Investing a larger sum at 20 years old (still in school so I can't invest for at least 5 years)

#1

Dear all,

I have about CHF 20’000 to invest at 20 years old (current age). I am still in school and will not be working for a few more years (at least 5). This leads me to believe that I will not be able to invest a substantial amount of money again for at least 5 years. Simply because I won’t have a real job to earn income.

Here’s what I thought of so far, to invest my current money:

  • If I invest in Säule 3a, I want to use viac.ch
  • If I invest in an ETF, I want to go 100% stocks (At least for now since I’m 20yo)

I have already read a few books and a lot of posts and it all boils down to three questions:

Should I invest in Säule 3a and the rest in ETF. Or should I invest everything in ETFs?
Past discussions lead me to believe that Säule 3a could be worth it due to tax deduction. Does this change for me because I have only worked for a year with a total income of CHF 57’000?

Should I use InteractiveBrokers or CornerTrader?
IB seems to be better, but it has a monthly “inactivity” fee. Is it still be better in the long run, if I won’t really invest for at least 5 years? Is it possible to change from CT to IB later on, or would I incur heavy fees?

I want to keep my future portfolio simple. Does it make sense to only invest the money I have right now in VT?
I’m referring to this mustachian blog post. I do plan on using a domestic ETF someday, but does it make sense to invest my current money in only one ETF? The actual amount will be based on whether I invest in Säule 3a.

Thank you for your time. I hope everything is clear :slight_smile:

#2

If you invest now and do nothing for 5 years, IBKRs inactivity fee should be app. 1% of your investment (5 years x 12 months x 3 USD/month). Once you turn 25 though, it will be 10 USD/month, as long your portfolio‘s NLV is less than 100k USD. Question is: how soon are you going to reach the 100‘000 - or make investments/trades in regular intervals actually use it for commissions?

Pillar 3a: Income in your investments will be tax-free. However, unless you have or expect significant other (full-time job or capital) income, you will probably not pay much tax anyway. And your capital will be locked in the 3a system, which entails severely limited withdrawal options, (often) higher costs and a limited choice of investment opportunities and/or allocation.

You‘re (probably?) not going to save much on tax by investing money in a 3rd pillar product, unless you have other income which you can „deduct“ it from. The higher your other income, the higher savings by investing in pillar 3a - and you can only deduct in the same tax (= calendar) year.

And what about future plans? Going to university? What about spending a year abroad - and how are you going to finance it? Need a car (Maybe as part of a new job)? How are you going to pay for it? At your age, I wouldn‘t lock 20k away for retirement savings/investments, unless you can get that amount from other sources in the short run.

So if these are (pretty much) your only savings and unless your situation is somehow „special“, I would strongly recommend against pillar 3a.

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#3

Even if they do say, you can‘t time the markets, in the current climate, I would look for some (very simple) cost averaging at least. Like… maybe waiting for another year or two, before investing the second half of your money. Or set myself a mark and only invest it once stock prices will have lost 10% of today‘s value. It is only just a gut feeling, but I expect to see such lower entry points into the markets within the next years.

Also, if you can exchange currency inexpensively at good rates (through Revolut, for instance, beware of their monthly limits), I would probably go with one of the (non-Swiss) European Brokers that do not charge custodial (or inactivity) fees (like the German ones, for instance). Keep in mind that they usually won‘t sell you US-based ETFs (like VT).

If you‘re feeling optimistic about North American markets (which account for 58% of VT) right now, why not?

Do you?

#4

That’s not correct. You also save on wealth tax and divivdend tax in the long run. Over 45+ years that’s not nothing.

The wealth tax is effectively counterbalanced by the higher expense ratios at Viac, the dividend tax however is the more significant aspect.

#5

I agree. The possible (if any) tax savings benefit of the Säule 3a doesn‘t outweigh that I can‘t easily access the money until im 65.

I will therefore invest the money I have right now in a ETF.

  • Truth is, I have no idea about the current market. But does it really matter that much when I plan on leaving it for 25-40 years?

  • Are there alternatives to the VT ETF that I should keep in mind for my specific circumstances?

  • Paying 1% of my investment over the course of 5 years at IB sounds like a lot. Should I go for CT then? I‘d rather not do something complicated like the currency exchange with a german company like you mentioned.

  • Is it possible to change from CT to IB later on? Are there fees involved?

I definitely plan on getting to more than 100k once I have a job after school. But I suppose it would be better to change to IB or something similar once the time comes. If that is even possible.

Thank you guys for any other inputs!

#6

In that situation I would avoid 3a, but would be very fee-sensitive with that money since you know you won’t be able to contribute much in the next 5 years. On 20k CHF you’ll be paying a minimum of 0.6%/year fees with IB (too much). Degiro would be the obvious choice to keep it really cheap, although they no longer offer US-based ETFs.

