Accumulated wealth can be enjoyed in retirement – but systematically is best. (Illustration: Alexander Glandien)

You can provide financially for old age or the period after working life in various ways. The easiest - and probably most traditional approach - is to save over the course of your professional life, rather than burning money the moment you earn it, while also piling up debt. Someone who regularly sets something aside for a rainy day, and who may even have cleverly built up a small fortune, will not only have a solid financial reserve in time of need, but will also be able to draw upon it later - even if only to supplement payments expected from various other pension entitlements.

Squirreling away keeps your worries at bay

This has become more urgent than ever for two important reasons. Firstly, the world's population will be aging significantly in coming years, leaving ever fewer young contributors in the so-called social security system to finance growing numbers of the elderly - who after they retire are entitled to draw a regular income from the “joint account” that reflects their earlier contributions. Second, by pursuing “extreme bank and national rescue policies” over the last few years, governments and central banks have made it very hard to earn decent returns in financial markets on the capital stock built up in various countries to cover pension claims - and if at all, then only by taking on enormous risk. In fact, fixed-income securities today barely deliver any return at all, and the prices of other assets have in many cases risen to quite “unhealthy” levels.

If various calculations are to be believed, many countries in the Western world will soon be threatened by a pension crisis, because many states, companies and private individuals fail to set enough aside to satisfy the expectations of future retirees. This might well make some people nervous. But those who have managed to squirrel away savings - over what was hopefully a fairly profitable career - can draw on these reserves in the “winter of life,” that is to say in old age. This assumes, of course, that you can remember where you've hidden your savings away, and also that they are still in good, usable condition. This should not be a problem if the groundwork was done well.

Planning the “dissaving process”

At the end of the day, or rather after what was hopefully a profitable career, AHV and pension fund benefits ensure you can expect at least some continuous income for the rest of your life. However, if this income is not enough to create a healthy balance between your desire for comfort and the associated expense, you will have to organize your available assets as skillfully as possible. To arrange this “dissaving process” in the best way possible, experts advise tackling the topic head on and getting started on it early. In the long run, liquidity should always be ensured.

In this regard, a number of parameters should first be defined:

  • How large is the amount of available assets?
  • Can some exceptional change in the foreseeable future be anticipated?
  • What financial needs can be predicted and when will they kick in?
  • What buffer against absolute emergencies should be available at all times?
  • How high are the returns that could be achieved in capital markets if money is invested wisely?
  • What is the ideal timetable, or rather what life expectancy can be assumed?
  • How much wealth should be left over to be on the safe side or to leave something to the next generation?

Answering these questions can be a large and demanding undertaking. In actuality, tax effects must be taken into account; in light of the dramatic dislocations in the international financial and capital goods markets of recent years, caution is called for when estimating anticipated returns; and farsightedness is needed when making personal plans for the future. Lastly, it should be possible to anticipate when something like a trip around the world is pending and how expensive this may be, if and when one would like to sell existing real estate and what price can realistically be expected – or even better - you could supplement your income by concluding a reverse mortgage and “consuming” the real estate.

Needs call the tune

These are tricky questions. And this is not an exact science, after all. Estimating the life expectancy of a single individual is nearly impossible in itself. Unlike insurance companies, who tackle similar problems by running their calculations in accordance with the law of large numbers using statistical values and so-called mortality tables, an individual has to draw inferences based on family experience and his or her own sense of well-being. For these reasons, so-called annuity contracts are often brought into play. Even so, many advise against selling off assets or withdrawing pension fund assets to get a lifelong supplement to your pension compared to a one-time, lump-sum payment. According to this view, the conditions are generally unattractive.

In the end, not much will be left other than to invest the accumulated wealth and consume it personally. In practice, it is possible to distinguish between:

  • Short-term needs:
    These are defined as financial claims that have to be met in the first years immediately after retirement. They are best covered by secure and very liquid types of investments. In times of exceptionally low returns, opportunity costs are not very high anyway.
  • Intermediate needs:
    These are defined as financial needs that can be anticipated when looking roughly ten years into retirement. This length of time creates the opportunity to take on somewhat higher risks in the financial markets. At least under normal conditions, such risks are compensated with higher returns.
  • Long-term needs:
    These are defined as financial needs more likely to arise later than earlier. You could expose these assets to somewhat greater risk in the markets to get more out later.

In this regard, not only is the effective financial need key, but market conditions also play a role. In some cases, price gains will need to be realized at favorable times, even if the money will only be needed much later. In this way you won't be forced to sell financial assets during some very unfavorable phase to avoid sudden illiquidity. That is easier said than done, but after retirement, there is still enough time to deal with such questions.

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