If one would retire at age 65, the plan for financial independence is simple: calculate your costs, substract pensions from 1st and 2nd pillar, and what’s left needs to be funded by your portfolio. This approach however only works when retiring regularily instead of early (FIRR?).
If one plans to retire at, say, age 50, income drops to zero so they would now need to have 100% of their costs funded by the portfolio. But 15 years later, suddenly “income” starts flowing again through their 1st and 2nd pillar pensions.
Sure you could build up a portfolio by age 50 that funds your life forever (e.g. with a 3% withdrawal rate), but 1. you’d need to be able to amass that much money by then and 2. you’d then have way too much money after turning 65 (which means you could have FIRE’d sooner).
So how does one go about calculating what portfolio size is needed when retiring early?
I make an excel and put each year in a row. This way you can define exactly when income comes in and when expenses go out and model it.
There’s no other way to do this accurately other than year by year as you have things changing each year e.g. taxes, capital withdrawal tax, changes in tax rates, changes in family allowance, lumpy costs (e.g. one-off costs for wedding, costs for 4 years in a row due to funding university).
Some interactions are very hard to calculate and non-intuitive e.g. do you save more money by staggering pillar 2 withdrawal over 2-5 years? Hard to tell if wealth tax and tax on return on those withdrawn funds outweighs tax on capital withdrawal being at a higher rate if you take it in a single lump sum.
Then if you want to combine/test out multiples of these factors/decisions, there’s no way to figure out how they interact other than to put it all into a single model.
There is no 2nd pillar income when you retire at 50. your pension fund assets will be transferred to a vested benefits account like Finpension. There you can invest it tax-free for another 10-15 years.
Regarding 1st pillar: It should be considered. First as a cost (minimum AHV needs to be paid, depending on assets can be several thousand CHF per year). Second as you noted as inflation-adjusted retirement income.
I would personally add 0.5% on my SWR for the time till 65. This might be 4.5% instead of 4% or 4% instead of 3.5%. So if I retire with 2 million (including 2nd/3rd pillar assets) at 50, spend 90k/year for the first 15 years. Then probably 65k/year with AHV.
I once had a version of a Google Sheet where I tracked the historic performance of my stockpicking portfolio with daily granularity (with the historic price data lookup function in GOOGLEFINANCE) to discover that I was pushing against the limits of sheets.
Not only did the sheet get slower and slower, at some point I reached the maximum number of cells supported (couple million IIRC) … *
I now track performance on a monthly basis and I hope to reach the near zen state when I move to yearly (and full zen when I stop tracking it completely).
* I’m sure one or two Google servers ran a bitter hotter because of my Sheet actions, but since I did this before Google stopped claiming to be carbon neutral (quite recently, actually, because of — guess what! — AI, of course) I don’t feel too bad about it.
My Sheet stresstesting back then was still offset by Google’s VP of Greenwashing buying power generated by wind farms hooked up to diesel generators or something like that.
I think @Barto is discounting the certainty of the pillar 1 payout …
But you’re quite right on taking into account that you’ll pay into pillar 1 for the foreseeable future, whether as an employee (soon a little more, one way or another …) or as a person not working before the age of 65 (2.03.d (ahv-iv.ch)).
If you want to retire early, my understanding is that you best invest in both your second pillar (volunatry contributions) and your pillar 3A… and that you then invest these assets (VIAC / Finpension / Frankly) and leave these assets there until 65. These assets are shielded from the first pillar contribution that is based on your taxable wealth.
Another optimization is that you invest some of your free investments into Swiss RE Funds with direct ownership, as they don’t contribute towards your taxable wealth.
Could any of the early retirees here in this board probably quickly re-confirm my understanding?
Doing 5x50-100k buy-ins into 2nd pillar before retiring and then transferring it to Finpension and leave it invested till official retirement age. You would save a huge amount of taxes in those 5 years (likely the ones with the highest income), less taxes on dividends and smaller AHV contribution. Might net you an additional 100k, maybe even 200k.
You should spread out buy-ins to save more taxes. Your marginal tax rate decreases with smaller taxable income. So doing 5x50k will probably save you 75k in taxes whereas 2x125k would save you 50k in taxes. Just an estimate, not calculated.
I just think that relying on a ~2000 CHF/month income to arrive ~20 years in the future would imply my plan was too aggressive and that I had pushed it too far
I sleep better and am less stressed having worked a while longer to lower the WR
With 3% WR the most likely scenario is that when I am 65 my pot will be growing faster than I can spend it. If sequence of return strikes then I have AVS in my back pocket in reserve.
When the return in Pillar 2 is low, there’s a trade-off between too many years in low return vs tax savings. Plus you have to be careful of unexpected job losses.
There is a sweetspot in terms of years before being able to withdraw it and/or invest it. If you start doing buy-ins 10 years before retirement, you might gain 30% in taxes and 15% in interest, but lose out on a potential 50-100% return in the stock market. So it‘s a net loss. Depending on the interest of the pension fund, I would go for 5-10 years.
This and the lower marginal tax rate as a young adult are the main reasons why you shouldn‘t do buy-ins 10+ years before retirement.
You also probably want to do the buy-ins when markets are hitting all times highs, even if that’s 1 or 2 years earlier than planned. That way it’s also doing some rebalancing into cash-like assets and it is less problematic that the returns in the pension fund are lower in the remaining years.
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