(I put this under taxes as it deals with 'AHV/OASI tax/contribution)
TL;DR: it looks like paying the voluntary minimum AHV contribution after FIRE (assuming no income other than dividends) is a good deal - but are you accounting for it?
Let’s assume someone FIREs at 50, planning to no longer work. If there’s no income, then there’s no mandatory AHV contributions (and afaik you don’t pay AHV on dividends). If you don’t pay AHV for a full year, you get charged with a ‘AHV gap year’ resulting in a 2.22% (1/44) permanent reduction to the AHV pension.
To avoid getting a ‘AHV gap year’ reduction you can voluntarily pay AHV that same year (even back to 5 years if you ‘forget’). The amount you have to pay to avoid the gap year thingy is dependent on … your assets, your net worth. The following PDF at page 6 has a table how much a non-employed person has to pay per year based on assets:
As an example: let’s say you have 1 million CHF at FIRE time, so you’d currently (!) have to pay 1947.50 CHF every year towards AHV to avoid a gap year. If you opt to not pay, you get a 0.22% permanent reduction of the AHV pension - which is equal to 320 - 640 CHF per (pension) year (the amount depends on overall contribution - but these values are based on minimum and maximum AHV pension). Let’s say you live until 90, so 25 pension years, that amounts to 8000 - 16000 CHF.
So in other words: you’d pay 2000 CHF ‘now’ to get back 8000 - 16000 CHF throughout your pension. That sounds like a very good deal. Minimal risk. Including some inflation adjustments. Of course you could try to get 400% (after tax & expenses!) with some risky investment within 20 years, but this deal here is rather minimal risk (the risk is that AHV survives, economically and politically…).
Of course your actual number might be slightly different - but you get the point.
Which brings me to the reason for bringing this up in the first place: is this all correct? and is everyone here aware that after FIRE you’re going to have to pay that AHV minimal contribution thing and do you plan to do that and calculate that into the FIRE number?
Your thoughts and numbers are correct, in my opinion. I would also plan that contribution amount into the “FIRE budget”.
I’ve played with similar numbers.
Also using 50y/o FIRE and 1’000’000 assets I calculate paying in 2’000 p.a. from 50 to 65.
This prevents a 15/44 reduction on an AHV pension of say 2000pm = 680pm = 8000 p.a. for from 65 to 85.
If one would pay the 2000 for 15 years into an investment bringing 7%, then the withdrawal rate thereafter would only be 5000 p.a. (65 to 85). Alternatively to reach an allowable 8000 p.a. withdrawal you’d need almost 10% returns.
For me, like you, the conclusion is that it is low risk, relatively high return, if you live that long.
I’ve ignored taxation which has an influence, but that’s many relatively small factors making it complicated and the effect smallish.
A big difference/influence though - If your wife still works, then you may be exempt. Also a child (0-16) can give you 16 years worth of “Erziehungsgutschriften”, but I have yet to figure out if this just increases your total “theoretical income” that the AHV then use to calculate your pension, or whether these years also count as “Beitragsjahre” and free you of the need to pay the AHV contributions to avoid gap years.
I read somewhere that ahv pension basically depends on just two main factors: 1) years of contributions and 2) average salary during them. Average salary factor is capped at 86k so if you earn much more than that a lot of your contribution are wasted for nothing, and in this case it could make sense to pay for an empty year just to avoid this waste.
it seems your numbers are correct even if you went confused between 2.2% and 0.22%. Your assumption of reaching an age of 90 is beyond the statistics and it is probably why it seems so favorable to pay regularly for AHV. Stastically high savers live longer probably because of life habits associated with saving (no smoke, few alcool, less car for short trip.
My last word is that Switzerland is not made for FIRE. If you agree about it then you get, after early retirement, a “stupid job” of consultant, book keeper, part time sales force, or what else and you get AHV paid through this stupid job. The wealth you have is then tax free for AHV no matter how high it is.
Ha, good point that CH is probably not really FIRE ready, especially if you think not only about AHV contrib but also the status of being “private” or “professional” investor to be able to live off your investments…
But I guess that also in other European countries there will be lot’s of unclear borders about living off from investments and that state not to pretend taxes from you…
Anyway back to your consideration about “stupid job” I’d like to add that I doubt such a job is easy to find and keep, no? I mean either it’s a real job that somehow defeats your “freedom” of being early retired or I can hardly imagine it to be easy to find one where you can work for almost no effort and them to keep you… no?
To my opinion it is not so difficult. Two of my colleagues applied this technique while retiring at 60 (not really FIRE). A company is reluctant to hire a technical specialist on an unlimited contract with a salary cost of CHF 150’000 per year. But a professional with 30 years experience, on a limited part time contract that will cost this year only CHF 30’000 it is a much easyier decision to take and an opportunity not to miss for a small size company.
there’s this official website to get an estimate on the AHV pension: http://acor-avs.ch/requerant - only with real numbers can one actually see the real effect of voluntary payments
they do adjust older income with some factory (not sure what exactly, but likely inflation dependent) - nevertheless a gap year with age 64 reduces the pension by the same 2.22% as does a gap year with age 51 (even though, ok, the income of age 51 does get inflation-like compounding to some extend - but I’d doubt it would match what you can get in the stock market). So one could come up with a hack where you calculate the marginal additional pension depending on the voluntary payment and if that margin drops below acceptable, you’d stop. So let’s say you conclude that in your case 5 gap years make sense. Then you could opt to put those gap years at age 51-55 and instead invest that money into VT, instead of having the gap years at age 60-64. Just saying it might turn out marginally favourable. Someone should do a simulation of this shit.
Am I misunderstanding something?
“Assets and annual pension income multiplied by 20”
If you were to multiply assets by 20, then it would suffice to have 420’000 CHF in assets to get kicked into the top bracket.
I assume you take the assets + 20x Income. What is the income? Dividends etc?
I revamp this old thread to get an understanding about how much your ‘non working’ contributions are valued, as the OASI retirement calculator only allows to enter actual salaries.
In your example, how much would your yearly contribution of 3’638 get valued for the rent calculation ? Would it be transformed in some ‘equivalent salary’ dividing by the total tax (employee + employer) of 10.6% ? So something like 3.638 / 0.106 = 34’320 CHF / year ? Or are there other rules ?