Recently I read this article which explains the idea of integrating 2nd pillar as part of your Portfolio. Personally, I didn’t take it into account but after evaluating the idea I think it make a lot of sense, specially if you consider your portfolio as a long term investment .
Another idea, that the article bring to the table is consider your 2nd pillar as bonds since these funds generally speaking, the asset allocation is quite conservative and if I’m not mistaken is it guarantee by law that the yearly minimum interest rate is 1%.
I effectively consider the 2nd pillar as part of my portfolio and strategy and this is one of the reasons why I am quite aggressively investing in stock with minimal investment in bonds. It is however not clear to me if when I will retire it will be possible to get a lump sum from my second pillar as the rule can change and some left wing party would be interested to make an hold up on the capital accumulated by people on second pillar.
I’m in the same mindset as Bamboo, only that there is a small chance my family will leave the country before we retire, so that money will just be reinvested as bonds.
I also think you should consider 2nd pillar as part of your portfolio. Yes, you will not be able to withdraw it until retirement, but you shouldn’t need to. Also, when you leave Switzerland or buy a flat, you can actually withdraw it.
Secondly, A 59-yo with years of paying into 2nd pillar is in a whole different situation than a 29-yo with no money in his 2nd pillar.
You can treat it as a bond or whatever, but if you count it as a part of your portfolio, then you should definitely adjust the expected rate of return of your portfolio. For example, if you have 200k in stocks and you expect 8% growth from it, and you have 100k 2nd pillar and you expect 2% from it, then you have a 300k portfolio with 6% expected growth.
At this point, the more interesting question to me is about the 1st pillar. I know it too little to tell, but I expect that there is still high chance that when I reach statutory retirement age, I will receive back something from the Swiss state.
Well I don’t know Swiss politics. Don’t know how reliable and stable local laws are, but I hope a bit more than in Poland. In Poland the 2nd pillar is called OFE (open pension funds), and it was all promised as your own money on your own account, but when the 1st pillar ran into troubles, the government made a shocking decision of shifting some of that money from the 2nd pillar to the 1st pillar. So they took some honey from your dedicated jar and put it into the big “everybody’s” jar.
The difference in Switzerland is, you have ways of cashing out before reaching retirement age. So if you see things don’t look so good, you can get the money before the government steals it from you. So I really don’t see your point. Your money even with 0% return is still your money.
Yes, I also consider 2a as part of my portfolio.
The allocations are published (40% stocks, 35% bonds, 20% immo, commodities etc) so I use those allocations. I don’t feel putting it at 100% bonds is correct in my case. Returns were 3.5% in 2017 and 1% in 2018 so I feel the returns are acc. to the individual contribution of each part, albeit with some damping in a big-positive year (to then be used in a negative year), since minus returns are not “welcomed” (risk-free expectations by many employees, as well as the authoritiesl.
it was all promised as your own money on your own account, but when the 1st pillar ran into troubles, the government made a shocking decision of shifting some of that money from the 2nd pillar to the 1st pillar. So they took some honey from your dedicated jar and put it into the big “everybody’s” jar.
This is exactly what I fear what might happen. Not today but maybe in 10-15 years time.
Also, while I have read the article, I still do not see much of a point in considering it part of your portfolio. It has no practical effects on mine because I have 0% in bonds anyway and I am not planning on adding any.
Forget the article, forget bonds. You have tens, maybe hundreds of thousands of CHF in 2nd pillar and it’s under your name, so if you choose to ignore them as a part of a psychological trick, it still doesn’t change the fact that it’s yours.
Yes, it could potentially be taken away. But a) this is Switzerland, a much richer and advanced country than Poland and b) when you see it coming, you can still find a way to withdraw it before they take it away.
And once losing it is out of the picture, then yes, it has huge practical effects on planning of your FIRE. If you ignore it and keep on working to reach that goal, then by the time you reach 60, you may realize you worked too much, because now you have this extra source of money that you ignored.
so this is a valid argument, I was more responding to the original article which was aimed mostly at asset allocation.
However keep in mind that 2nd pillar contributions are the biggest when you are 50+ working, so if you actually want to “retire early” that is out of the picture. It can still be a substantial sum by that time but it might not be. It depends on your income and your employers contributions.
After you stop working you can transfer your 2. pillar to two „Freizügigkeitskonti“. Swisscanto currently offers a fund with 75% stocks but TER plus account fees of the banks are quite high.
Offering a low cost solution would be a new business oportunity for someone like VIAC. Maybe the regulatory framework allows so,ething even closer to 100% stocks.
Sure, age 25-34 they take 7%, 35-44 10%, so if you’re a diligent mustachian, you will retire by the time you’re 45, when they start taking 15%. But still, 10% of your gross income, that’s not nothing. I guess I already have over 50k in my 2. pillar.
I’d also absolutely consider 2nd pillar as part of the portfolio.
However I’d always look at the two parts of the 2nd pillar very differently: Obligatorium/obligatory part and Ueberobligatorium/over obligatory part.
The Obligatorium (which is the part of your salary up to 84.6k) is highly protected from a political point of view. You’ll get that money out again with high certainty. Sure, the actual conversion rate to the rent (currently 6.8) is unrealistically high at the moment and will be much lower in 10, 20, 30 years. But I’d argue that you will still get a good rent out of it and until retirement you will get interest on the money which is roughly following inflation - so perhaps slightly better than bonds but worse than stocks.
The Ueberobligatorium (salary part above 84.6k) however is at very high risk in my view. Risk from interest paid to be perhaps 1 or 1.5% lower than inflation. Risk that they will outright ‘steal’ your money should your particular pension fund become underfunded, etc etc. I think this part you cannot really count upon fully. Perhaps you can assume you get 70-80% back…
But consequently when counting 2nd pillar as part of your portfolio you should also include the pension contributions (both Employeer and Employee) to calculate your saving rate. Would you agree?
I also include the 2nd and 3rd pillars in the bonds category our net worth (based on Mr RIP’s fantastic sheet). And I created 2 lines : one including all assets, another excluding bonds for a better visibility.
However still hesitating to include VIAC in bonds vs. stocks.
And the more I think about it, the more I believe we will invest a big chunk of our pillars in real estate
Another post made me think about this again. I didn’t care so much about the bonds in my asset allocation, but getting older, maybe I should. I considered my 2nd pillar as bonds. I read on their website about 100% capital guarantee. We have the Business Protect solution of Swiss Life.
What do you folks think? Anything speaking against considering this bond-like?
To me it sounds like a very conservative product.
Pillar 2 is a very important part of retirement planning in Switzerland. It’s one of the few vehicles you can put a ton of money in and have it:
grow free of tax
not be subject to wealth tax
not be subject to AHV tax basis when unemployed
have priviledged tax rates on exit
and the icing on top: payments into it are tax deductible!
the main downsides are:
the money is locked up until retirement (but there are various ways to work around that, so this is not a serious downside, IMO)
Lack of control means you are at the mercy of your PK and returns might be low. In which case you might want to back-weight contributions just before retirement (which is typically also when you have the highest marginal tax rates).
I have now realized that if/when changing jobs I should ask much more information about the 2nd pillar. On long term, it can make a significant difference.
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100% security: you have a capital and interest rate guarantee on all your vested pension capital.