Not sure I fully understood, but your assumptions seem a little too pessimistic* to me.
Also, you seem to assume that the pension pot is a pile of cash in a safe that you withdraw from, i.e.
i) it does not generate income on its own
ii) you ignore that inflation reduces the pile’s purchasing power continually
I’d like to offer some … other avenues. With your goal of 72k income, you could aim e.g. for
making a very conservative 2% income on your 2.8 million pile, i.e. close to 60k income (which you would income pay tax on, maybe about 5k total?), AHV and wealth tax still apply, and you replenish the difference to your desired (inflation adjusted) 72k by withdrawing from your nestegg, now at a rate of maybe about 15-20k p.a., i.e. forever?).
This should last beyond your most optimistic life expectancy.
make an aggressive but still realistic 4% income on your 2.8 mil pile, i.e. close to 120k income (tax yadda yadda yah), most likely leaving your nest egg intact (depending on inflation and your life time), and your additional “problem” of having to spend more than your planned 72k net.
You heirs (or the trust you’ll set up) will thank you.
… hey, I’ll one up the above in two steps:
i) make a calculated 4% or slightly more income on your nestegg and actively select your eventually well diversified portfolio to consist of both reliable dividend payers and proven dividend growth payers. Your income will even grow over time, ideally surpassing inflation but at least catching up with it.
The younger you are the more you can focus on dividend growth companies that will grow your income at 5-10% every year, the closer you are to FIRE, the more you probably want to focus on reliable dividend payers that pay a 5-10% dividend that won’t grow much (if at all) but that is reliably payed out.
ii) buy into undervalued companies that will over time (typically years) benefit from multiple expansion and bath in the sun of your nestegg expanding while you do exactly nothing.
Perhaps much more interesting to you: this latest approach would perhaps allow you to retire much earlier than planned according to your calculations.
Ok … not entirely sure whether you’re able to tell which approach I have subscribed to … (if you are interested, check out this discussion).
Anyway, sorry if I went into too much detail, but I suppose the path to FIRE is indeed very much detail and path dependant and IMO can be achieved with much less net worth than currently inflation adjusted 3 million at an age of 50 (unless you strongly believe index large market investing is the only path to enlightenment and are happy with a less than 2% return and withdrawing as necessarily even when the market pukes).
Thanks for putting out the question and again apologies if I misunderstood or if it has already been answered.
Good night and good luck!
* Only checked my own tables, didn’t verify in detail:
If you lived in Zurich (the city) with withdrawing/consuming 90k gross and had initially 2.8 million saved up
you’d perpetually pay no income taxes (well, assuming your wealth does not generate income, see my other thoughts above) as you are just withdrawing from your own capital, not generating any taxable income.
you’d pay AHV about 4.3k (per person, based on your wealth), decreasing over time, as your wealth decreases as you withdraw, and stopping once you reach 65 (or whatever the retirement age will be at that time).
you’d pay wealth tax of about 4k, decreasing over time perpetually as your wealth decreases from your withdrawals.
So 90k gross withdrawal leaves you with a little above 80k net to spend.
80k gross withdrawal would already leave you with your desired about 72k net, according to these calculations.
3x Health insurance, two of them at the high end, one at normalish costs
Heating which is higher than my total Nebenkosten which actually includes electricity.
Electricity : what are you running there at 150 CHF a month ? I am at 40 CHF a month when high
Food is high for 2 people, I am at about 400-500 CHF/month. Does it include restaurants/other items ?
Internet you can get it for half probably. Remember, a normal household needs approx. 100 mb/s for normal applications, including UHD Netflix streaming. The whole Fiberglas 1gb/s is just for making you pay for stuff you do not need.
Cable ? Seriously ? Get Zattoo or something like that if you really need it, actually it should be included in the internet anyway.
Travel + Trips : maybe
Mobile phone @40CHF/month each. At Galaxus you can get it much cheaper (19CHF*2)
*I don’t see anything on housing maintenance (maybe it would be a good idea to replace that heating), nor interests.
