Voluntary 2nd pillar contribution / our story

Hey guys,

Sorry about the long post…
I read about FIRE in the newspapers someday, googled it and found out, that my SO and I somehow already pursue that lifestyle - but not because we wanted to become FIRE (we didn’t now about that concept), but because we had one big dream - our own proper house close to a bigger Swiss city.

We’re a married couple (mid-thirties) and started (properly, not zero at month-end) working after completing studies about 12-14 years ago. Since then, we never pushed our lifestyle after climbing the career ladder and were always a bit careful with spending money during these years as we dreamed of this house. The dream came true 4 years ago and we continued to live as we did before.

I was a silent reader of the blog (and other FIRE blogs) for a couple of months but now I have registered to this forum and would like to ask you for your opinion as we would like to successfully continue this somehow FIRE journey. But I need your opinion as our situation is individual due to a lot of our money being blocked with the equity of our primary home. Plus we do have no investments at all, everything else is in cash (side-story, I got burned in 2006-2008 where I lost 15k (out of my 30k savings) due to financial crisis and never invested anything again - some could think stupid, but in the end we had the money for our house). Here’s a quick summary of our current situation:

Total NW: 1.1 MCHF
Value primary home: 1.7 MCHF
Equity primary home: 690 KCHF (1/3 paid-off, no obligation to pay back)
Mortgage primary home: 1,05 MCHF @ 1,35% average
2nd pillar approx. 200K (not used for PH)
3rd pillars 2*30 KCHF (cash, used in 2016 as equity for PH)
Cash 150 KCHF
Approx. household income 260k before tax

And now to my question - instead of investing the cash or pay back the mortgage I thought of filling my gap I have in my 2nd pillar - which is approx. 150K - I thought of putting 3*50K into the 2nd pillar over the next three years - which would save us about 56 KCHF of taxes in total. Important to mention is, that my pension fund is quite nice as we get not only the usual 1-1,5% but an actual yield (was between 7 and 12% over the last years).
In the end that would mean - that 1 MIO CHF would be blocked in our primary home and the pension fund - which is not very helpful in achieving FIRE. What is your opinion on that?
I do not see any value in paying back the mortgage - and in case of need I would still be able to withdraw 3rd pillar again to reduce or to bond the 2nd pillar towards the bank. I also believe that markets are quite high atm - putting the money into pension funds bears no risk, at a minimum I always get 1%.

Many thanks for your opinion.

Best regards
FIRE-evening

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Too good to be true.

Keep in mind that minimum BVG/LPP interest rates and conversion rates won’t apply to non-mandatory benefits.

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Well, that is how it is - somehow, I’m not a 2nd pillar specialist but recalculated it for last year where we got 9% - it was nearly 12k I got in addition. There were years where we only got 1,5% though… working there since 10 years.

Thanks for the hint - that must be true with the non-mandatory benefits, however we always got more than the 1% over the last 10 years.

Congrats on your path! You seem to know what you want and to be on the path for it, I’d guess at most we can point out were you might have blindspots, though you don’t necessarily have any.

I’m seconding San_Francisco, any chance you could get some feedback on what the returns on your plan were during the 2008 crisis? What I’d also check is the coverage ratio of your pension fund. If it’s over 100% and you don’t need the money for 3 years, putting it in it should be safe, though you may get lower returns in the future.

Other than that, I’d assert how attached to the concept of FIRE you are now that you know of it. If you are interested in retireing early, I’d ponder a bit more before locking more of your net worth in non-liquid assets. If you’re happy at your job or fathom your career as leading to self-employment, then buying back second pillar amounts makes sense (the amount you buy back is still locked for 3 years so that’s to be taken into account).

Another thing to keep in mind, if you are considering self-employement, is that you can’t use your second pillar if your plans evolve and you want to partner with someone right at the start. Keeping your net worth more liquid may broaden your options.

Whatever you do, I’d still keep enough on the side that you and your spouse feel comfortable in the next few years. The unforseen tends to happen in unforseen ways, life can get tough if all your net worth is tied to your home and retirement assets. I’m guessing you’re having a high enough savings rate that those 3x50k wouldn’t be all your available money but I’d reconsider if they were.

Thanks Wolverine for your valuable feedback and your thoughts - I need to think about this - especially the “to have enough on the side”. I will also ask for some information on how the returns were during 2008. The coverage ratio of the pension funds is currently at 122%.

Just a bit more information (as you assumed, I’m already attached to the concept) :smiley: I calculated saving rates and everything in accordance with Mr. RIPs template… so our saving rate is currently at around 51% (after tax) on a monthly basis, not considering 2nd pillar contributions and also no bonuses - we had savings of around 90-100k / year for the last 2-3 years. So I think we should be in a position to compensate for “missing cash” going forward + we would save the 50K in taxes which gives some liquidity.
In addition - mortgages are to be re-negotiated in 2026 - so bringing money into 2nd pillar in 21/22/23 would still allow us to withdraw it in 2023 as 3 years would be over by then.

