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Retirement planning – looking ahead after 50

Take care of your retirement planning in good time to enjoy your retirement to the full In Switzerland, the old-age pension system is based on three pillars: public pension provision (1st pillar), occupational pension provision (2nd pillar), and individual pension provision (3rd pillar). This system leaves plenty of room for private initiative and optimization opportunities. If you take advantage of this flexibility and start planning for your retirement early enough, you can look forward to it with peace of mind.

For most people, retirement is a major turning point in their lives. It affects their free time, their relationship with their partner, their finances, their social status, and many other areas.

No one knows in advance what retirement will be like, but it is possible to prepare for it by learning from others and anticipating this new phase of life.

From a financial perspective in particular, it is useful to plan your retirement in good time, as it is still possible to optimize your pension provision a few years before you retire. The Swiss pension system offers you sufficient flexibility to do this.

The three-pillar system
The Swiss pension system is based on three pillars: public pension provision, occupational pension provision, and individual pension provision. Public pension provision is compulsory for everyone, while individual pension provision is optional. Employees who earn an annual salary of CHF 20,880 or more must be insured under the occupational pension plan; self-employed persons can insure themselves if they wish.

In principle, the first pillar—public pension provision—covers basic living expenses. The second pillar, or occupational pension provision, is intended to maintain the usual standard of living after retirement. The third pillar, private pension provision, fills any gaps.

The benefits provided by the first and second pillars are generally not sufficient to maintain the usual standard of living.

The first pillar: public pension provision (AVS/AI)

The first pillar includes old-age and survivors' insurance (AVS), disability insurance (AI), and supplementary benefits (PC), which are paid in certain cases. The AVS is Switzerland's most important social welfare program; it was established in 1948 and has been revised ten times since its creation.

The AVS was designed to compensate for loss of income due to age or death:

• The old-age pension allows insured persons to retire from working life with financial security.
• The survivor's pension prevents the death of a spouse or parent from causing insurmountable financial difficulties for the survivors.

The AVS is compulsory insurance. All adults residing or working in Switzerland are insured. Swiss nationals working abroad can take out optional insurance to avoid gaps in their contributions. Children and people who are not gainfully employed, such as students, disabled persons, pensioners, and homemakers, are also subject to the AVS.

AVS is financed on a pay-as-you-go basis: contributions paid by the working population are immediately used to finance current pensions. The insurance is therefore based on the principle of solidarity between generations.

However, for many years now, the gap between contributors and pension recipients has been widening, as the proportion of elderly people in the total population is constantly increasing. In the long term, demographic trends threaten the AHV system in its current form, to such an extent that the retirement age may have to be raised sooner or later.

AVS benefits are not huge sums and only guarantee the minimum subsistence level. Old-age pensions are calculated on the basis of the number of years of contributions and the "average annual income". They are adjusted in line with wage and price trends; currently, the maximum annual pension is CHF 27,840 for a single person and CHF 41,760 for a couple. The
minimum pension is half the maximum pension.

To find out how much pension you will be entitled to, you can order your individual AHV account statement at
www.ahv.ch
If you are over 40 years of age, it will be sent to you free of charge.

Maximum annual AHV pension amount:

• CHF 27,840 for single persons
• CHF 41,760 for couples

The 2nd pillar: occupational pension provision (LPP)

Pension funds have been around for over 100 years, yet occupational pension provision remained optional for a long time; it was only incorporated into the Federal Constitution in 1972, forming the second pillar of old-age provision. It was not until 1985 that the Federal Law on Occupational Pension Plans made the second pillar compulsory.

Occupational pension plans are based on the following principle: a portion of income—representing between 3.5% and 9% of the insured salary, depending on the age of the individual—is credited to an individual account instead of being paid directly to the employee. The employer pays into this account an amount at least equal to the employee's contribution. The individual account is thus credited each month with a sum amounting to between 7% and 18% of the insured salary, depending on the age group to which the employee belongs.

The money placed in this account over the years constitutes the retirement savings, which earns interest at the minimum BVG rate. Currently, in 2011, this rate is 2%. Upon retirement, it is possible to withdraw these assets in the form of a lump sum or request their conversion into a lifetime retirement pension; you will find more details on this subject on page 18 of this brochure.

