I discovered MP’s blog not long ago and I’m thinking more and more about investing in the 3a pillar following his example. For context, I’m also planning to retire early, say at 35/40. However, there is a piece in MP’s plan that I don’t quite get (I promise I’ve tried to find an answer in MP’s posts and previous entries in the forum but without success).
The question is, if you expect to FIRE at 40 or so, you shouldn’t count on the money you have in your 3rd pillar for that, right? Assuming you won’t use that money to buy a house in Switzerland, of course.
My point is that you won’t be able to touch that money until you’re 60, so it wouldn’t make sense to count it for the 4% rule. If you did it, you wouldn’t be using a 4% rule until you’re 60 on your freely available money, but rather some higher number, like 6, 7 or 8%, which starts sounding risky.
The consequence of this is that you would then need to do some extra, tricky math that goes beyond the simple 4% rule. Like, “How much money do I need to retire with (if I FIRE at x age) assuming that I will partly deplete it and take more than 4% annually until I turn 60 (the moment when I will finally be able to have all my 3rd pillar at my disposal)?”
I have the impression that MP has never addressed this intricate question in any of his posts, but I may be wrong. He simply affirms that he’ll start taking the money out once he turns 60 – but that’s not exactly the same as retiring at age 40 following the 4% rule, since for that you would need to have free access to the returns that all your money is generating at that point. Am I missing something? Maybe some help from Marc?
Tl;dr: is it fair to count your 3a pillar for your total assets if you’re planning to use the 4% rule for FIRing?
Include 3a and Vested Benefits in your net worth, based on which you calculate your withdrawal rate (which given you retire at 40) should be in the range of max 3%. Then withdraw the full amoint from your „free Portfolio“.
This leads to the situation where the weight of 3a and Pension likely grows and the free portfolio heavily shrinks. This just requires you to do three sanity checks:
can you maintain your overall asset allocation (or are there any relevant Investment limitations on 3a / Vested Benefits compared to your free Portfolio)
will you have enough free Portfolio you can draw down, so that it lasts until you can withdraw 3a
do you have sufficient buffer in case 3a regulations change, meaning payout tax increases (I would already now reduce 3a by at least 12-15%) and in case you can only withdraw it later (e.g. at 63 if pension age increased to 68) and will you survive if politics prevent any withdrawal on vested benefits put forces you to e.g. take on an annuity af 65-68)
So its all a matter of how long the free investments last and can bridge the gap…
You need to do 2 calculations. One overall seeing whether you have enough ignoring the age restrictions. If you fail that then you already know.
Then you do a second calculation: leaving out assets that are restricted, you calculate whether you have enough to last until the restrictions are lifted. If so, then you are good.
I might be a little contrarian here, but if you’re FIRE’d, nobody stops you from deregistering in Switzerland and redeem 3a. Problem solved, 4% rule (for what it’s worth) maintained.
Two examples to illustrate. Let’s assume you need 120k a year in retirement. You want to retire at 50.
Case 1
Your only assets are 1 trillion dollars in a pension fund which you can access at 65 and nothing else.
You can’t retire since you have nothing to live on between 50 and 65.
Case 2
You have a defined benefit pension that will pay you 120k per year inflation adjusted for the rest of your life from age 65 onwards. You also have 1.8 million in the bank that earns 0% inflation adjusted.
Even though you have much less than in case 1, you can retire since you can live off the 1.8 million until you reach the age of 65 and can draw your pension.
4% is never valid for more than 30 years in the first place.
Other than that, I would say yes. As inflation is also at the same time way lower. The inflation adjustment that happens normally with the rule, is subsequently lower.
That we are able to rebalance tax-free, helps as well.
At age 40, I‘d stay in the range of 3-3.5% max. AHV kicking in later will help safeguard also.
Not at all, I suspect many people here are not Swiss, putting a lot of effort into saving money in Switzerland and then spending it in Switzerland is a disservice to the effort invested. Personally I consider the 4% “rule” to be 100% bunk anyway because it’s completely arbitrary as what everyone considers a reasonable standard of living is wildly and widely different. Case in point, my mother’s retired academic friend who saw her state pension cut from 3500 to 1500, complaining “she can’t live like this” while I was maintaining a great standard of living for a family of 4 with 2000. Sure she couldn’t travel to London every other weekend, or eat diamonds for breakfast, but tough luck, better save next time. Oh there’s no next time!
I think it could be possible. Maybe you need to be lucky with sequence of returns, but maybe an 80/20 stock bond portfolio and using up the bonds as a buffer could get you there.
I’m not Swiss, but see a big chance of retiring here, even though it is not ideal. Reasons?
Kids. They were born and grew up here, so maybe I’ll stay to be close to them if they stay here
Inertia. It’s a pain to move, esp. in 16 years time when my kids are grown up and I’ll be 63
Starting again. I lost touch with all but one friend from my home country and even he moved out of our hometown. I’d have to start again in my 60s. Admittedly, here I know nobody and have no social life anyway, so it would probably be an improvement
Administrative hassle. I hate it, esp. with taxes and other things to do with the government. I couldn’t imagine having to deal with living with the admin in France, or the hostile German tax authorities. Other countries would be OK for this.
But that’s two different things? Your personal 4% are exactly the standard of living you want to target. It’s just a yearly % for a safe withdrawal, without hitting zero after 30 years, with a 50/50 stock/bond portfolio. That’s all the study measured essentially.
It’s mainly a guideline on how much assets you need to accumulate to last you your retirement. But only you yourself set the actual value.
how much would I need to spend to live as I find to be reasonable
then extrapolate that into a % taken from the principal + expected/realised growth (a +20% year won’t be the same as a -10% year!)
can’t define X years because nobody knows when they’ll die UNLESS they can engineer their timely demise - something I find to be a legitimately sane idea, even if people recoil in horror when they hear about it!
I understand the process, but the premise appears to me to be that one first sets up their needs (the 100k in the example, and the timepoint they desire to stop earning) and then looks at the numbers. This doesn’t feel realistic to me but could be the way I am thinking about it.
You essentially just stop working when you reach that number (or now you are finished and can do whatever you want, just that you now could retire at any moment).
And when you want to reach it/ expect to reach it? You make some assumptions on your savings/ salary + return on your investments and then project into the future hoping the market gods are on your side
Thanks @TeaGhost and @PhilMongoose ! So MP’s advice still holds realistic and feasible – how could I doubt, @_MP --, but in that case, I think it would be important to clearly state this detail at some point in the blog. Namely, the caveat that it is fair to count 3a towards your 3 or 4% rule as long as you’ll be able to live off your freely available portfolio until you reach age ~60.
I’m a regular visitor here, but tend to forget the forum is actually hosted by someone, and even comes along with a blog.
It certainly doesn’t hurt to challenge things you read online when your financial or live planning depends on it
Some thoughts from Mr. MP rightfully deserve challenging, as do some of the ideas on this board, including those I defend.
I would not consider the content of this board as an endorsement of the articles written by Mr. MP. They’re two different things in my perception.
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--, but in that case, I think it would be important to clearly state this detail at some point in the blog. Namely, the caveat that it is fair to count 3a towards your 3 or 4% rule as long as you’ll be able to live off your freely available portfolio until you reach age ~60.