Financial downsides of early retirement

Life Hacking
21

you’ll end up paying a lot more in taxes than you would save in AHV.

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22

Check the link to the federal guide posted by @patrik above. The following paragraph combined with minimum wage plus the fact that at early retirement you will probably have significant assets probably rule this out as practical option:

“For individuals in gainful employment who are not in permanent full-time work (i.e. they work less than nine months a year or work less than 50% of normal working hours), the compensation office must carry out a comparative calculation to determine whether the contributions from gainful employment, including employer’s contributions, amount to less than half of what they would have to contribute as a non-employed person. If the compensation office finds that this is not the case, the individual must also pay contributions as a non-employed person.”

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23

Yet this would be an interesting exercise to carry out.

  1. Is it possible and accepted by the tax authorities to create a GmbH with the sole purpose keeping myself employed and pay myself a salary so that I check the box for the AHV?

  2. How much would be the cost per year to do so (i.e. the money I’m not getting paid back to myself because it goes into social contributions and the cost of running the GmbH).

For simplicity sake, I would assume this is my only income and thus that income taxes would be probably around 200 CHF (in ZH).

Assuming I would pay myself 24000 CHF / year (2000 month), that would contribute 2 * 5.3% to social security 2544 CHF (well enough to check AHV minimum of 514/yearly I guess).

2522 CHF is the mandatory yearly AHV contribution for unemployed single people with a wealth of 1.240M CHF (from https://www.ahv-iv.ch/p/2.03.e). That would mean that (pending 0 CHF cost to run the GmbH). For a reasonable early retirement in Switzerland, I would expect a larger capital, probably above 2M CHF.

So, pending this is a legal and accepted way, it may be cheaper than paying the contributions directly. Many ifs and far from precise numbers. If someone has some more information, I would be really curious to learn more about this or help digging this out.

24

Your assumptions are not realistic. Firstly ask any firm how much it would cost to incorporate, and run a gmbh (including preparation of accounts and tax filings). This alone will probably kill your savings each year.

Then assume a modest 20% income tax on your income - that also reduces.

Now what about any profit in the gmbh itself that should be taxed? More leakage.

And you don’t just pay AHV, you also have IV, ALV etc.

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25

This. A company is taxed on capital gains.

26

That’s exactly my point: finding how much leakage there is. Is it 2000 or 5000 CHF? Then match it to the mandatory AHV contributions and figure out the break even point in terms of wealth. At the break even, the leakage is smaller than the AHV contributions for unemployed persons.

Granted, if the leakage is around 5K, we are looking into the 2.5M of wealth (my guess) for this to be positive.

And no, the company doesn’t have to make any profit. It just exists for the only purpose of paying myself a salary (if that’s legal). If an excuse is needed, let’s say it’s a startup developing a new app in stealth mode.

27

Even at break-even, that‘s a looot of effort for zero gain. You need way more than break-even to even remotely make it worth your time and effort.

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28

The maximum you can ever possibly save is 12’850 per year if you have about 9m in assets as AHV is capped there.

So you’ll need 121k of income to generate your quarter of the AHV. Assuming 20% tax, you already pay 24k of tax so that’s almost the entire AHV you would have to pay without employment. Then you have half-AHV on top for the employment. And then you have all the other costs on top meaning that at maximum wealth you are losing at least 50% by doing this.

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29

So there’s no relief by increasing wealth even to the upper bound. Now at the lower bound, the minimum AHV you have to pay is 514 per year equivalent to a salary of 4851. Again assuming your marginal tax rate is 20%, you have 970 of tax on this.

The maximum wealth you could have where this is sufficent to avoid paying AHV on a wealth basis would be around 1 million. So you’d save 58 francs per year if we just look at AHV. Of course, if you include ALV, IV, gmbh running costs and etc. this would also be loss making.

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30

I leave it as an exercise for the reader to plot the chart to determine the shape of the curve and find the maximum and minimum points.