Unlike the AVS, the 2nd pillar is not a solidarity scheme; in principle, everyone saves for themselves. Employees aged 17 or over must be insured with a pension fund through their employer if they pay AVS contributions and earn at least CHF 20,880 per year. Until January 1 following their 24th birthday, employees who pay LPP contributions are only insured against death and disability; they then begin to build up their retirement savings.

The following persons are not subject to the compulsory occupational pension scheme:

• self-employed persons,
• employees with an employment contract of three months or less,
• persons working on a farm who are members of the farm owner's family, and
• persons who are at least 70% incapacitated for work according to the AI.

For high incomes, the salary is not fully subject to compulsory insurance. The portion of the salary above the maximum LPP amount of CHF 83,520 is called the extra-mandatory portion and is not subject to any legislation. You will find all the details concerning the extra-mandatory portion of your retirement assets in your pension fund regulations.

The benefits paid by the pension fund and the OASI are intended to guarantee that insured persons can maintain their usual standard of living after retirement. However, due to the many changes that have taken place since the introduction of the BVG, this objective is rarely achieved today.

The return on retirement assets, for example, has been significantly reduced. The conversion rate, which defines the portion of accumulated retirement assets that is paid out to insured persons each year in the form of a pension, has also been lowered. When the LPP was introduced, this rate was set at 7.2%. However, as the population ages, it must be reduced to 6.8% by 2014. This small difference in rates is not without consequences: for retirement assets of CHF 400,000, the annual pension amounted to CHF 28,800 under the initial rate, whereas in 2014 it will only be CHF 27,200.

Maximum annual pension under the mandatory BVG scheme: approximately $27,000.

The 3rd pillar: individual pension provision

If the benefits from the first and second pillars are not sufficient to maintain your usual standard of living, you can fill the gaps in your pension provision – at least in part – with the third pillar.

There are two types of individual pension provision:

• Pillar 3a, also known as tied pension provision, offers tax advantages: you can deduct the amount paid into pillar 3a from your income and thus save up to CHF 2,000 in taxes. When the retirement capital accumulated under pillar 3a is subsequently paid out, a reduced tax rate is applied. However, there are limits on the amounts that can be allocated to pillar 3a each year.
• Pillar 3b, also known as voluntary pension provision, is more flexible but does not offer any tax advantages. Pillar 3b includes all forms of private savings other than pillar 3a: savings accounts, cash, various savings and investment products, life annuities, home ownership, valuables, etc.

Pillar 3a allows you to save up to CHF 2,000 in taxes per year.

"It is essential to involve your partner in the planning process."

Why plan for retirement when the law has everything covered?
Bruno Kaufmann: There are many things you can and should prepare yourself, starting with the following questions: Do I intend to take early retirement? How can I manage the transition from working life to an active retirement? How can I organize my time wisely when the time comes? Should I withdraw my pension fund savings in the form of a pension or a lump sum?

When should I start planning for retirement?
Ideally, from the age of 50. At this age, children are usually grown up; needs are no longer the same, there is still time to fill any financial gaps and, in general, people enjoy a stable professional situation and, as a result, a comfortable income. Self-employed people, on the other hand, need to start thinking about their retirement as soon as they set up their business, at least from a succession planning perspective.

How should you plan for retirement? What should you pay attention to?
It is very important to always include your partner in the planning. Consult a specialist pension advisor, who will examine the options available to you in terms of occupational pension provision: can you make a purchase to increase your retirement savings? Can you afford to request a lump-sum payment or consider early retirement? How much will your retirement pension and your partner's pension be if you die?

What steps can you take now to improve your financial situation in retirement?
There are several possibilities. The first is to buy back insurance years from your pension fund, which has tax advantages, improves your retirement pension, and may make it easier to take early retirement. Building up a pillar 3a as part of your individual pension plan with tax advantages is also a solution. But what seems most important to me is to save money at your own level: you need to eliminate situations of over-insurance and double insurance and reduce your costs, for example by increasing your health insurance deductible.

Planning for retirement: taking control of your future in ten steps

Three pillars, capital withdrawal, pensions, retirement savings – it all sounds very complicated. In reality, however, it is not that difficult to plan financially for your retirement. Here's how to do it in ten steps.

