FIRE: Pillars 2 & 3

Can’t get my head around a probably fairly simple question. Do you include your pillars 2 & 3 in your FIRE calculations? If so, how?

Counting both pillars to your FIRE portfolio would greatly accelerate the path to FIRE, but since you cannot access this money until legal retirement age, I’m not sure how to consider 2nd/3rd pillar for EARLY retirement?

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You have the option to move abroad.
Lower cost of living + possible withdrawal of 2nd and 3rd pillar.

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Yes, I definitely include them in my FIRE calculations, it’s my money in the end of the day :slight_smile:

I just include them in my net worth, that I can only access it later, doesn’t change anything about my withdrawal rate or target FIRE net worth.

Side note, you can withdraw 3rd pillar funds 5 years before retirement, that’s why it is the preferred strategy to have 5 accounts and withdraw one every year starting at 60 to break the progressive withdrawal tax. You can only withdraw the full amount from an account (exception being to buy a house).

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I include pillar 3 but not pillar 2.

With interests below inflation, I don’t really expect much to be left of pillar 2 when I reach retirement age any more. :frowning: I wish we had something like American 401(k)s.

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Mr. Money Mustache has a piece about how to deal with tax advantaged (but locked) investments in a FIRE setting: https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/

I personally do count both my 2nd and 3rd pillar as part of my net worth. There may come a time when it’s more important to save in taxable in order to bridge the gap to normal retirement age but that would probably mean not being able to save more (or only marginally more) than the max 3a contributions, which would probably put any FIRE date not too far away from normal early retirement age (so with a small gap to fill with non-retirement accounts).

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I include them, yes, but calculate net worth & cash flow separately. In both I deduct projected taxes.

In my case I will probably have 10-15 years between FIRE and legal retirement age, so the time gap is not as large as somebody that retires with 40.

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By the time I (or those younger than me) get to it, it will likely be up to 70+. :sweat_smile:
So it’s a slowly moving target. :smiley:

On topic: I include both in NW calculations.

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Same thoughts. Lets assume someone retires at 55 with 2 million in assets of which 250k are in the 3rd pillar (5 accounts) and 500k are in the 2nd pillar (2 accounts). So only 1.25 million taxable. Lets also assume no return and no inflation due to simplicity.

With a 4% withdrawal rate that’s 80k/year. From 55-60 you would take out 400k from your taxable account thus reducing it to 850k. Then over the next 5 years all your 3rd pillar accounts will be used year after year which will reduce your taxable account down to 700k (30k/year that isn’t covered by the 3rd pillar) when you reach 65.

As you want to optimize income and wealth taxes, you’ll keep those 2 2nd pillar accounts till 69-70 and thus once again only use the taxable account for 4 years. With 70 you’ll be left with 800k in your taxable account. Letting you survive till you are 80 when you eventually run out of money.

The reality will be much better. All your investments will grow longterm, especially the 2nd pillar which will stay untouched for 15 years. Those 500k are very likely to double or tripple. Also there is AHV which will reduce the withdrawal rate substantially (from 4% down to 2.6% in that example).

Sidenote: You might argue that this strategy won’t work for someone retiring at 35-40 and thus waiting at least 20 years for the 2nd/3rd pillar assets. But quite the contrary. Someone retiring at that age won’t have that much in his 2nd/3rd pillar anyway. Taxable account will make up most of this persons net worth.

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Sure I count them both and they are the largest part of our net worth anyway. My 3a is invested in index funds on stocks, so I count them as they are. For the 2nd pillar I am still hesitant if I should count it as 50/50 stocks/bonds as per their internal asset allocation or as a bond with a variable return of 1-4%.

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For me the pension fund is like a AAA bond with B bond yield. Basically 0 default risk and decent interest rate. 50/50 would mean that you personally had some kind of market risk, which isn’t really the case.

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And if you die before 69y, the 2nd pillar money is gone :smiley: But you are right, this is the most optimized game plan.

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I include booth… My strategy is to have like 3 different profiles (we can call them “volatility” profiles). Pension fund = LOW (can be cashed out in 2 different years), 3a = INTERMEDIATE (5 accounts to be cashed out in 5 different years) and separate personal investments = HIGH. Having different volatility profiles divided into different accounts I can a) optimize taxes b) cash out whatever makes sense at that point in time depending on the stock market.

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Guys, you made my day, I just figured I could FIRE immediately if wished to do so :partying_face::partying_face::partying_face: Thanks for all your inputs!

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No it’s not. When you FIRE at 55 your pension fund will be transfered to two vested benefit accounts.

Care to share what changed?

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Excellent article, thanks! It refers to US retirement though (401k, Roth IRA etc). Are there any differences in Swiss regulations worth knowing?

Also: Are CHF 800’000 really enough for Swiss conditions? I think I couldn’t survive too comfortably on 40k annually :sweat_smile: 50k might work

I wrongly assumed that my safe withdrawal rate (SWR) would be to low due to too little taxable money and pillar 2&3 being blocked. But I can easily make it to retirement age with taxable :+1:

BTW: In terms of portfolio management, might be useful to differentiate between accumulation phase and decumulation (FIRE) phase. In accumulation phase, 100% stocks and maybe even leverage is optimal. In decumulation (FIRE), a risk parity portfolio enables better SWR (safe withdrawal rates), thereby making your FIRE portfolio last longer.

Some resources on risk parity portfolios (kind of all weather, multi-asset portfolios):

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Of course I include them, I really don’t understand why some people don’t.

I count the 2nd pillar as bonds (even though 30% of it is in stocks) and the 3rd pillar exactly as I have it invested (part stocks and part cash).

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That depends on your definition of comfortable. I recommend the book Early Retirement Extreme, it gives you another perspective on consumerism. This guy spends 7’000 dollar per YEAR and retired 5 years after entering the workforce.

Personally I aim for 80’000 for 2 adults and one child.

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Assuming the 2nd pillar gets into a vested benefits account upon retirement and thus can be invested at the allocation of your choice, I don’t think the basic premises change much. AHV contributions still have to be taken into account after FIRE and future taxes and expenses have to be evaluated but I don’t think the difference between a 401K and a vested benefits account, or a traditional IRA or a 3a account are very significant.

Roth IRA contributions can be withdrawn without penalties, so it’s more important to check that we can reach retirement on taxable assets alone but other than that, the same principles should apply.

Edit:

It’s very personal. My own lean FIRE target as a single with no dependents and no known health issues is 750K. My regular fire target is 1.5 mil. Your mileage may vary, I’d assess it based on my current expenses, expected changes due to retirement and a safety margin accounting for potential health issues, old age and/or additional wants.

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