Health insurance: we’re in BL which is one of the higher cost places for health insurance. This is for 5 people.
Heating costs have been crazy due to the recent oil price spike, but maybe this will subside.
Food costs are actually for 2+3 kids - I expect we’ll continue to feed them for a while and it to get more expensive as they enter teenage years! These are groceries. We never eat out.
Housing maintenance cost is a big miss on the budgeting! I guess I should accrue 1k per month assuming standard 1% and 1.2m property
Anyway. It seems like my budget is probably too light!
Yes, I probably need to be more accurate on the taxes. I also assumed whole income would be taxable on one person, but a simple optimization would be to split the wealth (subject to inheritance/transfer tax considerations) to reduce tax costs.
I assumed the pot could produce a 4% return (rising with inflation) for 45 years without depleting below zero - which might be somewhat optimistic if inflation is higher than expected.
However, you are right it is pessimistic to assume all is taxed as some can be withdrawn as capital, some might be in tax sheltered vehicles. Though from some of the workings above, the income tax rate doesn’t have a huge impact.
Wealth tax (and inflation which is waved away in the 4%) provide a more substantial drag. Note that Basel has a substantially higher wealth tax than Zurich - I guess in the order of 2x-3x. (thanks @oslasho )
The 4% safe withdrawal rule (AFAIK) takes into account future annual returns. It allows you to spend more (cumulatively) on your retirement than you have saved - relying on an assumption of future returns that exceed inflation. At 2.8 million you don’t really need those.
How long are you going to live? To 90, if we’re being generous - another 40 years from the age of 50.
40 years * 72‘000 CHF/year = 2‘880‘000 CHF (the figure you suggested)
You could draw on your principal at a zero per cent rate of return.
Your capital just needs to return the rate of inflation. And for wealth tax, you mentally just adjust your projected spend. You still more or less retire on a real rate of return of zero - which is incredibly pessimistic.
I’d go with 45 years, to account for medical advances and allow some margin. But even going with 40, we have the 2.88 figure.
That also doesn’t account for AHV which is, say 8k*15 years = 120k. Adding that on gives a nice round 3 million.
I ran a simulation and with a pot of 3 million and an inflation adjusted return of 0.5% assuming a 15% tax rate to give you a 40 year retirement (after which the pot is about empty). For a 45 year retirement, you need 1.2% real rate of return.
That does not make sense. You can’t have such a small return (15’000 CHF/y) and 15% tax rate. Your tax rate will rather be zero (just a little wealth tax).
Furthermore a stock portfolio should give a 4-5% minimum inflation adjusted return (Benchmark).
And again, after 15y, you have the income from the AHV.
Keep in mind that if your wealth decreases towards the end of your life, so will your wealth taxes. I.e., it’s more like a drag on your net return than a fixed expense. It might be reasonable to simply adjust your expected annual return by about 1 percentage point to cover fees (TER, broker), dividend and wealth taxes.
And if your wealth doesn’t decrease (much) due to higher than expected returns, it shouldn’t be a concern.
I did some extensive research for France… and definitely cheaper to be in France (as long as you do not want to live in Paris). Taxes are not that high if your income is on a mustachian level and housing can be extremely cheap. (I was looking at a town with direct TGV connection of less than an hour from Paris, so not talking about some village in the middle of nowhere). Healthcare also make a rather big difference.
And I did not even account for tax savings possibilities (You can store part of your stocks in a different tax free account which is locked only for 5y).
If you add kids, the difference will be even bigger, since childcare is much cheaper (childcare, school, school lunches, club life, family advantages for trains etc. which simply do not exist in Switzerland). France has btw one of the highest rate of women working.
Now if you want to live in the countryside because you want to have a big house and big land, France is definitely worth looking at.
