AHV - when to take it?

Banks, Insurances & Third Pillar
2

That is an interesting overview, many thanks!

I guess it really depends on two variables

a) How long do you expect to live? If you withdraw later, you have a higher income, but also less years to get it. You have to think about your current health and about the life style that you have lived for the last thirty years or so. You can also pull some statistics about mortability rates, etc.

b) What exactly do you want to maximize?
I. Your personal free time to enjoy and live
II. The wealth that you inherit to your children? And/or do you have a spouse for which you want to make all arrangements in case that you suddenly die?

Having the AHV gives you less stress and more financial freedom to do activies with your families and grand children. Once you have financial freedom and less years to benefit from compounding interest, I could imagine that the means to live a rich live can be much more rewarding than gaining a few percentages more. Nobody knows when you might have a stroke or some other tragedy and then you loose personally and financially you lose all future payments as well.

3

Have you considered that you also need to pay in as long as you don’t take money out?

Does it also increase if you are already at the max AHV rent?

4

You still need to pay the AHV contribution till 65, doesn’t matter if you take it early at 63. Otherwise you lose out on 1/44 for any missing year.

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5

So you’re not paying in anymore after 65 if you no longer work & not access the AHV?

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6

No.

"Die Beitragspflicht endet, wenn Sie das ordentliche Rentenalter erreicht haben. Für Männer liegt das ordentliche Rentenalater bei 65 Jahren und für Frauen bei 64 Jahren."

from https://www.ahv-iv.ch/p/2.03.d

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7

This is an interesting question! Thanks for putting it out there! :slight_smile:

Lots of variables, plenty of tax considerations, etc, as you mention. I haven’t punched the numbers - so please expect no useful contribution here - but I wanted to share this anyhow:

As others have mentioned you still pay into the AHV insurance until 65 (64 for women, currently) if you stop working and the amount you (should)* pay depends

  • whether you have a spouse and whether they still at least pay twice the minimal AHV contribution (currently about CHF 1k per year)
  • on your wealth
  • on 20 times the yearly pension income you receive

The corresponding guide by AHV/IV was already linked by @rolandinho.

IIUC, assuming that you do not have a spouse who pays at least twice the minmal AHV contribution, this means that for collecting AHV at 63 and 64 you’ll still have to pay into AHV, and the amount is based on

  • age 63: CHF ~3000k (CHF 2500k portfolio + 20 times AHV pension of CHF 25.4k)
  • age 64: CHF ~3040k (CHF 2500k portfolio + 20 times AHV pension of CHF 27.4k)

The table in the linked guide doesn’t have explicit numbers for this in their Beitragstabelle, but extrapolating from the figure for CHF 1500k (and saucing on some nice progression) you end up paying between 7k and maybe 9k into AHV for those years before turning 65.

Of course any additional pension income from pillar 2 or a bunch of other things affect this calculation as well.

Wow, that was just the part for receiving AHV before the regular pension age.

Whole different set of questions and calculations for waiting until 70 for AHV payout. I’ll have to think about this more thoroughly … seems like the AVH expected per year pension increase is just around my expected per year dividend increase of my portfolios (although the AHV pension increase seems more guaranteed … but OTOH I’ll benefit from additional nest egg capital appreciation … or, ahem, write-down).

If I manage to punch some actual numbers, I’ll post them here. The question is certainly super interesting (probably though only if you’re nearing the decision year :-D).

* Another wrinkle for the entire calculation is of course to forego some percentage of the AHV pension for years not paid in. Does your expected return on contributions missed exceed the one promised by AHV? Wrinkles after wrinkles …

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8

Of course if you start later your pension is higher, but you receive it for a smaller number of years. It takes 12.7 years of the pension at 65 to reach the same total amount as when starting at 63 (12.7 * 29.4 = 14.7 * 25.4).

The conclusion from this is very personal; I’ll probably favor my early retirement years rather than my future self above 80…

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9

Delaying AHV doesn‘t change your ability to favor the early years of retirement. Waiting for it till 70 means that your portfolio withdrawals will decrease from 100k to 61k per year (as shown in my 1st post). So you could potentially withdraw 6%/year (150k from a 2.5M portfolio) for 7 years for example. With 0% real return (assuming something rather conservative), your portfolio would decrease down to 1.45M. Now you‘re 70 and go back to the 100k/year you planned on in the beginning. 39k from AHV and 61k/year from portfolio withdrawals that will last till you‘re 94 years old (assuming once again 0% real return over those 24 years). So you could also view the whole delaying as an insurance for 70+ which gives you the opportunity to spend way more till then.

