While for many their new freedom as a pensioner brings a sense of release and new beginnings, there are also some serious things to consider. Incomes shrink because average mandatory pillar 1 and 2 benefits are only equivalent to around 60 percent of your last salary. The question arises of whether we can maintain our current standard of living. The answer depends on our current expenses and how they might change. Good preparation and accurate budgeting will pay off. After all, those retiring today can expect to live another 25 years on average and this number is increasing.
No radical changes overnight
Spending fluctuates during our lifetimes and usually follows a certain pattern. This is shown by data from the Swiss Household Budget Survey (HABE) of the Federal Statistical Office, illustrated by the example of a childless couple who earn the Swiss median income.
When we start working, our expenses are low but usually increase quickly. Expenditure peaks between the ages of 40 and 65, with accommodation typically the largest category. Taxes and social insurance contributions are also a major expense but there is little we can do to influence them. Every tax situation is different. However, in general we can say that taxes in retirement will fall less than is often assumed.
Towards the end of our working life and at the start of retirement, expenses in general decrease slightly. The last few years of life are often marked by a significant increase in health care and nursing costs.
How our expenditure changes
Individual consideration of our main budget items and how they’re likely to change in retirement is worthwhile; see the graph “Monthly living costs.” You can then make deliberate, specific decisions in favor of one or more items.
- Consumption of food and beverages falls. Compared with the total basket of expenditure, this is a relatively small item. At the start of our working lives, we are usually quite cost-conscious. Over time our expenses gradually increase before falling slightly after we retire.
- Accommodation makes up the lion’s share of costs throughout our lives. For renters, these costs are relatively constant at around 30 percent of total spending. After retirement however, many of us are able to live more modestly. When it comes to the question of whether to rent or buy, a lot of factors come into play. Due in particular to low interest rates, residential property is currently around 15 percent cheaper than its rental equivalent.
- Health costs increase as we get older. Total health care costs double in retirement compared with when we are still working. Towards the end of our lives, we can also expect health care expenses to increase exponentially, for example the costs of nursing care. When you budget for retirement, if possible you should save a separate amount to cover care costs.
- Transport costs fall. Pensioners spend only half as much on transport on average. They no longer have to commute and often travel by train rather than by car, the latter being the biggest cost-driver in the mobility budget of the average Swiss couple.
- Free time and leisure need to be viewed differently. While spending on travel increases in the first few years after retirement, average expenditure on free time and leisure activities does not. The highest amount – about half of this category – is spent on visits to restaurants and bars, and a quarter on sports and culture. However, this type of spending falls sharply in old age.
A budget will give you clarity
First, create a list of expected income and expenses. The budgeting process then involves balancing the two sides, which usually means reducing your spending. As a couple or if you live with others or make use of the sharing economy, you can benefit from economies of scale. Major items such as a car or apartment have a certain basic cost that can be split through shared usage. Overall, someone who lives on their own – due to higher life expectancy this will more usually be a woman than a man at retirement age – can expect to spend on average 60 to 70 percent of the amount spent by a couple.
We're happy to help
To ensure you’re prepared for retirement, you should draw up a solid financial plan in good time. Contact your client advisor. He or she will be happy to assist you with their expertise.