1. Start your planning by determining the budget that will cover your living expenses during retirement. Think about the projects you want to carry out later in life, your future lifestyle, and the risks you will have to take in terms of finances and health. Also take into account your personal wishes, such as significant investments in your home.
   
   Let's assume that your regular expenses in retirement amount to CHF 80,000 per year.
2. To find out how much you will be entitled to in annual AHV pension, request an individual account statement from your AHV compensation fund.
   
   The pension is capped at CHF 27,840 per year.
3. Contact your pension fund to find out how much you will receive each year in LPP pension payments.
   
   In this example, we assume that the LPP pension amounts to CHF 27,160 per year.
4. To determine your annual pension shortfall, calculate the difference between your current expenses and the pensions you will receive from your pension fund and the AHV.
   
   CHF 80,000 – CHF 27,840 – CHF
   CHF 27,160 = CHF 25,000.
5. Now you can estimate how much capital you will need at age 65 to cover your pension gap. Assuming an average life expectancy of 85, you will need to cover your annual pension gap for 20 years to accumulate the necessary capital.
   
   20 x $25,000 = $500,000 (capital required).
6. Calculate the amount of capital you have available today (actual capital), i.e., the assets you already own. Take into account the fact that your capital will earn interest until you retire.
   
   Amount currently available: $200,000. Thanks to interest, this capital will amount to $260,000 when you retire (effective capital).
7. Calculate the difference between your actual capital and the capital you need to determine your capital requirements and find out how much you will need to save until retirement to cover your living expenses.
   
   CHF 500,000 – CHF 260,000 = CHF
   CHF 240,000 (capital requirements).
8. How much time do you have to save the missing capital?
   To find out, subtract your current age from your retirement age.
   
   65 – 45 = 20 years.
9. You can now calculate the amount you need to save to cover your capital requirements.
   
   CHF 240,000 in 20 years = CHF
   12,000 per year or CHF 1,000 per month.
10. Compare the amount you need to save with your financial resources. Will you be able to save enough money by the time you retire to cover your capital needs? If not, there are several options available to you to optimize your budget. The first is to limit your expenses after retirement in order to reduce your annual financial needs. You can also choose to retire at age 67, which gives you more time to fill your pension gap. Alternatively, you can reduce your current expenses in order to set aside more money until retirement. You may find other ways to optimize your investment strategy and achieve a better return.

Build up your assets quickly and use them with peace of mind

Planning for your retirement allows you to know how much you need to save in order to enjoy your retirement without financial worries. But you need to start building up the necessary assets as early as possible and think about the best investment for the period after you retire.

In most cases, income from the first and second pillars only covers 40% to 60% of your last salary before retirement. If you want to maintain your usual standard of living in retirement, you will need to build up additional capital. The earlier you start saving, the better, as the effect of compound interest increases over time.

Return or security
When it comes to investments, there are no big gains without significant risks. Unfortunately, no investment instrument can escape the law of risk/return; an investment cannot guarantee high returns while offering maximum security.

Similarly, there is a conflict of objectives between liquidity and profitability: investments that are available in the short term often mean lower returns.

The interaction between return, security, and liquidity involves constant trade-offs. In any case, the choice of the optimal form of investment depends on your personal needs; there are no universal investment strategies that are optimal for everyone.

Few people can afford to risk losing their retirement capital in financial investments. If you are investing money that you will need for retirement, security must take precedence over return; only take high risks with capital that you can afford to lose, either in whole or in part.

If you are unsure about which investment to choose for your retirement capital, opt for security, even if this means sacrificing returns. Furthermore, as you approach retirement, choose investments that prioritize security, because the more time passes, the more valuable your assets become.

Of course, it can be frustrating to play it safe when people around you are making high returns on their investments. But the financial crisis has shown us that sharp rises always carry a high risk of sharp falls.

A careful balance between return, security, and liquidity.

Building up capital with pillar 3a

When you want to build up assets for your retirement, it is generally worth first exploring all the options offered by pillar 3a – tied pension provision – as it comes with tax advantages.

You can deduct the annual amount invested in pillar 3a from your taxable income. Later, when you withdraw the capital, it is not taxed at the normal rate, but at a reduced rate.

However, there are a number of restrictions on investing in pillar 3a:

• The amount you can pay in each year is limited; currently, in 2011, this amount is CHF 6,682 for employees insured under a pension fund and CHF 32,832 for the self-employed.
• You can withdraw the accumulated capital at the earliest five years before normal retirement, unless you move abroad, start a self-employed activity, or purchase a home.

