Recently, a friend asked me if people who are aspiring FIRE would include unemployment benefits in their financial planning. I think that’s an interesting question, since it has both a legal and an ethical component in my view.
It’s not a topic that’s been touched on a lot of other blogs I read. That’s probably because most German bloggers are still on their way to FIRE. In this stage you might not think about this yet. But when you are about to quit paid employment, it becomes a very relevant question at the latest.
First of all there is the legal side which changes from time to time. Current and detailed information can be found on the website of the Bundesarbeitsagentur (Federal Employment Agency).
Roughly speaking, in the last two years before unemployment, you must have worked for at least 12 months in a job subject to social insurance deductions to qualify for unemployment benefits. (The correct term is ‘Arbeitslosengeld I’, i.e. the unemployment benefit, which you are entitled to from the payment into unemployment insurance.)
How much ‘Arbeitslosengeld’ do you get?
The amount of the unemployment benefit depends on your last net salary. By default you will receive a maximum of 60% of your last net salary and up to 67% of your last net salary if you have a dependent child.
Why maximum? Maximum because the unemployment benefit is not based on your actual net salary, but on the gross salary up to which contributions to pension and unemployment insurance are paid. In 2018, the marginal gross salary will be 6,500 EUR (West) and 5,800 EUR (East).
So the take-away for you is: if you earn above the income threshold lined out above at the time when claiming unemployment benefits might become an issue, your unemployment benefit will actually be less than 60% or 67% of your last net salary. That’s a fair ‘deal’, though, because you only made contributions to unemployment insurance up to this ceiling as well.
Not to be underestimated: the tax code
Since unemployment benefits are calculated as a theoretical net, your tax class is also relevant. The higher the deductions in your tax class, the lower the paid out unemployment benefit – initial gross salaries being equal.
If you are single with tax class I, you unfortunately have no room for maneuver here. But if you’re married, things are different. Most relevant in this context is the tax class combination III/V.
Often, this combination is chosen by married couples if the salary differences of the two spouses are very high. In order to pay as few taxes as possible during the current year, the partner with the higher salary chooses tax class III and the partner with the lower salary tax class V. If the partner with the ‘unfavorable’ tax class V becomes unemployed, he/she only has a claim to 60% of the lower calculated net as well.
Using tax law creatively
If unemployment is on the horizon but not immediate, it may make sense to change the current tax class combination.
In the example above, the spouse who expects to become unemployed changes into tax class III, the spouse who retains his job, into tax class V. A married couple with similar salaries that has been using tax class combination IV/IV could switch to tax class combination III/V, too, which would result in a higher unemployment benefit as well. Incidentally, the same principle applies to the calculation of ‘Elterngeld’ (parental benefit).
It’s important to be aware of the fact that the unemployed partner has to remain in the ‘favorable’ tax class while receiving the unemployment benefit. Otherwise, the payment will be adjusted downwards accordingly. The gross salary of the partner who switches to the ‘unfavorable’ tax class V provides less net during this period (the difference will be leveled out with your annual tax declaration). So you really have to familiarize yourself with all implications and/or consult a tax consultant to decide which solution makes the most sense for your individual circumstances.
How long is ‘Arbeitslosengeld’ paid out?
And how long is unemployment benefit paid? That depends on how long you have been contributing to unemployment insurance before becoming unemployed and on how old you are.
Again, roughly: if you have worked for two years before unemployment and are younger than 50 years old, you are entitled to up to 12 months unemployment benefit. In fact it’s exactly 360 days which I found surprising, since the usual reference is to 12 months.
If you are 50 years old, you are entitled to up to 15 months (450 days), at 55 years this is extended to up to 18 months (540 days), and at 58 years to up to 24 months (720 days) of unemployment benefit.
What else is important?
If you give notice yourself or sign a cancellation agreement, the employment agency usually imposes a waiting-period. In other words, with a theoretical 12-month benefit, you will NOT receive any unemployment benefits during the first three months. During the waiting-period, no contributions will be paid into your state pension by the employment agency either. However, from the second month at the latest, your statutory health insurance will be taken over or you will be paid a corresponding subsidy if you are privately insured.
And of course, if you get unemployment benefits, the employment agency expects you to look for a new job. You’ll probably be asked to send out applications to a certain number of job offers each month. Or at least you will have to document your activities to find new employment.
And what about the ethical question?
Which takes me directly to the ethical question. From my point of view, it is not unethical per se to take benefits from unemployment insurance, even if you are already close to financial independence. Unlike other state benefits that are funded by taxes, you only receive unemployment benefits if you have paid into this insurance.
So it’s an insurance claim, and if the insured event occurs, you can claim the benefit. To make sure no one is ‘rewarded’ for deliberately bringing about such an insurance claim, the waiting-period has been establishe. I think that’s appropriate too.
Still, I’d probably be reluctant to claim unemployment benefits, if I already knew that I never wanted to work again. Peter Ranning has touched on this on his blog “Der Privatier” as well.
In that case, I would prefer to focus on my new projects. And I would loath having to write applications and to report to the employment agency.
What’s been my own experience?
But maybe you’ll find yourself in a situation similar to mine: I originally wanted to take a year at maximum to find a new salaried position that suited me. At the time, I would not have been sure we could get by without my regular salary. And I deliberately chose not to switch directly from ‘safe’ employment to freelance work. At the age of 49, I assumed this was the last time I could find a new full-time job with an open-ended contract.
So I registered with the Arbeitsagentur. Since I had negotiated a cancellation agreement with my employer, I got a three-month waiting period. As this didn’t come unexpected, however, I had taken precautions, and negotiated an appropriate compensation in my cancellation agreement.
During the year I had various interviews for new jobs. One option I found quite interesting. But this job would have been associated with a lot of travel and the same level of stress that had been normal during the past 20 years. At the same time, it had become evident that we didn’t absolutely need my salary anymore. And I noticed that ‘more money’ was simply not important enough to me to go back into the rat race. So I am very grateful that I had the opportunity to choose the luxury of ‘more time’.
Financial Independence Rocks!