Withdrawing 3rd pillar accounts to reduce mortgage shortly before selling?

Real Estate
43

It’s all good.
I think @Cortana needs to decide whether he likes flexibility or 10K when retiring.

But the point @PhilMongoose made is also worth considering. If you know that everyone would retire at some point in life, then why not park some money if you know for sure that it would be a bit better than not parking it in tax advantaged account

I also would suggest to think about what is the use case of flexibility

  • unplanned events (worth to have flexibility)
  • Buying house (possible with 3a too)
  • Market timing (not worth it to have flexibility)
1 Like
44

I can understand the opposite view. I had the same view when I was younger: keep it all liquid, I don’t trust the government etc. etc. At that time retirement was far away and abstract. Money was tight.

Later on in life, retirement is not so abstract. You are further in your career and have more money than you know what to do with.

You look back and wonder what if you had invested fully into pensions. Throughout the dotcom crash. through the 2008 financial crisis. Through covid. All in a nice tax protected wrapper with a tax rebate. and i think, damn - i’d be retired already!

4 Likes
45

and whether the existing liquidity is already enough to cover the unplanned events (and whether some should be covered by insurance).

1 Like
46

My last point before this is getting too off topic: This is a forum where early retirement (or at least being financially independent) is the target, so 65 years for retirement is not anyone’s target here. So, let’s assume you concluded that you need three million CHF to be FI, and you expect to reach this at 45 years.

Would you prefer (strongly simplified without doing actual math):

(A) One million freely invested which you will be forced to use-up during the initial 20 years of retirement, and two million that you receive at 65 to use from then on, or

(B) Three million freely invested and available at 45 years old, which will be having a negative impact if you do the math (especially due to higher AHV contributions), but with which you will not see your available money dwindle towards zero over the initial two decades.

I would clearly prefer scenario B just for the psychological aspect of it. Just as much as I would withdraw the 3rd pillar now in @Cortana’s case because you don’t know what’s going to happen in the coming decades. My whole argument here is: The math/scenario is only ever giving you an indication, there are always soft factors to consider too.

PS: I fully trust the government, and I fully support aggressive buy-ins into 2nd and 3rd pillars (the initial tax discount is just too good). But whenever you have the option to get that money back, you should take it.

1 Like
47

I guess the question is whether this is just an ‘irrational’ psychological comfort (like having a paid off home) or a real concern. I wonder what scenarios you have which involve burning your 142k of liquid funds in scenario A and then still needing to burn through another 48k.

Isn’t the 142k already enough of a psychological buffer?

48

I think your scenarios are not quite right and in a way that matters.

Firstly you can withdraw 3A at age 60 (or earlier if you are a woman) so you are looking at 15 years instead of 20.

3A is typically small compared to total retirement assets. Let’s say you contributed 8k per year for 25 years into 3A and it doubles in size. Thats 8x25x2 = 400k.

So the realistic scenario is more like:

A) 2.6 million freely available at 45 and receive 400k at age 60; or
B) 2.95 million (assuming loss of 50k due to tax inefficiency) freely available at age 45.

2 Likes
49

This is actually exactly where my idea is coming from. The fact that I want to retire as soon as possible (50 at the latest) and feel more comfortable having a bigger portion outside retirement accounts. Gives me more flexibility and full control of those assets (you never know what increasing poverty in old age might do to retirement account regulations politically).

But as shown from @Abs_max there is a 11k penalty for doing so. Plus an additional 3-4k due to increased AHV contributions (Nichterwerbstätigenbeiträge). So one could argue that having those 50k now as liquid assets will cost me 15k in retirement assets. From a purely financial viewpoint it makes absolutely no sense withdrawing 3rd pillar accounts (if not necessary) before 60.

50

I want to adjust the numbers based on my reality. As I work for a bank I can’t use IBKR, so I have increased costs there. But I would invest it in VTI (not VT) and adjust the geographical allocation in the invested retirement accounts. Assuming I retire at 50 and withdraw it at 60.

Case 1: Keep money in 3a
Investment size 50000 CHF
Capital gains 4%
Dividends 2%
TER 0.40%
Wealth Tax 0%
Dividend Tax (@0%) 0%
Eff yield 5.60%
Investment in 27 years 200’120 CHF
Lumpsum tax 6.70%
Final value 186’710 CHF
Case 2: Withdraw and Invest in ETFs
Withdrawl amount 50’000 CHF
Lumpsum Tax 3.08%
Investing costs 1.00%
Investment size 47’960 CHF
Capital gains 4.5%
Dividends 1.5%
TER + custody account fees 0.20%
Wealth Tax 0.18%
Dividend Tax (27%) 0.40%
Eff yield 5.22%
Investment in 27 years 183’680 CHF
Additional AHV contributions -4’000 CHF
Lumpsum tax 0.00%
Final value 179’680 CHF

AHV contributions are just an estimate as I don’t know the exact asset volume I’m going to retire with. But the total cost of flexibility is actually closer to 7k in my example.

What also comes to mind: What if in the 2nd scenario I do a 2nd pillar buy-in right before retiring and then transfer it to a vested benefits account where I can invest it tax-free again? I couldn’t do that with 3a assets (it would just be a normal transfer without tax benefits). Then the additional AHV contributions aren’t a thing anymore and also the lower effective yield. Should I account for such an option too @Abs_max ? Or is this just mental accounting and not a real thing as I could use assets outside 3a as well?

