Switzerland’s life expectancy at birth is one of the highest in the world, with an average of 83 years. Nevertheless, many people still dream of retiring before the official retirement age, which is 64 years for women and 65 years for men. According to a survey conducted earlier this year by the market research organization GfK on behalf of the finance company Moneypark, 36% of the Swiss workforce wants to retire before reaching retirement age. The higher the level of income and education, the greater the desire is to retire early.
The choice of early retirement is taken from some by their employer, who all but "forces them into retirement." Other reasons for an early retirement may be health-related issues or a high-stress job. In any case, early retirement comes with considerable financial drawbacks. What should one look out for when retiring early?
■ First, it’s very important to get the planning right. Willy Graf, founder of the wealth management and retirement planning company VVK, advises accurately clarifying and defining one’s financial needs by drawing up a household budget for old age. Otherwise there is no starting point for obtaining advice. During this process, retirement income is compared against anticipated expenses. Mr. Graf points out that certain expenses cease to exist after retirement, such as pillar 3a contributions or some insurance contributions. The same applies to any expenses related to your work commute. So after an early retirement, expenses could be lower, but this is not necessarily always the case – for instance, if one wants to travel or spend more money because of an increase in free time.
■ On the other hand, income after retiring early will generally be much lower. This can result in a relatively large income gap. This gap is often bigger than expected, says Damian Gliott of the consulting company Vermögenspartner. One should also consider that the pension paid for the rest of one's life will be significantly lower. In most cases of early retirement, one must invariably start saving early on, says Mr. Gliott. Ways to mitigate the looming income gap include voluntary purchases of pension fund benefits, saving in pillar 3a or accumulating wealth independently.
■ Not only do wages disappear in the years following early retirement – assets are also being used up earlier. When working out a household budget, one should also keep in mind that AHV pensions are not paid out until retirement age – unless drawn earlier at the price of suffering considerable financial penalties. Instead, one must continue to make payments into the AHV pension until retirement age, even though your income is diminished. According to an AHV/IV leaflet, policy holders can draw their pensions one or two years earlier; however, advance withdrawals for single months are not possible. Those who draw AHV earlier receive a reduced pension throughout their entire retirement – by 6.8% for one year and 13.6% for two years. Mr. Gliott deems advance withdrawal of the AHV pension a poor idea, given the high financial penalties.
■ Those who are interested in early retirement must also be prepared to get a lower conversion rate from the pension fund. The conversion rate is the percentage of the accrued wealth in the retirement fund that is paid out yearly to a policy holder after their retirement. Additionally, in the years after early retirement, capital is no longer added to the pension fund. Interest rates and compound interest would also no longer apply, adds Gliott. Those who enter retirement five years early should be ready for an occupational pension reduced by roughly 30%. One should expect reductions of 5 to 7% per year from most pension funds.
■ Mr. Graf also points out that an increasing number of pension funds force their policy holders to draw 50% of their savings at retirement. This would need to be clarified. After all, most policy holders want to receive monthly “income” in the form of a pension.
Pillar 3a fills gaps
■ Some employers support their employees in drawing an early retirement, says Mr. Gliott. This can take on the form of additional payments into pension funds, a supplementary AHV pension or even the employer paying AHV contributions for the employee. Some pension funds offer bridging pensions to their policy holders so they won’t have to draw on AHV earlier. Such pensions run until retirement age – though employees often have to finance these themselves. A gradual transition into retirement is also possible, during which time the workload is reduced little by little. In this case, the financial cutbacks are smaller.
■ The funds saved up in pillar 3a can be drawn up to five years before retirement age and can be used to partially fill the income gap generated by an early retirement. A good tax plan is necessary when drawing pillar 3a savings, according to Mr. Graf. Opening several pillar 3a accounts with different banks is worth considering. One can interrupt the tax progression by withdrawing these savings in different years. However, one must consider that paying into pillar 3a is no longer possible after early retirement, says Mr. Gliott.
By courtesy of Neue Zürcher Zeitung. Translated by UBS Switzerland Marketing Translation Services.