If you are absolutely 100% sure you will not need that money until you retire, plunk it all in a single ETF such as VWRL.

But, dare I say in a forum such as this, that while thinking of long-term savings at your age is awesome, you should be out there travelling the world, meeting people, exploring, taking chances, etc… :slight_smile: Youth tends to evaporate quicker than some may think!

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#7

Degiro looks like a good alternative thanks to not having any fees. I will not need the money for the next 25-40 years and I have some more on the side for travelling and such :slight_smile:

What is the full name of the VWRL and why is it better than VT?

#8

Vanguard FTSE All-World UCITS ETF

I wouldn’t say it’s better, but if you pick Degiro you will not have access to VT so this is a decent alternative. You can find more details in the ETF tax optimization topic.

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#9

I was referring to the specific point that faith was mentioning about „tax deduction“ and other (work) income. These tax savings might be comparable to instantly getting back a sizable chunk, the amount invested (pillar 3a). For common income brackets, I‘d say about 20%, more or less, depending on income and (slightly simplifying) marginal tax rate. But there will be no such „upfront“ return if you‘re having no other income.

Nonetheless, you raise a valid point about subsequent long-run tax savings. Especially since you‘re only allowed a maximum inpayment into 3a each year that you will be shielding from tax.

For me personally though, it is the upfront savings by deducting from my yearly income that tip the balance in favour of making a contribution into pillar 3a. I wouldn‘t do it without, but rather prefer the freedom and unrestrictedness of of pillar 3b.

#10

It might. Just to put it into perspective: the biggest chunk of any world index, is still U.S. large caps. These have seen tremendous growth over the last 10 years.

If you take a look at the preceding decade though, let’s say 2000-2010, sometimes referred to as a „lost decade“, the S&P 500 (and we’re not even really talking about the NASDAQ dot-com frenzy) had an annualized total return of -1%.

The choice of that timeframe is of course arbitrary. To me, it does illustrate not only the possibility of recovering from huge stock market crashes and bear markets - but also that market timing can play a considerable factor.

Is there a difference if you got into the market with a one-time investment in, say 2002-2004 or 2009-2010, instead of 1999-2000 or 2006-2008? I think so. Does it pale compared to a 25-year outlook? Somewhat, yes. But I still wouldn’t say timing is totally negligible.

Of course in the end, as such things are hard to predict without the benefit of hindsight, it boils down to what you feel comfortable with.

#11

First off: you can access it before age 65 under certain circumstances.

Second off: why would you want to access it before 65? When you FIRE you simply start using your nonsheltered money first. If you run out of nonsheltered money before 65 then your FIRE plan probably isn’t going to work.

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#12

I do realize that I can access it before the age of 65, that’s why I wrote “can’t easily access it” :wink:

However, the biggest benefit of the Säule 3a is the tax savings. My total income this year will not be more than 25k (my contract ends this june and I will go to school for a few years). So wouldn’t it be smarter to use a simple ETF like VT or VWRL, given that I don’t really have a big income to deduct my taxes from?

You’re right that it will probably work out just fine doing it the way you described in your second point. For me it’s more a question of which is the better investment long-term given that the tax deductions aren’t really big for me.

#13

Can you elaborate on the pillar 3b option or send me a link? To be honest, I didn’t really understand what I mean, but I don’t want to make it too complicated anyway.

#14

Another twist - to avoid dividends and taxes on them - instead of Vanguard ETFs, just park your cash with BRK.B. :smiley:

#15

Just a different name for any „free“ savings/investment you do, i.e. unregulated in withdrawal conditions - like your IBKR account or the standard savings account at the local cantonal bank. :wink:

#16

Just to add (meant to to earlier but forgot):

IBKRs inactivity minimum for clients under 25 years of age, such as the thread starter, is only 3 USD/month. That would calculate to only a 0.18% per year in fees - as opposed to 10 USD and 0.6% for older clients.

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#17

That’s actually a really great point in favor of IB! Thank you for that :smile:

If I go with Degiro, I will have access to VWRL, which is IE domiciled.

But going with IB means that I could use VT or VTI+VXUS and benefit from the optimised taxes thanks to them being US domiciled fonds. Relevant thread

Did I get that right, or have I missed something?

By the way, what’s the full name of IBKR? I suppose it’s InteractiveBrokers, but what’s the KR behind it?

#18

Interactive Brokers :smiley:

#19

Yup, to sum up: IB with VT is perfect default choice for a Swiss resident, especially if you’re under 25 and/or you’re capable of getting fast to 100k. For random folks, who don’t obsess about FIRE and/or can’t save much, Swiss and European brokers like CT, SQ or Degiro are probably good enough.

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#20

Also since the 3$ inactivity fee is just enough for one currency conversion (2$) and one or two transactions of VT or something (@<0.5$ each) so you should probably rarely need to pay more than the 3$ per month.

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