Thanks

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That’s the part that makes me think that your bet is rather safe: if you plan to keep that house or move to another with a similar value, then paying into your 2nd pillar is effectively very similar to paying off your mortgage. I’d not hesitate too much if you like where you live, don’t need to move for kids in the future and feel your job is safe.

It’s still worth drawing your path to FIRE before committing to it. You’ve got most of the year for it so you are in a really good spot for that.

ETA: I’d say your biggest impact risks at this point are divorce/separation, then loss of income. The latter is worse if your income comes from only one member of your couple and could happen through disability/death rather than unemployment. I’d also check the risk coverage part of my 2nd pillar(s). Your home being reassessed at a lower value, forcing you to pay off a good chunck of your mortgage at once, would be another of the risks you are being exposed to.

Buying into a Pension fund is often a good idea, but requires quite a bit of due diligence beforehand. Namely:

  • How long will you likely stay in this company (can we calculate based on this Pension Fund or do we need to assume an „average“ pension fund
  • How long will your salary remain at the same tax level (buying can be very lucrative to break high taxes between mariage and a child reduced income reduction)
  • Whats your mandatory vs. extramandatory savings percentage (do you truly get better age benefits or are 80% mandatory so far and new investments only help the pension fund to cover the true cost on the mandatory part but you don‘t get a „real“ benefit as all your investments get lost in the „holistic“ conversion rates)
  • What retiree vs active ratio does your pension fund have (there are pension funds with hardly no retirees and very low mandatory benefits. On these cases, your pension return doesnt get dilluted with retirement losses)
  • What asset allocation does the pension fund operate with and how close to the benchmark are they; is the asset return adequate from a risk/return point of view
  • What technical interest rate and conversion rate does the Pension Fund apply; this will alow to validate what the coverage ratio of 122% actually means (122% can be super good or terribly bad, depending on the other two parameters)
  • How do payments into the pension fund inform death or disability benefits (especially if not married; some pension funds make you lose all your optional payments upon death)
  • Do you have enough non Pillar 2 Assets to fund Pension without ever buying back the Home Ownership take-out; paying back home ownership can become extremely expensive and I would plan in that you will fail to do it given the wrong incentives. So only do home ownership if you never intend to save taxes b investing into the pension fund again

Truly, its hard to make a sensible advice based on one post only; best is to either dig into the materials yourself or to ask a financial advisor.

As long as there are no alarm signs on the above, I would in your case probably invest 20k p.a. In your pension fund but not the entire 50k.

Re this one:

There are employers that don‘t retire people. Ever seen a 65 year old Googler that celebrated an ordinary retirement? These companies are hardly not restricted by conversion rates. De-facto, the only point that genuinely matters to them is that they need to have sufficient coverage ratio to absorb a bad year. Once the coverage ratio is there; they can give you clise to equity returns; but after a massive downer you may expect that pension interest will be lower again until the coverage ratio is back to sensible levels. If the corp then has deep pockets and as part of employer branding decides to fund some re-couping of coverage ratios; you are good and at a very much direct investment like return.
Clearly, there is a different wuestion on what we think about such anti-social employers that violate the social contracts and by doing so undermine stability and return of other pension funds; but thats a different topic.

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Damn… my company neither retires people nor uses any high returns pension fund, nor allows higher contributions…

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Thanks all for your valuable feedback. The 2nd pillar topic seems more complex than initially thought… I reached out to them and asked for some additional feedback and got the following answers:

  • Regarding conversion range - it is dynamic based on your retirement age - for me it is currently 3.95% of the estimated fund - so if I increase by buying in, this is going to be considered in the calculation and would show/potentially result in a higher pension.
  • Regarding death: payments that were made additionally (buy-in) are tracked as a separate capital and would be paid out separately independent from any rents, which is a benefit for my wife
  • They currently calculate with a technical interest rate at 1,5%
  • In case of a financial crisis like 2008 - only the “BGV minimum” would be “safe” in terms of interest - they decide on the interest rates on an annual basis (which is always applied to all the capital). I checked the report, in 2007 it was 2.5% and in 2008 it was 1.5%. If we look at it since then it was always between 1.5 and 9%. So the risk here would be in case of a crisis, that I will only get 1.5% or less for the full capital.