In principle, a pillar 3a investment solution can take two forms:

• a banking solution, or
• an insurance solution.

With a banking solution, you pay money into a 3a account and benefit from a preferential rate. There are also 3a accounts linked to investment funds, which allow you to participate in the performance of a fund. The potential returns offered by these accounts are attractive, but the risks are correspondingly high. You decide each year how much to invest.

With the insurance solution, you also benefit from protection: part of the annual premium is used to cover the risks of disability and death. In the event of death, the insurer pays the agreed sum to the beneficiaries. If you are unable to work, the insurer will pay the premiums. The capital is paid out to you when the contract expires. However, the safety features of this solution limit the return. As with the banking solution, it is possible to choose insurance products linked to investment funds.

The choice of one or the other solution will be dictated by your personal situation and your plans. You can also combine the two solutions by opening a 3a account with a bank and taking out a 3a savings policy with an insurance company. The total amount invested in both solutions must not exceed the maximum deductible amount.

Building up capital with pillar 3b
Don't want to be subject to the restrictions of pillar 3a? Then you can invest as you wish in pillar 3b. Although this type of "unrestricted" pension plan does not offer any tax advantages, it does offer a great deal of freedom. It offers a wide range of banking and insurance solutions, from complex structured products to "nest eggs" and all kinds of life insurance.

Contributions to pillar 3a: capped at CHF 6,682 for employees.

Diversify your investments
As each type of investment has its advantages and disadvantages, it is generally wise to diversify your investments by spreading them across different types.
Let's take an example:

Each year, you invest CHF 3,400 in a traditional life insurance policy and pay CHF 3,166 into a 3a bank account linked to investment funds. In terms of the "magic triangle" formed by return, security, and liquidity, this gives the following:

• Return: the pillar 3a linked to investment funds and the resulting tax privileges offer you good return opportunities.
• Security: life insurance guarantees you a lump sum payment of a predetermined amount, which you can receive at age 65, for example.
• Liquidity: you are free to determine the amounts paid into the 3a account at any time, up to the legal maximum amount; if you need a little more money available in a given year, you can simply reduce your payments.

Shortly before retirement, security is key

The closer you get to retirement, the more your investments should focus on security. In the years leading up to retirement, gradually shift your investments from those with a strong focus on returns to those that prioritize security.

What investments should you make after retirement?

Once retired, most people move from a capital accumulation phase to a capital consumption phase, meaning they begin to live off their savings. During this period, it is particularly important to find the right balance between return, security, and liquidity for your investments.

At this stage, however, liquidity becomes increasingly important, as you need cash to cover your day-to-day expenses. This affects your investment options. Some lucrative investments offer higher returns by locking up your capital for a certain period of time, but you will incur significant losses if you are forced to withdraw it early.

How much cash do you need?

Make sure you can always cover your fixed expenses, such as housing costs, food, etc. You should also plan for the possible purchase of a new car or heating system, if necessary.

When choosing an investment, think carefully about how much money you need to keep available.

Experts recommend always having a safety net by setting aside approximately six months' salary in a bank account before investing your capital in one of the many financial instruments available on the market.

A proven strategy in terms of capital consumption is to invest your money after retirement in "compartments" with different investment horizons (short, medium, and long term); this way, part of your capital will generate an attractive return, while the other part will be readily available. The amount invested in each instrument and each compartment will again depend on your personal situation.

After retirement, invest in short-, medium-, and long-term investments.

Are your investments safe?

Each investment product has a unique position within the magic triangle; the characteristics of return, security, and liquidity vary greatly from one product to another.

While bonds are considered to offer a high degree of security, it is recommended that you only invest in corporate bonds that are rated as solid by rating agencies.

Stocks, on the other hand, are subject to very sharp fluctuations in value. The share price of a corporation that becomes insolvent can even fall to zero!

The current crisis has shown that investments in seemingly safe investments are not immune to losses in value. Some large companies have not been spared massive price falls or have even gone bankrupt.

Bank accounts do not offer foolproof security either, as banks can also become insolvent. However, the Swiss Federal Law on Banks and Savings Banks has established "depositor protection," whereby funds deposited in a bank receive preferential treatment up to a maximum of CHF 100,000 (currently) per customer per bank.

