Home ownership – plan for tomorrow today
It's never too soon to start planning your retirement. We address the most important questions and answers.
by Jürg Zulliger
03 Aug 2017
What does retirement planning include?
A key question is timing: Do you want to retire early or “properly”? Since early retirement means a sharp reduction in pension, partial retirement can make sense. For example, you might reduce your workload by 30 percent at age 62 and completely stop working at age 65. Setting up a budget is also crucial for the phase before and after retirement. Experience has taught us that costs are not lower after giving up gainful employment than before, though this is often assumed – for example, many people spend more after retirement on vacations and leisure.
Regulating the disbursements from your pillar 3a and vested pension assets should also be part of your planning. Pension institutions want to know up to three years in advance whether a retiree wishes to receive a lump-sum payment or draw a pension. Those who haven’t made any early withdrawals can check if any voluntary, tax-deductible purchases of additional benefits are possible and worthwhile. Among other things, it's important to take into account how well the pension fund is doing financially.
What must homeowners consider?
The mortgage amount is crucial. The financing must also be affordable after retirement. That means that regular fixed costs (interest, any amortizations and ancillary costs) should make up no more than one-third of income available at the time (typically the benefits from AHV and the pension fund). This comparison of income and costs is crucial and should be calculated at an imputed mortgage interest rate of five percent. Having checked the numbers, you’ll often find that the affordability is less attractive than expected. Even when you only have a first mortgage for 65 percent of the property value, this is no guarantee that the requirements for affordability after retirement are satisfied. If income drops sharply after retirement, you may not be able to meet today's standards in the credit business.
What does this mean for my taxes?
By staggering withdrawals from your pillar 3a, you can interrupt the progression of tax on capital payments. When planning your retirement, keep in mind that income taxes often don't decrease as much as you might first expect. At the same time, many opportunities to take deductions are lost, such as work-related expenses, payments into pillar 3a, etc. Someone who repays withdrawals into the pension fund which were allowed for the promotion of home ownership cannot deduct these amounts from taxable income – only capital payments taxes (without interest) originally paid can be recovered. The application for recovery must be submitted within three years after repayment into the pension fund.
What is easily forgotten?
For some time, it was very popular to withdraw pension fund assets to acquire residential property (to encourage home ownership). If these withdrawals are not paid back by the time of retirement, the pensions could potentially be lower. Judging from experience, many people are not aware that this opens up a gap in their retirement provision, which can later have a negative impact on financial security during retirement.
When should you start to plan for retirement?
It's never too early. It's ideal if you start thinking about it at 50. This gives you 10 to 15 years’ time to take certain steps. Some people may conclude they must save more so they can afford their home in old age. In some cases, amortizations or repayments of pension fund withdrawals would be advisable. Extraordinary amortizations are possible for fixed or Libor mortgages – but only if this is regulated early by contract. At the age of 62 or 63 it is often too late to adjust finances to the new circumstances.
When is the right moment to undertake renovations and adaptations?
If possible, you should implement any renovations during the acquisition phase. For a variety of reasons: Since income from employment is higher than pension income, your financial flexibility is simply greater. The closer retirement gets, the less sense it makes to increase a mortgage to make modifications. Tax considerations also come into play: The tax saving effect is greater for even higher income, especially when investments are staggered over several years. In the end, this gives the homeowner more security – they do not need to worry that high costs will come due shortly after retirement.
And if it's not enough?
Of course one must judge each case on its own merits. So it's relevant whether a minor or major gap in affordability is opened up. It's good to know that after retirement, assets above a certain amount can be taken into account in the affordability calculation. This means that not only pensions are included when making the calculation, but potentially also a portion of return on assets and wealth attrition. Selling the residential property becomes hard to avoid, however, if you conclude, despite this more precise evaluation, that the conditions for financial affordability are not met.
What form of amortization is worthwhile?
In the vast majority of cases, it is advantageous to execute amortizations indirectly through pillar 3a. The client profits twice over: On the one hand, payments of taxable income are deductible. On the other, it can make sense when you have a longer-term investment horizon to invest pillar 3a savings in funds, thereby getting a chance at higher returns. In the case of indirect amortization, the savings are pledged to the bank and later used for larger amortizations. Pillar 3a is also attractive for younger people. If you pay in regularly, you can accumulate a sizeable sum over time, which can be used to purchase your own home. Pillar 3a is similar in this respect to the privileged home-building loan model.
What other resources, such as potential inheritances, may be considered when planning for retirement?
Parental wealth can play a role if appropriate contractual agreements exist (for example, gifts, advances against inheritance or contracts of inheritance within the family). However, oftentimes children are granted their statutory entitlement, either in a testament or in inheritance contracts. Or the inheritance doesn't live up to expectations for other reasons (health and nursing costs). As a rule, it thus makes sense to regulate your estate and wealth during your lifetime. Only in this way can individual requests and needs be taken into account and implemented.
Which documents are needed for a consultation?
It is important to compile essential documents before seeking professional advice. These include the budget, a pillar 3a account statement, the pension fund statement and a tax declaration. Generally, an AHV pension projection also makes sense, but not before age 50. You can obtain such a projection from the competent AHV compensation office free of charge.