Real estate: Part of your retirement planning
If you want to buy your own home as part of your retirement planning you need a well thought-out-strategy.
by Jürg Zulliger
01 Sep 2016
Purchasing residential real estate is an acquisition for life – and part of your retirement preparation. If you’re planning to buy a house or apartment, you should start by thinking carefully about where you are in life, and the goals you want to achieve. If you’re 30 or 35, you’ll have different priorities from someone over 50. It’s vital to have a well-defined individual financing strategy. Just as for capital investments, the aim is to achieve optimal diversification. By combining a mix of different products and terms, you minimize the risk of having to reorganize your entire financing in an unfavorable interest environment.
Stage 1: Finance residential real estate and close any gaps
If you dream of owning your own four walls while you’re still young, you need to set yourself a savings goal as early as possible. The maximum price you can pay for a property will depend on your financial situation. With the financing guidelines that currently apply, you need to be sure you can still meet the running costs of the real estate even with a higher interest burden. Today, you need equity of 20 percent to buy or build a home of your own. At least 10 percent of this must be “real” equity, i.e. your own savings, securities, Pillar 3 assets, or the redemption value of insurance policies. Advances on inheritance or loans from relatives are also accepted, provided they do not have to be paid back and no interest is due on them. The remaining 10 percent can come from an advance withdrawal or pledge from your pension fund. The other 80 percent is usually financed via a bank mortgage.
As a future homeowner, you should also think about protecting your family. And if you decide to use money from your pension fund, you need to be aware of the possible impact. Depending on your pension fund’s regulations, you may lose out on benefits. It’s best to ask your pension fund about the benefits you can expect in the event of invalidity or death. Early withdrawals always lead to a gap in retirement pension cover, however. These gaps can be closed later by making voluntary purchases of pension fund benefits. Thanks to compulsory accident insurance, employees are relatively well insured against loss of earnings due to an accident, although they may suffer a significant loss of income if they become unable to work or die following an illness.
To make sure that the family can still afford its home if the main breadwinner is unable to work or dies, you can take out life insurance for a sum equivalent to a second mortgage. The insured sum paid out reduces the debt. You should also check whether benefits from Pillars 1 (AHV) and 2 (pension fund) would be sufficient to meet your financial obligations. If not, you’ll need to make other arrangements.
Stage 2: Plan your expenses and optimize your assets
In the next stage of life, the main thing is to keep an overview of your total financial situation. Think about ongoing building maintenance, any repairs needed, and the risk of a rise in interest rates. A good piece of advice is that any money you save today thanks to the historically low interest rates should not be used up straight away or spent on other things. Instead, you should put these savings to one side as a financial cushion for periods with higher interest rates.
Financial retirement planning during the second stage of life also involves optimizing assets. Most importantly, make sure that you can afford your current expenses with sufficient liquidity to spare. Also consider using any available resources for amortization, or for investments other than in real estate. If you still need to close gaps in your retirement savings – i.e. if you’ve made early withdrawals from your pension fund – this needs to be taken into account in your financial planning. Finally, consider the relationship between debt (mortgage amount) and your tax burden. Some homeowners avoid repaying all their debt so that they can deduct the debt interest (to offset imputed rental value tax) on their tax returns. However, this is not always worthwhile and should be calculated on a case-by-case basis.
Stage 3: Prepare for retirement
The benefits from the AHV and your pension fund will generally not be enough to maintain your current standard of living. From the age of 65, income is often more than 20 percent lower than when you were in active employment. As a result, it’s important to prepare for retirement by calculating the pension you’re likely to receive (or have it calculated) and draw up a budget. It’s best to start planning for retirement once you reach age 50. You can close any gaps in pension cover by making voluntary purchases of pension fund benefits, through private retirement savings under Pillar 3, or by accumulating wealth other than in real estate. Follow the motto: the sooner, the better.
One very common mistake concerns the amount of mortgage in place after retirement. Most people enjoy the quality of life and comfort of having their own home, and want to keep their mortgage debt as low as possible in retirement. But be careful you don’t underestimate your everyday outgoings. A great many costs can arise during retirement, such as for repairs or modifications to your home, nursing care, or medical treatment. Since AHV and pension fund benefits are lower than your income when you were earning, increasing your mortgage will often prove difficult – it is simply not financially viable. So you should only amortize your mortgage to the extent it is affordable, taking your liquidity requirements into account. When you’re over 65, it’s no use being a proud homeowner on paper if you’re unable to meet the running costs of your property.
In conclusion: if you start preparing for retirement early on, you’ll be able to enjoy living in your own four walls when you’re older without having to worry about your finances.