People that worry about (material) 2P contributions will have a marginal income tax of ~30%+ => assume low 30%
Pay-out tax on 2P is for most people in the range of ~4-8% => assume high 8%
The comparison is therefore:
a) Invest 100k at 6% Return, minus 1.05% Distribution Tax (2.5% Yield at 30% Marginal Income Tax), minus 0.3% Wealth Tax => Invest 100k at 4.5% p.a
b) Invest 100k that upon Investment are worth 131.5k (100k / (1-30%) * (1-8%)) at a return of probably 3%
It takes YEARS until scenario A wins. When you then as well take the reduction in downside risk (there is hardly none), the simplicicy of no behavorial mistakes and the additional security into the equation - I think it is clear that you shoudl invest into 2P.
Personally, I started to buy back missing pension coverage starting at the age of 29 and I kept doing so until I reached my max buy-in allowance. Further, I always maximize my contribution option. You don‘t want to lose this benefit.
Negative, a pension fund does two things: it mutes volatility and provides downside insurance protection. It further contains a Long Position on Interest Rate Futures. From a return point of view, it gives you returns that materially exceed bonds.
This sounds like a hedge fund or private equity. Your Pension Fund belongs into your Alternative Investment Bucket of your Portfolio. The Alternative Investment Bucket should be counted equally as 50% Bonds and 50% Shares.
But that too is not a given.
We’ve seen the range from 1-5% p.a. on this forum in the past few years (can’t find the thread now), majority of the phat part sitting on the left side of it.
Long term I’d probably calculate with closer to 2% (depends on individual fund of course).
Pension fund investment managers structure the portfolios of your pension funds in a slightly … ok, I’m sandbagging here … they actually invest pillar 2 money in a rather sophisticated way, taking into account a bunch more variables than we do as individual investors, balancing between expected payout needs (both pensions as well as Kapitalbezug), and a metric ton of other variables. These variables (and restrictions) limit the return they can get, but they don’t just buy bonds (or bond like asset classes) and it would be oversimplifying counting your entire pillar 2 as a bond (especially if you’re still many years from your retirement age).
That things are handled this ways is actually a Good Thing: imagine if everyone were able to choose the investments in their pillar 2 … maybe it would work with the audience in this forum (no comment), I am sure it would not work with the general population. It is already an issue that some people do Kapitalbezug instead of Rente but then end up with insufficient funds in their later years - which the collective will pay for with taxes …
Do you have any contribution gaps ? If so, why don’t you just keep the flexibility of buy-ins if and when you feel appropriate instead of committing to pour money on a regular basis in the system ?
Slightly orthogonal to the point (I believe) you are making: market timing versus sticking to a plan?
I see the flexibility point you are making (or I believe you are making), but I also see the downside of not making it automated/regular and hence “forgetting” about contributiions in seemingly good or bad years.
I have over 60k possible buy-in, at least it was the case on my latest LPP report, but I just changed job so I don’t know how it will be now (salary decreased a little bit but I think contributions went drastically up with the new LPP and employer strategy). Not sure if that’s what you mean with contribution gap, as it’s more due to salary increase than unemployment (Although I only started working at age 23). I’ll consider using some of it next year, as indeed we both have a pretty good income and not much to deduct, so it’s maybe our prime time to lower our taxes (compared to say, if we have kids further down the line, which lowers the taxes already).
I didn’t do it until now because of what I wrote in this thread, my overall impression that going all-in VT on IBKR works better in the long term. Thanks to all of you I now see it’s not really and/or always the case. I have to say, I always has a negative reaction when reading either “bonds” or “pension fund”, as I tend to assimilate that to low performance and low control, as well as with a need of short term stability that I currently don’t have.
Yes that’s what I meant. Considering that there is no matching from the Employer’s side of your extra contribution and given your young age I wouldn’t commit to a fix extra-payment but use the flexibility of buy-ins. Maybe it’s worth to clarify whether you can revert to a lower contribution plan if you so decide and which notice you have to give.
What are you using as marginal tax rate assumption / tax benefit? Because this tax benefit should increase over time as your taxable income increases (salary, dividends etc). To be complete perhaps you should try and forecast your future income and future marginal tax rate.
Without doing the math too much, in my situation I carry a circa 200k max voluntary contribution (together with my wife), and this should increase over time as our salaries go up. We are buying in regularly to manage taxes despite being in our 30s, but this is due to our high living costs atm (2 small kids in daycare) so more of a cash management than investment management.
You being young and kids-free, perhaps you should build up this deficit, invest outside of Pillar 2, and buy into it when cash is more constrained in the future. Unless you plan on buying real estate in <10y, as it was mentioned already.
Thanks Phil, I read this as “if you dont have a Pillar 2 yet you this is the max contribution you can make when entering the fund” but I assume a gap must exist in the first place in order for you to buy into the fund.
2P return (whether it is 0.5%, 1%, 3% etc) depends on the other participants in the plan, political decisions on minimum annuity rate, and discretion of the pension fund trustees how to manage any surplus (how much will be credited to employee’s accounts each year)
If you change employer, 2 pillar return depends on future employer. In my experience if you have a small employer 2P is often “outsourced” to insurance companies and returns low (I experienced <0.5% …)
if plan is to retire overseas careful planning is needed since tax rate can be prohibitive (I mention it since it is often overlooked )
Employer and employee contributions increase with age - by default most people will end up with higher % allocation of assets in 2P as they near retirement, without voluntary contributions
I think it is the max you can pay in (assuming zero currently) as a percentage of insured salary. Obviously, if you already contributed, you would have to deduct your contributions from this maximum.
I was looking to make voluntary payments and noticed that the amount I can add goes up by this amount which is much higher than my measly salary increase.
That’s my understanding, as well. It doesn’t increase automatically with age.
But if you get salary increase at age 30, you can buy-in the delta for, let’s say 5 years. Same salary increase at age 50 and the limit increases higher, to cover 25 years of missed contributions for this increase.
The pension funds I know allow additional buy-ins for early retirement. I’m not sure if it’s an universal option by law. The amount could be listed in your yearly statement, or it couldn’t.
Maybe you know or did this already. If not, this would provide you additional options.
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
