Choice for the future

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Hello everyone,

I’m a 35 years old Swiss citizen and since this Christmas, I’ve started to take money seriously after my wife bought me a book about how money work and it really make me understand that I didn’t know anything…

Now, I’m learning more about investing and how to found other source of income.
But before I start to invest, i have a choice to make and I would be happy if anyone can help me…

This is about the 2nd pillar.
I have a 5 years old hole in it. The reason is almost 2 years of unemployment following 2 years of insurance invalidity (AI / IV). The result is a hole around 30’000 CHF.

My question is this :
What should I do about it, how and when ?
I asked around, and the answer I’ve heard is : buying back as late as possible, but that’s a big sum.

Should I :

Option A:

  • Buying near retirement

Option B:

  • Start buying it from now with a little amount for the next 25 years (like 50.- CHF each month)

Option C:

  • Start investing this amount somewhere more profitable with risks.

I don’t know how is the rentability of the 2nd pillar and no one know if there will be enough money in 2045, but your answer will determine a big part of my retirement strategy I think.

Thanks you in advance for your help.

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Welcome. A Combination of A & C (if you plan on working until retirement). B does not make sense as you don‘t gain a lot in terms of progressive taxing.

2nd pillar is at the moment a minimum of 1% interest on your capital, which is not a lot if you compare with other investment options.

Most here will recommend C, as you can access that money easily before retirement. I‘d say a majority here invest longterm, meaning they don‘t plan to access the money in the next decade or more.

What about the 3a pillar? There you can choose independent of your employer how you want to invest the money (search viac, finpension on this forum).

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What book is that?

(Filling my 20 characters)

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Rich Dad, poor Dad :joy:

Thanks for your answer.

I’m also planning for a 3a, but it would depend of the 2e pillar investment.

Actually I have an old insurance 3a from skandia with 5% on it, and a 3a at a bank, but nothing on it.

The insurance way may be interesting for me with death insurance because I’m the only one working in my family. But I already loose 4000.- CHF because I started to have health issues and told me I lied on my health inquiries formulary. So I’ have a lot of hate towards insurance

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As a side note, many people on the forum have much bigger gaps in their 2nd pillar (due to having moved to Switzerland later in life). It probably also isn’t that different as people who get pillar2 money to fund a real estate transaction (ok, except those wouldn’t get tax benefits when buying back).

Note that doing a buy back has implication, e.g. it might make it more difficult to cash out the pension to buy a primary residence (might have to wait 3 years until last buy back, might vary from canton to canton).

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Hi

All options have their pros and cons.

Most likely, we reach the retirement age with the highest salary in our career. A buyback in the 2nd pillar near your retirement will offer the best tax break.

The latter the buyback the higher the return on assets (https://finpension.ch/en/when-is-a-voluntary-purchase-into-the-pension-fund-most-worthwhile/).

A minimum payment may be required for a buyback (i.e. CHF 5’000). Some pension fund may accept a monthly withholding from your salary. It will depend of your pension fund’s regulations. To be discussed with them.

It’s an option. However, you will be subject to wealth and income tax.

Your pension annuity is guaranteed (other things being equal) while the income/gains from your private investments are not.

The minimum yield is fixed by law. A pension fund can offer more. Distinction to be made between the mandatory and extra obligatory portion.

It’s impossible to say where the 2nd pillar will be in 40 or 50 years, the same for the AVS/AI.

When doing a buyback, you should look at the following:

  • is my pension fund in good health ?
  • what are the interest credited to my savings ? Different treatment between mandatory and extra mandatory ? Payment of an extra interest a year of good return in the stock market ?
  • what would be the disability annuity if you have to stop working ? will it improve (and how much) with a buyback ?
  • why would be the survivor annuity in case of death ? will it improve (and how much) with a buyback ?

Let’s not forget that the 2nd pillar is not only a savings account for our old age but also offers an interesting insurance system depending of the employer scheme.

While it may not be interesting for a single person or two high earners, it can be vital for others.

