Saving on taxes for retirement
The right investment strategy remains important, even after retirement (Illustration: Alexander Glandien)

Life is forever changing, and with it the right type of investment. This is particularly true of retirement, when the investment strategy must be adapted to new conditions. The Swiss are living longer, which is something to celebrate. Yet in terms of investment, longer life expectancies present retirees with new challenges, as their pensions and savings must now hold out much longer than in the past. Swiss men who retire today, live on average another 22 years after they retire, and Swiss women as many as 24. By comparison, the generation born in 1900 lived on average for another 15 years after retirement, which meant their nest egg did not need to last nearly as long.

Mind the gaps . . .

To enjoy the gift of longer lifespans, today's retirees need to put together a good investment plan for their old age. Those who plan poorly run the risk – sooner or later – of becoming a financial burden on their own offspring. The crucial thing in retirement is developing a realistic picture of your own financial situation and the standard of living you would like to maintain. As a first step, senior citizens should find out whether their income from the AHV, pension fund, third pillar or other sources (e.g. rental income from real estate they own, but do not use) is enough to cover basic living expenses. To estimate living expenses, it helps to look at the years before retirement. How high, for example, were annual expenses from the age of 60 to 65? Experts warn against the widespread assumption that expenses will suddenly fall dramatically after retirement – yet if you maintain your accustomed standard of living, expenses in general stay quite constant.

«The crucial thing in retirement is developing a realistic picture of your own financial situation and the standard of living you would like to maintain. »

Any gap between income and expenditures must be filled by using up a portion of your saved assets. This is why it's important, for a start, to quantify the gap and estimate how much should be set aside to cover the annual deficit for about ten years. The share of assets reserved for controlled consumption must be handled separately in the investment strategy. As this share of investments is set aside for day-to-day consumption, you should not take any risks with it. Additionally, you should only hold it in very liquid investments, so you can access it at any time. The fact that secure, highly liquid assets don't bring impressive returns goes without saying – but shouldn't cause concern. The so-called consumption share is not about maximizing your return on investment, but financing part of your general living expenses.

. . . and cover them

The sum that will be consumed in the first two years of retirement can be held in a standard savings account. The part that will be needed in later years can be invested in medium-term bonds, term deposits or money market funds –  which all feature high liquidity and low risk. Bonds or bond funds with the highest credit rating are well-suited for that tranche of the consumption share that will be used up last. Make sure that the term of the investments fits with the investor's time horizon; if bonds are held until maturity, price fluctuations during that period are irrelevant. When investing in bonds, time the maturity date so the bonds are redeemed when they will be consumed.

On the other hand, seniors can invest the remaining assets that are not intended for consumption in the first years of retirement.

Investing what's left

Approach this share of the investment the same as you would at any age and in any circumstance:

first, determine your risk profile, i.e. your capacity and appetite for risk. To determine the first, seniors must answer the question of how much money they can part with, either temporarily or entirely, without experiencing financial difficulties. Risk appetite is personal and based on how an investor handles risk emotionally. Do potential losses keep a person awake at night? How much does someone fret over actual losses suffered? A risk profile defined in this manner shapes the investment strategy; in other words, how much should be allocated to different asset classes such as equities, bonds and cash. People who barely tolerate risk – or do not want to – prefer a very low equity ratio, whereas risk-friendly and adventurous people prefer a higher one. Equity positions need long investment horizons – this is important. Recent retirees should understand that they will need to make do without the share of their assets they invest in equity or equity funds for several (ten or more) years. Exchange-traded funds are a convenient alternative to equity funds. These are passively managed funds that track a share index, for example the Swiss Market Index. It is important that individual investments be sufficiently diversified, with the equity component split up among 10 or 15 different stocks.

No worries

As a matter of principle, retirees should never make high-risk investments. For most of them, truly speculative investments such as complex leveraged products are taboo. At this stage of life, the ultimate aim of financial investment is to replace the share of investment being consumed with the share invested – in effect, to partly replenish the money that in the first ten years of retirement was used up to cover the gap between income and expenditures. This frees retirees to enjoy their sunset years well into old age – and sleep easily at night.

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