I don’t understand where this number comes from. Using the table on page 6 of the official document linked below, For a total wealth of 2.8M, that is 1.4M per married partner, I get roughly 2*2’900.- = 5’800.- for OASI. 2.03.e (ahv-iv.ch)
That couple would also have a tiny taxable income of 395.-, due on dividends (at a 2% dividends rate taken on the whole wealth).
Using a 4% SWR rule (which, admittedly, is streching things given it’s established on a 30 years retirement time horizon), that couple could spend, after taxes and OASI contributions, 87’350.- per year, or 7’279.- per month.
For net expenses of 6K per month for a couple living in Basel Stadt with the same above assumptions, the required wealth would be around 2.3M. That’s contributing to OASI until death and never getting any benefits out of it (admittedly on the Trinity study’s 30 years time horizon).
There is no world where I can make sense of a requirement of 3M for a couple living in Basel Stadt to retire at 50 and spend 6K per month after taxes and OASI, though my math and/or data may be flawed, in which case I am happy to get enlightened.
Edit: I was wondering if I had forgotten communal taxes in my calculations. Apparently, the Stadt Basel itself dosen’t levy them.
My kitchen logic approach to RE budget in case it helps anyone:
I budget for a withdrawal rate from NW of max 3.5%.
I budget 1% for wealth tax (canton Geneva) and compulsory AVS contributions.
For equities I invest in a Quality strategy which has ~1% dividend distribution. I do not have 100% of my NW in equities but if I did I would have tax on revenue of ~0.3% of my NW (typical 30% tax rate)
Leaves a budget of 2.2% of NW which I count on for living costs
Fine tuning:
Leave 3P & vested 2P to grow protected from tax as long as possible
I reduce the LPP value of 2P and 3P in my NW for withdrawal tax (“deferred tax”)
I keep income from AVS and home country pension as a safety net and don’t budget for it as it is a long way in the future. With 3.5% WR most likely I won’t need to rely on it.
Geneva currently has “bouclier fiscal” (cantonal and communal taxes are capped at 60% of taxable income). So it makes sense to optimise taxable income. I did not investigate fully yet
A reduction of 1.3 percentage points from your net return does not result in a reduction of 1.3 percentage points from your SWR.
E.g., for the simple case of fixed interest over 40 years, you’d need a 1.86% annual (real) interest for a 3.5% SWR. If the annual interest was only 0.56% (1.3 percentage points lower), your SWR would be 2.8%, significantly higher than 2.2%.
With unknown and volatile returns, you can’t precisely calculate it, of course. However, reducing your SWR by 1.3 percentage points sounds like a very pessimistic approach even if your assumption of a 1.3 percentage point return drag due to taxes and AVS is right.
But that’s limited to 150k and you have capital tax gain (flat 30% rate) in regular brokerage account.
Also I find all the arcane tax break super annoying, it tends to make people make weird investment decision. I find the swiss setup with limited tax break so much simpler/healthy.
I will re-check my numbers. But you can have a zero real rate of return and still have high tax. e.g. let’s say you have a rate of return of 100%, so are taxed at say 20% on that. But inflation is also 100%, then your real rate of return is 0%, but you still get a tax of 20% on the total value of your assets. (extreme example to illustrate principle only).
It could be because you are calculating the values split between 2 married people. Whereas I am calculating it as single income for one unmarried person and the funds would then be used to fund living costs for 2 people.
An optimization would be to split the wealth into 2 by giving half the wealth away.
What this discussion has shown me is that it is quite complicated and so I will make a full spreadsheet to model it out. This will enable an accurate year by year calculation of wealth tax and income taxes. I will share the results once complete.
You are right. I’m remiss in not putting proper attention to it. As you say, it is not insignificant and provides inflation and longevity protection. Plus at the tail end of retirement, when funds are possibly running low, it will grow to be an increasing proportion of the retirement income.
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(if you are interested, check out this discussion).
You could draw on your principal at a zero per cent rate of return.