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The answer, as often, is probably “it depends”.

Things to take into account:

  • Max 3a contributions are capped each year, 2nd pillar buybacks can be postponed. You can fill your 2nd pillar using 3a so, all other things being equal, if you don’t max your 3a contributions, I’d start there.

  • All other things are not equal: your 2nd pillar is invested conservatively by your pension institution. 3a asks you to decide if you want to keep it in a bank account with a low but guaranteed interest rate, invest it conservatively or aggressively.

  • On the topic of insurances: depending on your circumstances, pure risk insurance may be worth it (to protect your wife/children if you have any/hedge against potential future disability). I’d start by studying my 2nd pillar contract: what disability/risk/survivor/orphans coverage is there? If it is linked to the amount you have in it (very rare), buying it back is more attractive. If it is a set amount based on your salary (the vast, vast majority of policies), then buying it back looses this advantage.

  • If you have a very low income, lowering it further by buying back into the 2nd pillar, on top of maxing the 3a, may make you eligible to some social subsidies. You’d have to check your cantonal tax code to see where the thresholds are.

  • Aside from the previous point, the higher your income, the more tax benefits you get from buying back in your 2nd pillar.

  • The amounts you use to buy back into your 2nd pillar are stuck there for 3 years. It’s important if you plan to use it to buy a house or start a self-employed venture.

The usual advice is to wait until near retirement to buy the 2nd pillar back. The reasoning is that you are more likely to have a higher salary then and you can invest your money more agressively in the mean time, getting better returns.

My take would be:

  1. Make sure you have enough liquidities to feel safe on a regular basis (have enough in a checking/savings account that your end of months are just non-events).

  2. Check your insurances: make sure your wife and children (if you have any) would have enough to get by if you come to die or get disabled again. Don’t buy into mixed products: cover the risks with pure risk insurance, invest with pure investment products.

  3. Assess your risk tolerance:

  • What is your need for risk: how much returns do you need to meet your retirement goals?
  • What is your ability to take risk: how safe is your income, how much of your savings can you afford to loose before it threatens your plans?
  • What is your willingness to take risk: basically, how comfortable are you with the idea of loosing 1% of your assets? 5%? 15%? 30%? 60%+?
  1. Choose a 3a solution matching your risk tolerance.
  • Very conservative → bank account (if you’re there, you may prefer buying back into your 2nd pillar).
  • You can take some very low risk → a low equity solution like VIAC’s Account Plus.
  • You feel more at ease with risk → something with anywhere between 20-60 allocation to equities.
  • You don’t mind that your assets fluctuate a lot and may loose quite a bit from time to time because you are investing for the long term → an agressive solution with 90+ allocation to equities.

  1. Choose between investing in taxable or buying back in your 2nd pillar. I’d invest in taxable.

  2. When you’re nearing the age when you’ll stop working, assess whether it’s interesting to buy back in your 2nd pillar. If it is, do so.

Congrats on being on your way and have success on it! Don’t forget to avoid getting rich quick schemes on the way and people making you pay for lessons (at least for now): there’s plenty of excellent free resources on the internet (and also a lot of crap but those usually fall into the “get rich quick” or “buy my strategy” categories).

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The recent thread on ageism makes me think that the assumption behind this reasoning might be very optimistic…

Otherwise I completely agree with Wolverine.

One more thought on this point:

If you’re already maxing out the 3rd pillar and you plan to cash out the 2nd pillar in 3-5 years (home ownership, self-employment) I think that doing a buyback now might be a good idea, depending on your marginal tax rate you can get very good returns on a very low risk investment.

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Could you still close your 1st pillar AVS/AHV contribution gap?

Doesn’t that pre-empt the answer to your own question? You’d voluntarily be buying into something whose outcome is largely uncertain.

I’d consider a voluntary purchase if and when you can anticipate return and consequences (i.e. few of years before retirement or cashing out, but beware of changes in law and regulations).

