Tips for your retirement Budgeting for retirement

If you want to plan your pension, it’s best to set a budget now. Four UBS pension experts give more advice.

by UBS Insights 03 Apr 2020
Illustration: Pia Bublies

Retirement is a turning point in life, when many things change. Your financial situation in particular. People often forget to plan this new phase of life or begin dealing with it too late. “To avoid any unpleasant surprises, planning for retirement should start 10 to 15 years earlier,” says private client advisor Natali Geiser. “At this point you still have enough options open to make tweaks and close any pension gaps.”

The basis of reliable retirement planning is a detailed budget, as it is only by comparing your expected income and expenses that you can tell whether you’ll be able to maintain your accustomed standard of living when you retire. “The funds from the first and second pillars are usually insufficient for this, since they only cover 60 to 70 percent of your last income,” private client advisor Giuseppe Degiorgi explains. Drafting a budget reveals whether and how you can make up the remaining income. But it also helps you make certain decisions in connection with retirement: Should I have my pension fund assets paid out as a lump sum, as a regular pension or as a mixture of the two? Can I afford to retire early? Does it make sense to pay off my mortgage? And above all: What wishes will I be able to fulfil after retirement?

What are my expenses?

The first step in budgeting is to list your current expenses, broken down into areas such as insurance, housing, taxes, household, health, mobility and leisure. This involves recording your fixed monthly expenses – such as rent, health insurance and telephone bills – as well as quarterly or annual costs such as mortgage interest, household insurance and taxes. For larger budget items like this, it may be helpful to calculate a monthly average. The same is true for variable costs such as food or clothing.

The second step is to estimate how your expenses are likely to change once you retire. While you won’t have any job-related expenses such as the cost of getting to work, other expenses increase as you get older. Supplementary health insurance, for example, becomes more expensive. But the biggest difference is that pensioners have more time to spend their money. Expenditure on travel and hobbies often increases considerably in the first few years of retirement.

What costs get overlooked?

Taxes remain a significant item of expenditure for pensioners that is often underestimated: “Taxes often fall less sharply than anticipated after retirement,” private client advisor André Dubach observes. Even if your income decreases with retirement, your tax bill may be almost the same. This is mainly due to tax deductions, such as job-related expenses or payments into pillar 3a, ceasing to apply. Healthcare costs are also often underestimated. And people tend to forget to include replacement purchases, such as a new car or home renovation costs, in their budget planning.

What will your income be and how much is left?

Once you have worked out your anticipated expenses, you need to calculate your expected income. One part of this is the AHV pension, which can be determined on the basis of an AHV pension forecast, available from the compensation office. Another part is the income from pension fund assets. Your pension fund statement tells you how much this will be. In addition to income from pillars 1 and 2, other sources of income must also be taken into account, such as income from securities and rental income.

Why start planning your pension at age 50?

Create a budget plan to determine your financial requirements for when you retire.

The final step is to compare the two amounts, which makes many a prospective pensioner swallow hard at first: “Most people come to the conclusion that their income after retirement is going to drop much more sharply than their living costs,” says private client consultant Alida Kobler. This would result in the steady depletion of their assets. If your assets are not sufficient to secure the retirement income you need in the long term, the only solution is to lower your standard of living. Your budget planning helps you identify potential savings, which are usually significant in the area of housing costs.

Sound budget planning gives you the security you need to start off your retirement with a good feeling. It provides a solid foundation for optimizing investments, mortgages, health insurance and other insurances with a view to retirement. And not least, it puts everything in place for the lightest-possible tax burden when you’re no longer working.

Our experts

Natali Geiser

Private Client Advisor in Geneva
“I’m happiest in warmer climes, so when I retire I can see myself exploring or even living in the warm regions of the earth.”

Giuseppe Degiorgi

Private Client Advisor in Basel
“When I retire, more time is what I would like most. Not just for me, but also for the social projects I’m involved in.”

Alida Kobler

Private Client Advisor in Lugano
“Tuscany is where my heart is. That’s why I would like to spend my sunset years there, on my own little country estate.”

André Dubach

Private Client Advisor in Lausanne
“As a pensioner, I’d like to live in Switzerland and Thailand and run a small but select fruit farm.”