2 mio CHF to fire? rough calculation

#1

Hi fellow fire friends

Let’s assume you have 2 mio CHF (I guess that is a big number and somewhat close
to what RIP and others are gunning for) in the bank account and you want to FIRE.

The markets are sky-high but you still invest in VT and you decide to consume only
the dividends (2%) and let the equity rise/sink over time. The aim being that you
won’t need to consume that nest egg (good for your kids, etc).

-If you don’t work, you still need to pay AHV - roughly 3638 CHF (source:
https://www.ahv-iv.ch/p/2.03.d)
-You have 30k yearly expenses (rent, food, healthcare, etc)
-You will pay 5765 CHF in taxes (Freienbach - since i wanted to calculate the
minimum here)

If my math is right, things should work just OK (39000 expenses vs. income of 40000).

A few questions:

  • Thanks to the US/CH tax treaty you would see 15% tax withholding for the 40k.
  • What happens if the effective tax rate is below the 15%? Would the CH tax office refund you (even though the US tax office gets to keep the 15%)?
  • Are those the biggest cost factors or do you use completely different assumptions?
  • Have you seen any robust bond that yields 2% in CHF? (I haven’t :frowning: )
  • What do you think about barrier reverse convertible (BRC)? They are tax-free and buying Nestle/Roche/Novartis for 5% yield with a 40% downside protection doesn’t sound horrible. Do you know whether those certificates can be bought via the SIX stock exchange (I mostly see volume 0) or is “zeichnen” a must?
  • Have people considered starting a GmbH just to be employed? (That could make sense to avoid the AHV “fine” – plus if you earn just the required minimum for Säule 1, you would still be able to increase you pension)

Thank you!

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#2
  1. I would say it’s like this: first the ETF pays out 2% dividend (yes, since it’s 4 times a year it would be around a quarter of it, but let’s simplify). Then your broker takes 15% of this 2% (so 0.30%) as withholding tax, you’re left with 1.70%.
  2. You would not be able to get back more from the Swiss tax office than you paid them. So if these 5765 are less than 15% of your taxable income (which is your dividend income minus some reductions), then you will be only able to get that amount back.
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#3

I guess the 5765 also include the wealth tax. Does that make a difference?

#4

Good question. I don’t know if wealth tax counts, probably not.

#5

Example BRC: https://www.payoff.ch/products/stp/CH0416909056

40% safety net and 5.2% yield

I found out that you can easily buy them via SIX (but the spread is quite real :frowning: )

#6

This won’t work unless you’re actually doing work. The AHV will check. There have been court cases over this.

#7

Makes sense. Found this guide regarding this topic super insightful: https://www.bdo.ch/getmedia/79e8910b-a40d-43a0-8a38-037a6e6e530a/2_ahv_nichterwerbstaetige.pdf.aspx

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#8

Even if you’re kind of consultant who works an hour a day? That would suck. And how does AHV qualify what is work - based on issued invoices?

Anyways, I think most folks don’t want to abandon working altogether but rather prefer work on their own terms and escape the status of being somebody’s salary subject.

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#9

Even if I am FI, I would still work at least some time. Currently, the yearly minimum contribution is 475.– which you reach with an yearly gross income of 4612.-.
If you have a day rate of 900.- that means working 6 days a year and you are covered.

Anyways, let’s do some calculations if you don’t work at all.
Some assumptions:

  • RE at 45
  • Nest egg: 1´600´000

With 1.6 M, I would have to pay 3´193 CHF a year. Which for the 20 years until retirement would be 63’860. However, paying this minimum amount entitles you to claim un-cut retirement benefits from 1st pillar. If you take the AHV minimum of 1185.-, then you get 14´220.- a year from first pillar. (It would probably be more, since you have earned more than the minimum amount before you RE, which would bring up your average. But for now let’s assume you just get the bare minimum.
Now 63´830 / 14´220 = 4.5 years. This means, at age 69.5 you are break even.

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#10

the calculation might be a bit oversimplified:

  • you pay the ahv with after tax money, effectively
  • you could otherwise compount it in investments
  • the ahv you get in the future is not necessarily adjusted 100% by inflation, but hopefully partially
  • the ahv you get might be delayed a few years due to denographics - so you might have to pay longer too
  • the ahv you get you’ll have to pay taxes on

but yes, ahv covers a small part of your longevity risk in return, so…

#11

Can be deducted

[Empty words here because I need to write at least 20 characters to post.]

