CIO Age-specific retirement savings

Switzerland’s pension system is under pressure. So it’s all the more important that investments made from savings perform well. Your age determines how your retirement savings should be invested.

by Dr. Veronica Weisser, UBS CIO GWM 14 Nov 2018

The year 2015 marked a turning point in the Swiss demography. Since then, there are more people reaching retirement age every year than people turning 20 years old and entering the job market. The AHV has been recording a negative apportionment result year after year and in many pension funds, an increasing benefit period is pushing the conversion rate under five percent.

A low interest rate environment forces a rethink
The persistently low interest environment is also lowering returns on fixed-income accounts. As a result, the investment success of private savings has become all the more important for old age, including pillar 3a. Our new study (UBS House View – Pension Provision (PDF, 828 KB)) shows how retirement savers can invest their pillar 3a capital sensibly until they reach retirement age, depending on their age and corresponding investment horizon.

Capital preservation is the primary goal
As retirement savings should ensure financial security in old age, we set capital preservation as our primary objective. Based on modeling, this goal is considered to be achieved when there is a minimum of an 85 percent probability that you can expect a nominal gain (this means no losses) at the end of the investment horizon. Striving for the highest returns possible is our second goal.

An equity share is decisive
Historically speaking, stocks bring significantly higher returns than bonds over the long term, and the risk of loss declines with a longer holding period. The longer the investment horizon, the higher the equity share should be in your retirement portfolio.

What does that mean for your retirement savings?

Generation Y or millennials are considered to be well-educated. But retirement is often not at the forefront of their minds. Nevertheless, these are people who can start paying into pillar 3a from the age of 18 as long as they have an income subject to AHV contributions. An investment horizon of more than 30 years means that they can choose an equity share of 95 or 75 percent. The risk of loss over such a long time horizon is extremely low.

Well established in their careers, the 35–49 year-old age group is aware of the importance of private retirement savings. With a time horizon of 16 to 30 years until retirement age, this generation can also invest 95 or 75 percent of their regular retirement savings in lucrative investments such as equities, because in most cases, there is sufficient time for any setbacks in the financial market to be recovered.

The 50–56 year-old age group is part of the baby boomer generation. The increased prosperity per capita can also be attributed to the fact that the baby boomers only had few children to finance. Conversely, their AHV pensions are not secure because it’s unclear who will pay for them. There is absolute urgency in terms of private retirement savings. The investment horizon until age 65 still amounts to more than nine years. This means that this generation can invest with manageable risk up to 50 percent of their regular retirement savings contributions in diversified equities, 40 percent in bonds and 10 percent in real estate.

For 57 to 65 year-olds, who are just about to retire, the remaining investment horizon is too short to invest in equities with manageable risk. That's why a fixed-income account under risk considerations is their first choice. Whoever would still like to receive certain return opportunities can choose not to terminate their retirement fund at 65 and transfer the available 3a assets into their own securities account, and close the retirement fund later. If you terminate the fund from the age of 75, you can continue to invest 50 percent in diversified equities, 40 percent in bonds and 10 percent in real estate.

If you start to save for your retirement early, you can gain significantly higher returns without a high risk of loss, and enjoy a better standard of living in retirement.

Shortening the investment horizon

In particular cases, you can withdraw your pillar 3a retirement savings before you reach retirement age, for example to finance your own home or if you become self-employed. In this case, the investment horizon is shortened substantially and attractive returns can only be earned with a significantly higher risk of loss. Consequently, savings should be invested in accordance with the remaining investment horizon.

Example: If you plan to buy your own home in ten years, the investment strategy of a 55 year-old is chosen. In the first two years, up to 50 percent should be invested in equities, 40 percent in bonds and 10 percent in real estate, after which time you should pay into a fixed-income account.