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  • Writer's pictureDarren Tarrant - Cert CII, EIP

How to Save for Retirement as an Expat in Germany

Updated: Feb 18

Embarking on a new chapter in a foreign country can be a daunting task. And yet, expats from all over the world come to Germany to do just that, drawn by the country’s robust economy and rich cultural tapestry. If they choose to stay for the long term, they confront another challenge: planning for retirement as an expat in a German system that isn’t known for its simplicity.

But planning for retirement in Germany isn’t as complex as it might seem. And as with any challenge, it’s easier when broken down into steps. The first one is understanding the state of retirement in Germany. The state pension system, otherwise known as the Deutsche Rentenversicherung, is designed to provide government financial support to retirees, and is funded by both payroll and voluntary contributions from workers.

The Deutsche Rentenversicherung is certainly better than what many other countries have to offer, but it may not be sufficient on its own to secure a comfortable retirement. Add a healthy dose of confusion regarding eligibility criteria, a convoluted point system and contribution structures, and a language barrier, and you get many expats questioning their ability to build a secure financial future.

If you’re an expat feeling overwhelmed at the prospect of building wealth in Germany, we’re here to help. In this guide, we’ll review five steps to get you started on the path to a comfortable retirement.

Contents covered in this article:

1. Get to know the German pension system

One of the biggest challenges expats face when planning for retirement in Germany is not understanding how the country's complex pension system works. So, let’s tackle this question first.

The state-managed Deutsche Rentenversicherung (German Pension Insurance) is a comprehensive social security system designed to support individuals financially during their retirement years. The “pay-as-you-go” system means that current workers fund the retirement of current retirees. Currently, workers in Germany can retire at the age of 65, but this will increase to 67 by 2029.

Expats living and working in Germany are generally subject to the same rules and regulations as German citizens when it comes to social security, including contributions to the pension system.

Here are a few key points to know about how the Deutsche Rentenversicherung works — and why expats may not want to rely on it as the sole source of their retirement income.

Contributions are compulsory for employees (and some freelancers)

If you’re a salaried employee in Germany, you’re obligated to make contributions to the social security system — including the pension scheme. These contributions are typically deducted directly from your salary and matched by your employer.

Expats, just like German citizens, contribute a percentage of their gross income to the pension fund. How much you contribute exactly is determined by a specific income threshold, and the percentage may vary depending on factors such as the type of employment and income level.

For most self-employed people, contributions to the state pension system are voluntary. However, certain roles, such as freelance teachers, require contributions as well.

Time may not be on your side

The German pension system is point-based, meaning you can earn just over two points per year based on your income level. The more points you collect over the course of your working life, the higher your retirement income will be.

Because the Deutsche Rentenversicherung considers the total period during which an individual has made contributions, expats who move to Germany later in life may start a few steps behind. Though you may be able to get public pension contributions recognized in Germany, you’ll still probably need several decades of retirement contributions to live comfortably.

The state pension is (probably) not enough

Due to Germany’s ageing population and the pressures it puts on the state pension system, you’ll likely need additional savings to supplement your state pension benefits.

While the Deutsche Rentenversicherung forms the backbone of the retirement system in Germany, it is now clear that workers won’t be able to expect the comfortable retirement from the state they once could. Furthermore, like other income, retirement income is taxed, so your net earnings will be much lower than they might seem at the outset.

Given this, expats should also consider supplementary private pension plans that can help bridge any gaps in income and provide a more comfortable retirement. Finding tax-optimised ways to budget and save is important, too, but we’ll focus on that a bit later.

You may face some language barriers

Expats who don’t speak German may not find it so easy to navigate the German pension system. Many documents are available only in German, and it may be difficult to find folks at the Deutsche Rentenversicherung who can give you all the information you need in English.

Don’t let this be an excuse to skimp on your responsibilities. It's crucial to understand the correspondence from the pension authority and seek assistance, if needed, to ensure accurate and timely information.