#12

It’s not quite that simple, “Versicherte, die weniger als 9 Monate und weniger als 50% der üblichen Arbeitszeit erwerbstätig sind, müssen eine Vergleichsrech-
nung vornehmen!” Less than 9 months employed means you count as RE & u are eligible to pay 3193, based on your wealth. Since u worked nine days paying 475 this is deducted from the 3193. This is put simply, the exact calc is a bit more complicated, but the point is the min. amount is not 475 for everyone.

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#13

It’s actually a question that’s been on my mind for some time: if I had 1 million CHF or more, where would I pay less taxes: in Poland or in Switzerland? 40’000 CHF annual expenses, either retired, or working only as much as needed to solve the AHV problem.

In Poland there is capital gains tax of 19%. The dividend part is easy to calculate. The tax on sale of ETFs would be more difficult. At the beginning, it would be lower but with the years would get higher and higher and approach 19%. The worst case scenario would be 19% on the whole annual “income”. So at 40’000 CHF income, that’s 7’600 CHF of CGT.

That already seems comparable to the total of Swiss taxes. Then there is the disadvantage of not being able to hold US-based ETFs anymore. Then comes the question of fiscal condition of the economy and perspectives. Polish society is getting old, no babies. Switzerland is still fueled by immigrants.

All in all, I’m strongly considering getting a Swiss nationality as soon as possible to be domiciled here for the rest of my life (I could still spend as much time in Poland as I wanted). Or do you know a better place, with even lower taxes and higher stability and better perspectives?

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#14

There was already thread about this:
https://forum.mustachianpost.com/t/spending-your-retirement-abroad/

I think some people were recommending Malta as a low tax retirement destination.

#15

@Bojack I believe the AHV “fine” is the only issue – the rest (wealth tax, income tax on dividends, etc) is quite manageable.

Any thoughts on barrier reverse convertible (BRC)? Did anyone here buy such a certificate before?

#16

Dang, you’re right. Although that document from the BDO hints at the fact that if you just keep under the radar, the AHV-office might not control you and you might slip the Vergleichsrechnung.

For my part, I will count it as a 0.2% additional wealth tax in the pre-retirement phase. It is annoying, but not a dealbreaker.
The alternative would be to leave Switzerland and have your AHV cut for every year you are outside of the country. For a 20 year FIRE period, that would be a 45% cut.
Not sure if the saving of 0.2% can be invested to make up for those 45%. Seems like a complicate calculation.

#17

Although I never bought such a certificate, my work environment is such that i am quite familiar with them. Which kind of BRC do you have in mind? on a single stock? on an index? on multiple underlyings?

  • if it is on an index, i would not expect more than 2-3% of coupon
  • if it is on a basket of stocks, your final performance is often tied to the worst performer of the basket, not the average, so beware

The bid-ask spread is often high on these products, and the issuers and distributors of such product often have a commission that is included in the price.

For instance, you have a product that is worth 98CHF:

  • the issuer will take a 1CHF commission
  • the distributor will take as well 1 or 2 CHF commission
    Now the mid price is 101 CHF. Add the bid-ask spread and you get an idea of all the fees middle men are getting.

On the other hand, the coupon received is not considered as taxable income in Switzerland…

#18

Thanks @Julianek - yes it seems quite costly. Frankly, I want to hold CHF and I find 4% p.a. tax-free and some ok-level of risk quite attractive.

#19

What do you want to gain from it? This is mostly a bet against volatility, right? (if the stock goes higher than the coupon or lower than the barrier, you wouldn’t gain much from what I understand).

Why not simply hold the stock (or better an index to be diversified)? Also when comparing with the underlying, afaik they don’t take into account dividends, which can make the comparison biased.

Edit: and it seems a somewhat opposite to a FIRE approach, since it caps your upside, but you still carry unlimited downside risk.

#20

Well this mostly a thought exercise (see above).

You reached FIRE in terms of cash but how do you fund your actual day-to-day expenses. 2% ETF dividends is one way – but the BRC path seems to be another interesting one (3-5% p.a.; no tax; fairly limited downside – those bluechip stocks would need to drop more than 40% before you would get booked to your trading account vs. getting the 100% cash payback).