I think it‘s mental accounting so there is no real buy-in tax benefit in the 2nd scenario. But the effective yield is higher, so I need to adjust those numbers above down to 17 years and ignore AHV completely. It might come very close.

51

I have a question
Why are you using VT in 3a calculations while VTI in taxable account? Because if you want VTI in 3a, you can also do that. Isn’t it?

Assumption -: I am assuming 3a doesn’t restrict you to buy US only funds. I don’t know for sure because I never did that myself

I think for all practical purposes , given the flexibility of finpension, you can have exactly same allocation as VT or VTI or CHSPi inside 3a as you can in your taxable account.

Best would be to use same numbers of Capital gains and dividends in both cases to have Apple to Apple comparison

52

At the time of retirement, your assets would be much more than what you have in 3a account. So if you want to use funds to optimise 2a contributions, you are not really limited to use 3a funds. This scenario would only be applicable if your total assets restricted you somehow to use your “free funds”.

I still think that having flexibility is not a problem. Only thing that I wanted to make clear was that flexibility comes with a cost.

53

Don’t underestimate the potential of pillar 2 buy-ins if you have a progressive career and a decent pension funds. Just assuming you will have enough other liquidity to use the full potential may be rather ambitious. Also, if you want to further complicate the mental accounting: Our parliament is currently considering allowing additional 3rd pillar buy-ins. Who knows how that ends, maybe you can take out the money now and buy-in to close that “gap” you create a few years down the road again.

1 Like
54

I think that might be a loophole I could use.

Because I want a specific overall geographical allocation and I also use retirement accounts to optimize taxes by chosing geographical regions with higher dividends. That‘s why I only have VTI in my custody account. Rest of the world is covered by retirement accounts. Example: You want 70% US and 30% exUS.

  • 50k taxable 100k 3a accounts: 50k VTI, 3a with 45% US and 55% exUS
  • 100k taxable 50k 3a accounts: 100k VTI, 3a with 10% US and 90% exUS

It‘s how I reduce my dividend taxes.

55

This goes to my recycling point. If you wouldn’t have enough cash in the future to fully pay into your pension what you want, and you can recycle the 3a cash to pay into the pension, then this could be a benefit. I suspect this is not really the case.

Esp. since you made it a point about flexibility, and sticking the funds back into a pension locks it right back up again!

On the one hand 7k is not very much. On the other hand, it is 14% of the 50k you are withdrawing! So you pay 7k to have 43k of additional liquidity - but the liquidity only during the next 17 years when you are working (when you probably least need it) and not the 10 years between retiring when you don’t have a job but before you get your pension.

56

I see
I understand. This is why you adjusted the dividend portion to simulate that while keeping the total gains equal in both cases.

Got it. And it makes sense.

57

What I‘m also doing: 85-90% VTI and 10-15% UPRO to get some leverage (1.2-1.3x) and higher returns. Which worked quite nicely so far. I can‘t do that in my 3a accounts. This should even offset the tax advantages with 3a investing.

After sleeping an additional night over it and the discussions here I think I‘m going through with my plan. But I wouldn‘t recommend it in general. It‘s a unique situation and in the end it comes down to flexibility and risk appetite.

2 Likes
58

Sounds good. In the end what matters is that you have the full picture and you make full use of options you have

2 Likes
59

It also made me realize what the perfect plan would be for retirement. Lets assume I want to retire at 50. I would do 2nd pillar buy-ins between 45-50 (by selling ETFs) and then transfer my pension fund to 2 vested benefits accounts. Those vested benefits accounts would be solely invested in bonds (or a small stock portion depending on the overall asset amount).

That way one would gradually decrease the overall stock allocation (lets say from 100% stocks into a 70/30 retirement portfolio) and profit from huge tax savings (I’m talking about 100k/year or maybe more buy-ins for 5-6 years). Probably 100-200k in tax savings there. Plus less assets outside retirement accounts with all the benefits we discussed (tax-free coupons/dividends, less wealth tax, less AHV contributions).

60

Makes sense. I’m doing the same thing. This is year 2 of my pillar 2 buy-in. I just hope that I’ve got the guts to pull the trigger by year 5!

I do worry about sequence of returns (from a psychological perspective) so it would be ideal for me if the recession hits now and stock market tanks so I can get that out of the way and start retirement on a stock market upswing).

2 Likes
61

As per common advise, it’s wise to buy into 2a before retirement to optimise tax. Of course what matters is savings from marginal tax vs. Lumpsum withdrawal tax.

In your case it would be same but would be a 2 step process and should work out the same way but it only works if you actually do retire early and can move money to VZ.

  • buy into 2a
  • remain invested
  • Pay lumpsum tax at withdrawal
62

Makes sense if you keep working in same company. If you change jobs at 45, would you transfer a fat second pillar to new job and proceed with buy-in at new pension fund or already put the second pillar into a VB, and simply start a p2 from scratch to new company. In the latter case, it may be tricky to do buy-ins in your new pillar 2 account while having VB outside and potentially undeclared to your new pension fund.