Retirement poses great challenges, as Heinrich Lohse, alias Loriot, had to find out in the comedy Pappa ante Portas: “Excuse me, but this is my first retirement – I’m still practicing,” says the recently retired Lohse to his exasperated wife. Unfortunately, there's no time for practice if the issue is financial security in old age. The best way to achieve a retirement free from financial worry is through timely and careful planning.

Taking stock at 55

You should take stock of your situation no later than by age 55. This also includes setting up a budget. Compare fixed income from pensions, investments in securities, and real estate or a sideline job against expenses. Where there's a difference, it must be covered by dipping into other savings. The smaller the difference, the more liquidity senior citizens can withdraw from the pension fund.

When setting up a budget for after retirement, investors should start by assuming they’ll face the same expenses they had when they were actively employed – this is the rule of thumb used by Damian Gliott, co-founder of the wealth management company VermögensPartner AG. His experience has confirmed that this approach makes sense. Even though you'll no longer face some costs when you go into retirement, experience shows these are offset by higher expenses in other areas. For example, retirees have more time to travel. The tax load may lighten after you retire; however, these savings, too, are generally canceled out by other expenses. 

Carefree in the third stage of life
My house, my boat, my worry-free retirement. (Illustration: Alexander Glandien)

When determining the budget, it can help to take a look at the last three tax declarations for a rough approximation. Illustration Alexander Glandien What were you able to save in past few years? This is what you should ask yourself. Someone who could set aside CHF 20,000 per year while earning an annual income of CHF 100,000 should assume annual expenses of CHF 80,000 when planning a budget. Gliott of VermögensPartner warns against the common misconception that you’ll need significantly less after retirement.

An important consideration related to financial security in retirement concerns how to treat properties you already own. Many property owners want to stay in their own home for as long as possible. Others decide to sell their house at age 75 and buy or rent a home more suitable to their situation in old age. Both strategies have advantages and disadvantages. It's crucial to include these considerations in your financial planning. So, though the sale of property may bring additional liquidity, this must still be reinvested. At the same time, the move into a rental property may increase fixed expenses.

Income from three pillars

On the income side, you have pensions from the three pillars of retirement provision. You can pay into a third pillar account right up to your retirement. For tax reasons, it makes sense to withdraw savings from the third pillar in stages. Since you must always close out an entire 3a account at one time, you can only achieve a staggered approach by opening several such accounts.

When retirement is within sight, voluntary pension fund purchases are a good strategy for increasing your retirement income while saving taxes. Make purchases some ten years before retirement, and then you won't need to wait so long for your money. The deposits should be made in stages to optimize your tax savings. You can pay in the maximum amount up to three years before you retire. After that, retirement specialists advise against further voluntary purchases, since the tax authorities might require you to pay back the tax savings.

“Excuse me, but this is my first retirement
– I’m still practicing.”

Heinrich Lohse, alias Loriot (in the comedy "Pappa ante Portas")

Investors who've taken out life insurance should not feel under any pressure to cancel it. Firstly, commission costs have already been paid and will not be reimbursed. Secondly, reinvestment will be a problem if the insurance was taken out in a higher interest rate environment. In view of low interest rates, taking out life insurance policies is not currently advisable.

Besides income from pensions, many retirees get interest payments and dividends from investment portfolios as well as rental income. But you should only count on the latter if you have quite a large amount of invested capital at your disposal. Relying on rental income as your main source of income is very risky, warns Gliott. Vacancies or tax adjustments can play havoc with your budget. Real estate is well suited to supplementing investments in stocks and bonds in a mixed portfolio as it provides good protection against inflation. But investors should consider that the high demand of previous years resulted in today's relatively high appraisals.

Things look different for properties that are owner-occupied. In addition to their emotional value, they're a source of security in old age. In this case, the mortgages must always be taken into account when planning for retirement. Homeowners should always expect a longterm interest rate of 5% and check that this is affordable.

Many retirees ask themselves how to handle mortgage payments. Experts don't think paying down a mortgage to zero is worth it. Firstly, in view of low interest rates, the burden is comparatively low. Secondly, it's generally advisable to always maintain a liquidity buffer. In the worstcase, you can sell the property if you face some financial bottleneck. Taking on an additional, new mortgage or increasing one when you've reached retirement age is not as easy as some property owners might imagine. Banks reassess the income situation after retirement. Conditions for increasing a mortgage are generally less attractive for senior citizens than for the gainfully employed.

Security for your partner

Financial security during retirement always affects your partner. Is your spouse or cohabiting partner sufficiently insured in the event of your death? In the case of unmarried partners, you must clarify whether the surviving partner can pay all applicable taxes in the event of inheritance. Couples who are not married are better off during their lifetimes, since they submit two tax returns, thus keeping down the progressive increase in taxes, and they also both get full AHV pensions. However, the flip-side is the taxes that fall due on inheritance.

When setting up a budget for the third phase of life, senior citizens cannot get around defining a planning horizon. The minimum is the average life expectancy for the given age group. Experts advise adding on at least three to four years to avoid any gaps. Talk to your financial advisor about this topic – it should not be taboo, even though it can be very emotional. The same applies to the risk of dementia. By concluding an advance care directive, you ensure that your partner or another person close to you will handle your financial affairs in accordance with your wishes if you suffer from dementia.

By courtesy of Neue Zürcher Zeitung. Translated by UBS Switzerland Marketing Translation Services.