat tax rate of 26.375% in Germany (25% plus 5.5% solidarity surcharge–assuming no church tax). In a previous post we covered how different capital tax rates in popular retirement destinations can impact your financial independence timeline. While people tend to worry about this, the capital gains tax impact is often smaller than expected. The big killer here is the income tax and social charges during your path to financial independence. In relation to capital gains tax, it is worth remembering that it only applies to the profit part of the portfolio. So, if you are withdrawing €50,000 it could very well be that only about a third of that is profit and you may be paying “only” an effective tax rate of about 10% (i.e., €5,000 or so). In a future post we can dig into this into more detail.
Concluding remarks
Despite the pros and cons, overall I believe Germany to be a solid choice for pursuing financial independence. The decent salaries, especially when compared to the relatively low cost of living, allow for aggressive savings potential, and the general culture of thriftiness and frugality align well with this journey.
We’d love to hear your experiences with financial independence in Germany or questions about achieving FI in your home country. Share your thoughts in the comments! I see this post as a live document, which I will update if I think of more relevant items to add. As mentioned earlier, in a future post I intend to explore in more depth the relation of salaries and cost of living across different countries to help identify a subset of countries suitable for aggressive saving and the pursuit of financial independence. We recently conducted a similar exercise to identify suitable countries for geographic arbitrage.
Enjoyed this post? Don’t miss our insights on reaching your first $100K investment milestone or our post on embracing stealth wealth and the importance of choosing freedom over status (comprehensive list of blog posts further below).
Photo by Mateusz Sałaciak on Pexels. Wagenbrüchsee, Bavaria.