In the event of the bank's bankruptcy, depositors recover their funds up to this amount, at most, and have priority over all other creditors. Assets exceeding this amount are allocated to third-class claims. The CHF 100,000 limit applies per customer, not per bank account.

Banks benefiting from a state guarantee are in a special situation: most cantons act as guarantors for the commitments of their cantonal banks, including for deposits exceeding CHF 100,000.

The situation is slightly different for insurance companies. The insurer must guarantee claims arising from life insurance contracts by setting up a so-called tied asset. In the event of bankruptcy proceedings, life insurance policies guaranteed by tied assets are not dissolved, but transferred to another insurer or to FINMA, the Swiss Financial Market Supervisory Authority.

Life insurance policies offer a high level of security.

Investments: the five golden rules

1. Don't be overly ambitious
   Don't harbor illusory hopes for returns; be satisfied with the gains you've made and don't regret missed opportunities.
2. Be determined
   Should I buy or not? There is no return without decision-making. Don't be too reckless, but show determination.
3. Patience is golden
   Don't always be in a rush; impatience can lead to rash behavior. Especially in times of crisis, sometimes you have to say to yourself, "Let's wait and see."
4. Diversify your investments
   Even if you think you've found the best deal, don't put all your eggs in one basket: opt for diversified investments.
5. Admit your mistakes
   If you've made a bad decision, be willing to admit it, otherwise you'll correct your mistake too late and lose even more money. One of your stocks is starting to fall and shows no signs of stopping? Don't waste more money by buying other stocks.

"You should check every five years to see if an investment is still on track."

How can you achieve high returns while taking low risks?
Beat Lang: It's practically impossible. If you want your capital to generate a substantial return, you have to be willing to take high risks.

What are the key rules of investing?
All investments evolve within the magic triangle of investing, which involves return, security, and liquidity. When planning for retirement, you have to take into account the fact that you are moving from a phase of wealth accumulation to a phase of capital consumption; you can afford to take greater risks in the first phase than in the second. Sometimes I advise people to opt for investments that offer 100% protection and to invest the gains thus obtained in more aggressive investments.

How do you know which type of investment is best suited to your needs?
We work with our clients to determine their willingness and ability to take risks. To do this, we ask them to complete a questionnaire. To build up capital, I generally recommend taking out a mixed savings insurance policy with a guaranteed interest rate, i.e., a pillar 3a or 3b solution. This type of insurance allows you to include risk coverage for your partner. It is also possible to choose products linked to investment funds, which offer slightly higher return opportunities.

How often should you review your investment strategy?
It all depends on the nature of the investments. For long-term investments such as stocks, it is best to maintain your strategy over the long term, except perhaps in the event of significant fluctuations. As a general rule, you should check approximately every five years to see if your investment is still on track. This means taking the time to seek professional advice before making a decision and, above all, not changing your new strategy too quickly, as any arbitration will incur costs.

Early retirement?

The population is aging at an accelerating rate in Switzerland. One of the likely consequences in the medium to long term is an increase in the retirement age. However, few Swiss people want to work longer: early retirement is a widely shared dream. A dream that can become a reality if you plan your retirement and fill any gaps in your pension provision in good time.

Say goodbye to stress and marathon meetings, and hello to free time and jogging in the forest. Many people find the wait for their "final vacation" to be a long one. Surveys have shown that around three-quarters of Swiss people dream of taking early retirement.

In fact, nearly 50% of people in gainful employment in Switzerland leave the workforce early; 30% take early retirement three years before the normal retirement age, and 20% one or two years before.

Many can afford to do so... but many are even forced to.
At first glance, these figures may seem surprising, as early retirement comes at a cost. Retiring early means giving up a salary and seeing your old-age pension seriously reduced.

But the financial argument seems far from discouraging, at least for the more affluent. Statistics show that the more retirement capital accumulated in the second pillar during working life, the more likely early retirement is.

When talking about early retirement, it should not be forgotten that there are also many cases of forced early retirement. Around one-third of people who have taken early retirement have had to stop working due to health problems, restructuring of their company, or downsizing.

In total, around one-sixth of employees in Switzerland are forced into early retirement against their will. Many find themselves helpless in the face of this unexpected turn of events, especially as financial concerns often outweigh the happiness that this new freedom brings.