The answer to my question is thus really complex. You really have to run some numbers.

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10

Correct, and I haven’t done it.
But my intuition tells me that it is better to keep more capital, if you expect that it will have a real return, or if you have heirs :innocent:

11

It may also be interesting to consider the stock market conditions. If there is a big market crash shortly before turning 63, it may be beneficial to get AHV early to reduce the amount of stocks you have to sell at a low price (i.e., try to benefit more from the expected market recovery). Or more generally, request AHV at the first significant drawdown of your portfolio, if one occurs between 63 and 70.

I haven’t run any numbers on this, so I don’t know whether this actually makes sense.

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12

If one reaches the average life expectancy of about 86 years, it should be a zero-sum game. If you die earlier, it is better to draw as early as possible; if you die later, it is advantageous to draw later.

Since I want to protect myself against the risk of living a long time and running out of money, I currently plan to draw AHV as late as possible, at age 70.
If I die earlier, I will leave some money on the table, but that is the price I am willing to pay for this insurance.

A question on the side: How are the AHV years calculated in relation to the amount of the pension, in which one pays only the contributions for the unemployed? is it only the minimum amount or is there a calculation for this?

13

https://www.ahv-iv.ch/p/2.03.e

Page 6 of the PDF.

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14

Thanks, but I guess I expressed myself in an unfortunate way.
What I meant was how a year is counted with these contributions, does it count as if you only paid in the minimum amount or can you get to the maximum pension with a high enough contribution as well
e.g. i have paid for 22years with an income of +90k and then pay 22year 4.2k as an unemployed, do i get the full 2450chf/month or an reduced amount?

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16

yes,thats what i looked for
thank you!

20

It looks like one of the most important sources was not yet mentioned that helps you check your AHV claim against your past contributions: https://www.acor-avs.ch/requerant

21

You can run a Discounted Cash Flow DCF analysis in excel to decide, based on your personal cost of capital (=expected return you will get on your funds)

The AHV payout increases by 7.3 & 7.8% between 63 and 65. Thereafter 5.2- 5-6.1%. Before tax.

If your personal cost of capital (=expected return you can get on your money elsewhere) is higher than the above then it makes sense to take the AHV earlier.

For example if your expected return is 7% on your own funds (high % shares) then it probably wouldn’t make sense to wait until age 70. Better take at age 65

If you have a more conservative investment portfolio then you have lower expected return on own funds. Then it is more complicated but a DCF quickly tells you the likely break even age. For example suppose the question is whether to start AHV at age 70 vs 65. If your return on assets is 3% you likely need to live to ~93 for it to make sense. If your return on assets is 4.5% then you need to live to ~104. etc

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22

In my model, I use the AHV income as justification for a riskier 80/20 asset allocation compared to the traditional 60/40. The time between early retirement and AHV pension starting should then be filled with some sort of bond ladder / bond tent to smooth the risk over the years.

With this in mind, the DCF should then be compared to a risk free rate or an average bond return, no? A DCF against 7% stock return ignores the difference in risk profiles between those options?

23

Yes it would make sense to adapt the discount rate in your calculation to match the opportunity cost of the alternative.

It is a separate topic but I am not at all convinced that the model of taking a large allocation to bonds at retirement age that has been analysed to be safe historically reduces risk for people trying to Retire Early today

Assuming you plan on the often quoted 4% SWR. If you have 40% bonds earning 1% interest after tax it means the remaining 60% has to earn 6% to avoid eating into your capital. That’s before considering inflation: real returns on bonds are in fact negative.

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24

The original 4% SWR (from the Trinity study) was based on not running out of money within 30 years. As long as the capital after 30 years was >= 0, it was considered a success.

25

I agree and share the concern. Today the 2nd pillar covers that part of the asset allocation, after RE some sort of TIPS vehicle would be ideal … which doesn’t exist in CHF and is probably too expensive to hedge USD > CHF. Something I need to figure out by then, but I still have some time until I need to make that call.