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31

Has anyone run the numbers on the AHV contribution after retiring early?

Let‘s assume you retire at 55 with 2.5 million of which 2 million are outside your retirement accounts. What if you just don‘t pay the required AHV sum and lose ~23% of the AHV you‘ll eventually get at 65? Would it be worth it?

32

  1. AHV payments are not optional so you have no choice whether to pay it or not

  2. It also depends how much you earned. For me as I have a large salary and very few years, paying AHV is a ‘cheap’ way of gaining extra years.

    I worked out that even if I pay minimum AHV from now until retirement, I my average wage would still be above the 87k or so required to get maximum AHV, so it is relatively good value for me to add additional AHV years.

    But since I will only manage to pay 33 of the 44 possible years, the AHV will be capped at 75%.

    Note if you do this calculation and have kids, also take into account the Beziehungsgutschrift as you get a credit to AHV. I allocated 100% of this to my partner as I’m already maxxed out on AHV.

I include AHV contributions and payout in my retirement model.

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33

In my case since I would get around 600 per year in AHV for each additional year I contribute regardless of how much that contribution is, it entirely depends on how much I need to pay. If it is the minimum of 514, then I’d be getting over 100% of the contribution each year in retirement. If it is the maximum of 25k, then I’d be getting 2.33%.

Per my forecasts, I expect to get around 7-8%. YMMV.

Also, my case is simple as I’m already maxxed out so I can just focus on minimizing my AHV contributions.

If you will not average over the maximum AHV salary, then maybe paying more AHV could be worth it.

34

Oh didnt know that!

……

35

I budget for 0.2-0.3% of NW as an expense in my SWR addition to wealth tax. Discussed in this thread

I don’t count the payouts in my retirement model. Given the choice I would prefer to delay RE so my finances stand up on their own before retirement age and not be in the situtation where I am waiting for AVS to kick in. I keep it in my back pocket as an emergency plan

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36

The amount seems appropriate. Though it might be a little bit pessimistic to assume you get zero AHV!

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37

Apologies for the long delay in answering…

According to https://www.ahv-iv.ch/p/2.03.e the max is 25’700 for 8.74M.

I’m not sure I follow your reasoning. I probably wasn’t explicit enough in my initial question: I was looking at paying the absolute minimum (514 CHF) AHV contribution to qualify.

I agree with you that the numbers are complicated… the maximal AHV rent is achieved with an average yearly contribution of 88’200. With enough contributions in the early working years, it’s possible to contribute just the minimum for the remaining years till 65 and still get the maximum (to be clear: the maximal rent possible for the number of contribution years, which will be 44 or less).

38

I think you are missing one important fact: there is an anti-avoidance provision that states if your employment AHV payment is less than 50% of the amount of AHV due as an unemployed person, then it is dis-regarded and you have to pay the amount of AHV due as an unemployed person anyway, i.e. based on wealth.

39

According to the text linked (page 2, paragraph after the list of bullets), this is only for individuals not in a permanent full-time position (i.e. work less than 9 months a year or work less than 50%).

Granted, it’s going to be hard to claim to be in a 100% employment if the salary is very low. And the AHV could challenge that situation to court.

But isn’t this exactly what tech startups are doing? Those startups tend to grant low salaries to highly qualified people and high shares (in the hope of a future success). And do this for a few years till success or running out of cash.

40

I guess if you’re still fully working, then you will pay employement AHV. It is a question of context: this is a thread about paying AHV on retirement! If I am going to be working, then I expect to earn a heck of a lot of money to compensate me for giving up early retirement!

I also recall, reading some news about ‘fake employers’ being busted - at the time I didn’t really understand what it was about but somebody mentioned it was an AHV scam.

I couldn’t see myself working 50% in a low paying job. I could see myself working on my own things for little or no pay, but I suspect I would have a hard time convincing the authorities that they are geniune businesses.

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