Plan your pension the smart way
Have you been dreaming about the joys of retirement for years, or do you think you are too young to be bothered with all that boring pension stuff? Whichever category you’re in you really should start thinking seriously about your pension sooner rather than later. And here is an example to see why.
Mind the gap
Let’s say you have a good job that pays you CHF 90,000 a year. And you’ve calculated you will need CHF 60,000 a year to live in style and do what you want after you retire. Your Swiss basic state pension (AHV) will give you just under CHF 30,000 a year, and you have a private pension fund too which should pay out just over CHF 20,000. Let’s say these two pensions combined will give you CHF 53,200. That’s a CHF 6,800 funding gap every year (see table below).
Of course, you may have savings, but are they enough? The average life expectancy in Switzerland is 82.9 years according to the World Bank. And it is increasing, meaning you may have a longer retirement. If we take the regular retirement age of 65 and an annual income gap of CHF 6,800 your savings must last 17.9 years. That’s CHF 121,700 you’ll need in your savings account, and you may need that for medical emergencies or to repair a leaking roof.
You could just reduce your expenses after you retire and not go on that world trip, or help the children get a good start in life. Or you could start planning for retirement now and be able to live the dream.
Expectations versus reality
You need to think about what you want to do after you retire and what you will need to live the kind of life you want. But what are your options? What do you need to look out for? And how do you actually plan for retirement? Put simply, you need to ask yourself two questions.
What do I want?
How do I want to live after I have retired? Maybe travel the world or move somewhere sunnier? What about a comfortable retirement in Switzerland? Or maybe sell our big family home and move into a smaller apartment? Or do I want to continue to work?
What do I need?
By comparing your current income to your expected income after retirement you will get a rough idea about how much you will need. The following gives you an idea of what you need to consider.
- Individual expenses e.g. bills, clothes, meals and other general living expenses
- Monthly expenses e.g. rent, health insurance, phone bills, public transportation, or your car
- Annual expenses e.g. mortgage payments, insurances, taxes, donations, vacations, membership fees
- Reserves e.g. medical expenses, emergency house repairs, helping out the children
So now you have an idea of how much you’ll need, but where is that money going to come from?
Income after retirement
- Pillar 1: AHV-pension
- Pillar 2: Pension funds or capital payments
- Pillar 3A and 3B: Purchased pension or accumulated assets
- Additional income: Securities or rents from owned real estate
If there is still a gap between your anticipated costs and income after retirement you need to act.
What can you do?
- Buy into a pension fund (BVG)
Buying into a pension fund is very appealing in two ways. First. the pension increases with your age, and second it gives you a huge tax saving each year you the buy in to the scheme. And it’s not too late to do this. The average Swiss person has the highest income at the end of their career, so it is still feasible to buy in after you are 55.
- Pillar 3A
Voluntary payments into a pillar 3A account can be deducted from your taxes (for employees that are enrolled in a pension fund the maximum amount is CHF 6,768 per year). These savings can be significant, especially in the highly paid last years of employment. But be aware, the classic pillar 3A interest rate is currently not that high. But there are alternatives, such as a pillar 3A securities account for example.
- Further Employment
Many Swiss chose a “soft” transition from full time work such as part time jobs, and this can have a positive impact on your AHV-pension.
There are a lot of ways to improve your financial situation post retirement. And the sooner you start asking questions and planning ahead the better. And remember to get expert advice to avoid adverse tax implications. If you have any questions about planning your retirement, we would be happy to help you.
Troschel Treuhand & Beratungs GmbH
Troschel Treuhand & Beratungs GmbH