The trend towards early retirement and the high number of forced early retirements show that it is worth considering the financial consequences of early retirement at an early stage, regardless of whether or not you have considered this possibility.

One in six workers retires early against their will.

How much money do you need? How much can you count on?

What exactly does it mean to start thinking about early retirement early on? It means that you should start thinking about your retirement from working life and taking stock of your financial situation by your fifties at the latest. This will give you enough time to fill any gaps in your pension provision, if necessary.

AVS: significant reductions in benefits
If you wish, you can apply to receive your AHV pension one or two years before this age. In this case, as statistics show that the pension will be paid for longer than if you retired at the normal age, the annual pension is reduced. The reduction amounts to 6.8% per year of early retirement.

According to the 2007 pension register, barely a third of women received their AVS pension one or two years early, and only 8% of men. This means that most people who take early retirement do not receive their AVS pension until they reach the normal retirement age, so as not to suffer a reduction in their pension.

When applying for an early pension, you must normally continue to pay AHV contributions until the normal retirement age; the minimum contribution is CHF 475 and the maximum is CHF 10,300 per year.

If you wish to receive your AHV pension early, you must assert your rights with the relevant AHV compensation fund. Submit your application at least three months before the desired date. You can find the address of your compensation fund on the website
www.ahv.ch

Early retirement by one year: AHV pension reduced by 6.8% for life.

Pension fund: the situation varies from case to case

Pension funds can arrange their early retirement models as they see fit. Contact your pension fund to find out if it offers the option of early retirement. It may also allow you to take partial retirement, so that you can ease out of working life gradually.

Some pension funds compensate for the loss of the AHV pension with a transitional pension, which is added to the early retirement pension. The transitional pension can be financed by paying additional contributions during your working life; most employers cover half of the contributions.

Early retirement significantly reduces your pension. The pension fund pays you a certain percentage of your retirement capital in the form of an annual pension. This percentage – known as the conversion rate – and your retirement assets are significantly lower in the case of early retirement than in the case of normal retirement.

• The pension fund reduces the retirement pension because when it pays an early retirement pension, it suffers a loss of income as the employer and employee no longer pay contributions and no interest is earned; it then has to finance more pensions with lower contribution income. The reduction in the pension is 6 to 7% per year of early retirement.
• Insured persons accumulate around a quarter of their total retirement capital during the last five years of gainful employment, as this is often when their salary is highest and their contributions are therefore the highest. In addition, the effect of compound interest weighs a little more heavily in the balance each year.

Filling pension gaps
The pension gap resulting from early retirement can be filled in various ways. For example, by finding a good investment for your own assets. It is also possible that your employer will pay you a severance payment to facilitate your early retirement.

Don't forget that severance payments are taxable. If the tax authorities consider this payment to be a form of pension provision, the preferential tax rate set for pension provision will apply. Otherwise, it will be taxed as replacement income, along with your other income.

The reduction in your pension fund benefits is 6-7% per year of early retirement.

Early retirement: your checklist

1. When you are around 50, decide when you want to retire.
2. Contact your pension fund to find out whether early retirement is possible
   on the desired date.
3. Think about the lifestyle you want to adopt in retirement. Draw up a realistic budget taking into account all your expenses, and don't forget risks such as illness, which can lead to high medical costs.
4. Ask your AHV compensation fund to provide you with an individual account statement and contact your pension fund to find out how much your retirement savings are worth.
5. Ask your employer whether they pay transitional pensions in the event of early retirement.
6. Based on your budget, calculate the amount of the income gap.
7. Make an inventory of your assets: real estate, account balances, 2nd and 3rd pillar pension funds, securities, life insurance policies, shareholdings, expected inheritance, etc.
8. Calculate the amount of additional capital you need to fill your pension gap and consult your pension advisor.
9. If you wish to withdraw your retirement assets in the form of a lump sum, notify your pension fund of your decision within the specified time limit. With regard to AHV, you must claim your entitlements approximately three months before your retirement.

Postal codes served:

1977, 1978, 3978, 3975, 3971

 

• 1977 Icogne, 1978 Lens, 3978 Flanthey, 3975 Randogne, 3971 Chermignon
• In the center of the Crans resort