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Oh my god, I also read this book at the beginning of my investing path. I don’t know what the deal is with this book, it does not contain any concrete knowledge, just some mindset guidelines. And Kiyosaki himself monetizes heavy on this popularity, to me he’s kind of a guru with little content.

But somehow this book regarded as the 101 of getting rich. :slight_smile:

Regarding your pillar 2 question, it is probably the best if you make an excel sheet with all the options and then “simulate” the outcomes. Just make sure you factor in every cost.

My few cents:

  • If you pay in shortly before retirement (are you allowed to fill in your gap after so many years?), your money will be parked in the bad pillar 2 for the least amount of time before you can can it out, so that’s positive.
  • And if you let your current income get taxed and invest with higher returns, your investment will have a lot of time to “catch up” for the lost taxes
  • However, you don’t know how much you will earn in the future and when you will retire. It’s best to pay a large sum to the 2nd pillar in a year when you earn a lot. However, depending on the canton, the marginal income tax rate might be near maximum already at medium income levels.
  • If you decide to buy real estate as your primary residence, it changes the equation, as you can use pillar 2 for it. If you buy a flat in 5 years, it’s best to pay in as much as you can now, I guess.
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To be fair, Rich Dad Poor Dad was written at a moment when there were not so many books about personal finances. The most important principle is that it says that you need to own assets that will earn income for you, instead of having a liability-based lifestyle generating expense after expense. But I agree with you that since then, the author has marketed the franchise so much that I wonder if it does not hurts more the franchise than it helps it.

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Thank you everyone for your answer. Thoses are really interesting and helpful.

First I would say that my 2 objectives are :

  • 1st : closing any gap for the future for my family (wife and child ) and avoiding help from Social help or RC renting and if something happens to me, then they dont have to worry for a while.

  • 2nd.: FI would be a real bonus !

Spare money
Right now I have 1 month salary on spare. This still low, but a start.
My salary is too high for the lowering income strategy. But still it’s a good idea

**1st pillar AVS / AHV **
Honestly I’ have no idea about this one. I started working at 18 yo and I’ve always contributed since. Should I do something here?

2nd pillar
Well, if there isn’t any possibilities to do a monthly paiements, them problem is solved. I will look on a 3a pillar just for buyback my 2nd pillar later.

This is the situation of my 2nd pillar with what it cover :

  • Conversion rate : 5%
  • “Altersrent”, invalid and spouse rent = around 20’000 CHF
  • Child and orphan rent = around 4’000 CHF
  • Death benefit = 0 CHF

My wife is 100% investing on our child growth so, she’s not contributing in it and that’s fine for us.

About investing in a Real Estate, I’m not sure I will do before FI, so not in the near future. But If we can buy the 2nd with a 3a when we want, then I think this will be the best way to do it. On this matter, We have a house in our family, so there is some other way I think.

3a pillar
I read here about VIAC, it’s an interesting product. To avoid tax income at the end, I might do so :

  • 1 account for my 2nd pillar buyback global 40 maybe
  • 1 account for me global 80%

for now, it’s not possible for me to pay the full CHF 6800 + every year, but I will try to obtain enough from other sources of income.

I read on the website that now they propose a death insurance but as Wolverine says : mixing product isn’t a good fit, so I’ll have to check.

About this book, a lot of what’s inside is not doable here in Switzerland, but what made me open my eyes is the path of money in our accounts, and we never learned about that at school.

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What do you mean with this?
[wrong]Money that you put into the 3a pillar cannot be “pulled out” to later sip into the 2nd pillar; if that’s what you had in mind.[/wrong] - thanks xorfish for correction.

This is a no extra cost option AFAIK, you can tick that box.

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Oh seriously, had no idea!
Thanks for correcting me.

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If i understand correctly :

The maximal buyback is for the pension from 65 year’s old rent
The maximal WEF is for early pension before 65? If so, I have to double the amount of buying the 2nd, and this can’t be bought from 3a.

Is that right?