To answer some of your other questions:

  • The house is newly built and most likely currently undervalued with 1.7M according to our bank and a recent estimate, so we do not see a big risk here. The house is perfect, no need to to worry about the future.
  • Regarding disability/death - we have a death benefit insurance that could cover the mortgage. Risk coverage of my 2nd pillar is very reasonable, especially considering that mortgage would be covered by the insurance - so, nothing to worry about.

The question is more - what could be other options for that capital instead of putting it into the second pillar considering the tax benefit. Putting 60k into the 2nd pillar would bring us 22k of tax benefit for 2021 - that is an “interest” of 36%… I’m quite reserved, similar to Mr. RIP, when looking at the current prices and all those all time highs… somehow looks like in 2000… and I would be careful to start investing into ETFs now.

Maybe a little bit into crypto? ;-D (I’m an IT guy)

Thanks for your advice,
Best regards
FIRE-evening

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Nothing is risk free, tying up your money in a “safe” 1% return risks missing out on much higher returns.

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I would assume there is a high probability you will move to another employer before retirement. If that happens you are supposed to transfer your 2 Pillar to their scheme and the returns are likely to be lower than current

Thanks Barto - absolutely agree that nothing is risk-free and missing out of higher returns is a risk especially if you want to become FIRE :slight_smile: . I think it is not about a decision for good but more for now because I believe it might not be the right time to do the initial investment today due to current market prices… The second thing is also that I need to have it safe until 2026 that it allows me to pay back my mortgage in case of need… if there is a crash in 2024 and I lose 30% of it - that could be an issue…

How did you calculate the 234’375? I thought it might be even less…

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That’s really stretching the traditional meaning of risk (and risk free) in finance though :slight_smile:

I think the statement was correct that pension investments bear a low amount of risk (maybe not risk free but close to it).

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You are right. If you put 150k into your 2P and your marginal tax rate is 36% you would have a 54k reduction in your tax bill. So the starting amount should indeed be lower: 204k and not 234k

Just to showcase complexities of BVG. The Pension Fund MUST give you a 6.8% Conversion Rate on your mandatory part. On the Extra Mandatory, they may give you anything but a negative one. So when your Pension Fund states that your conversion rate was 3.95% (which is remarkably low btw) this actually means that your Pension Fund will give you
— 6.8% on your Mandatory Part
— X% on your Extra Mandatory Part
— X is set so that the total among both pots equates to 3.95%; but X was at least Zero

Based on this, something exciting happens. If your Mandatory Part is larger than 58%; X would in theory be below Zero. AsX must not be below 0, you therefore get a higher effective conversion rate than 3.95%.

If you in such situation invest into your Pension Fund (and as investments generally go to the extra mandatory pot)… your effective conversion rate gets reduced with every franc you invest. So you only benefit from higher pension as your share of Mandatory Money is below 58% as this will allow for a positive X. Once you are at 58%, the conversion rate on the marginal, additional franc invested is 3.95%; but until you reach 58% its zero.

Hence my recommendation; either do your own homework (which takes a substantial amount of time) or ask a pension advisor. But please don‘t just give up; pension investments are among the most lucrative ones, so definitely worth the time and energy but its just not an effort free Lunch.

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You are correct of course.

The point I am trying to make is that most people do not consider the opportunity cost of putting their savings in a low volatility / low return option at a young age

Over a 20 or 30 year period the risk of investing in the stock market is greatly reduced.

The biggest “risk” in my area of work is being made redundant in your 50s when it is difficult to find new employment.

But should also take the risk of not being able to handle the extra volatility. I don’t think everyone handles well seeing half of their NW disappear over a few days/weeks :confused:

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I agree. The reason I commented in the thread is that most people in society are not aware of this trade off nor how huge an impact compound returns can have. I am not implying that is FIRE-evening’s case

Coming back to FIRE-evening’s question, ideas you might consider:

  1. Forecast wealth in the future in excel based on future savings and investment return from the 2 different choices
  2. Drip feed fixed amounts into the stock market to address your concerns of investing at the peak

Currently my mandatory BVG part is 30% of the overall sum I have in my 2nd pillar. If I buy-in, it will be even less. I calculated based on your thoughts that the current extra mandatory part has 2.7% conversion rate currently (if the BGV must have 6.8%). However, I don’t know if this calculation is correct.

FYI the conversion rate is fixed based on age group and retirement age and not dynamic in a way as you described it. Additional capital that comes due to buy-in is also used for rent payments and included in the total capital. However obviously you’re correct by stating that the conversion rate changes… it is because the ratio between the pot changes… however currently if I would buy-in 150k, the conversion rate of the extra mandatory part would increase to 3.4% because the total amount also changes but the BVG amount doesn’t.
Seems to be complex… but I’m not in the mood to spend money on a pension advisor… :wink:

I was reading this older post. Wonder what @FIRE-evening you ended up doing?

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