2. Review the social security benefits in your previous country of residence

Germany has bilateral agreements with many countries to circumvent dual or duplicate social security contributions for expats who live here. Expats from these countries may also be able to count past contributions in their home country towards their Deutsche Rentenversicherung entitlements. Depending on your age, where your past contributions were made and how long you long you plan on living in Germany for, will determine how you should manage these previous contributions moving forward.

At LeX-Wealth, our qualified retirement-planning advisers can help you factor in any previous social security contributions, so you have a clear picture of how much income you can expect in retirement, and what additional savings you might need so that you can secure your desired level of future income.

3. Start budgeting (and saving) as early as possible

If the German state pension will not be enough on its own to support you in retirement, the question remains: Where does the rest of the money come from? The best way to ensure sustainable wealth in the long term is to optimise your saving and budgeting habits today.

This is especially true given the realities of inflation and Germany’s high cost of living, which can significantly impact your ability to retire comfortably as an expat. Inflation is especially a problem if all or most of your retirement depends on fixed-income streams such as pension plans and annuities, which may not be able to keep pace with rising healthcare, housing, and living costs.

To avoid this pitfall, it's crucial to budget and save with all the tools at your disposal. You may consider the following:

  • Exploring supplementary income streams. Savings earned with freelance or part-time work can help to supplement your retirement income.

  • Switching to private health insurance. If you earn more than €69,300 per year, you could save money during your career (and in retirement) by switching to private healthcare. Read more about this option in our guide to private health insurance vs. public health insurance.

  • Taking advantage of tax-optimised savings accounts. A private pension, for example, can help grow your wealth while living in Germany. Also known as a Privatrente in German, a private pension is a supplementary retirement savings plan that allows you to build your wealth in a highly flexible and tax-efficient manner.

4. Research your investment options

Investing may come with risks that traditional savings accounts don’t, but it also has the potential for much higher returns. This is especially true if you consider the benefits of investing over a long time horizon.

To take one prominent example, the average annualised return for the S&P 500 (a weighted index of the 500 top publicly traded companies in the U.S.) is nearly 10% since its inception nearly 100 years ago. Even if you aren’t planning to invest over the span of a century, time can still be on your side. If you invested €100 in the S&P 500 in early 2000, you would have nearly €500 by the end of 2023 (before taxes and fees) — a nearly 400% return on investment.

Though they require a higher risk tolerance and do not offer guaranteed returns, stocks have proven to be a powerful part of a wealth-building strategy over time. You may even be able to invest in stocks in a tax-efficient way via a supplementary retirement product like a private pension (privatrente).

The bottom line is that not investing wisely (or not investing at all) can jeopardise your retirement planning.

So, research investment options, consider your time horizon, and seek professional guidance to make informed decisions that align with your financial goals.

5. Don’t skimp on insurance coverage

Not paying for insurance coverage may save you money in the short term. But it can also be a major hindrance for expats planning for retirement abroad.

The right insurance can protect you from the kinds of unfortunate or catastrophic events that may happen over the course of a long life. Here are a few to consider:

  • Income protection insurance is a crucial type of insurance policy to consider (particularly if you have a family). While the German state will provide you with a small pension constituting a certain percentage of your last income, you may need to bridge the gap. Income protection insurance can help.

  • Long-term care insurance can provide additional security should you require nursing care in retirement. Due to an aging population and increasing costs of nursing care, that can be a particularly important part of your overall retirement planning.

  • Term life insurance can give you the peace of mind that your loved ones are protected and financially secure in the worst case scenario. If you’re thinking of how your spouse or children may fare in their retirement, this is an insurance to consider.

It's important to evaluate your needs and ensure that you have appropriate coverage for your current situation and retirement goals.

Get a head start on your retirement with LeX-Wealth

Retirement planning can be a complex task for expats living in Germany. That’s why it’s essential to be aware of potential pitfalls and take steps to avoid them.

By understanding the German pension system, saving enough, investing wisely, and having proper insurance coverage, you can help ensure a comfortable and secure retirement.

At LeX-Wealth, we specialise in financial and wealth-planning services, from retirement planning to securing the right insurance for your needs. Our English-speaking specialists offer continuous support, no matter how diverse your goals are. Contact us today to learn more.

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