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Retirement planning - looking beyond age 50

Taking care of your pension in time to live your retirement to the full In Switzerland, the pension system is based on three pillars: public provision (1st pillar), occupational provision (2nd pillar) and individual provision (3rd pillar). This system leaves plenty of room for private initiative and optimization. If you make use of this leeway and start planning your retirement early enough, you can look forward to it with peace of mind.

For most people, retirement is a major turning point in life. It affects leisure time, relationships with partners, finances, social status and many other areas.

No one knows what retirement is, but it is possible to prepare for it by learning from others and anticipating the new life to come.

Financially speaking, it is useful to plan your retirement in good time, as it is still possible to optimize your pension provision a few years before retirement. The Swiss pension system gives you plenty of room for manoeuvre in this respect.

The three-pillar system 
The Swiss pension system is built around three pillars: public pension provision, occupational pension provision and individual pension provision. Public pension plans are compulsory for all, while individual pension plans are optional. Employees earning an annual salary of CHF 20,880 or more are obliged to take out occupational pension insurance, while the self-employed are free to do so if they wish.

In principle, the 1st pillar - the public pension scheme - covers basic needs. The 2nd pillar, or occupational pensions, are intended to maintain the usual standard of living after retirement. As for the 3rd pillar, individual pension provision, it helps to fill any gaps.

Benefits from the 1st and 2nd pillars are generally not enough to maintain the usual standard of living.

The 1st pillar: public pension provision (AVS/AI)

The 1st pillar includes old-age and survivors' insurance (AVS), disability insurance (AI) and supplementary benefits (PC), paid in certain cases. The AVS is Switzerland's most important solidarity scheme; it came into being in 1948 and has been revised ten times since its inception.

The AVS was designed to compensate for loss of income due to age or death:

• The old-age pension enables insured persons to retire from working life with financial security.
• The survivors' pension prevents the death of a spouse or parent from leading to insurmountable financial difficulties for the survivors.

The AHV is a compulsory insurance scheme. All adults living or working in Switzerland are insured. Swiss nationals working abroad can take out voluntary insurance to avoid gaps in their contributions. Children and people not in gainful employment, such as students, invalids, pensioners and housewives, are also covered by the AVS.

The AVS is financed on a pay-as-you-go basis: contributions paid by the working population are immediately used to finance current pensions. However, for many years now, the gap between contributors and pensioners has been widening, as the proportion of older people in the total population continues to rise. In the long term, demographic change is threatening the AHV system in its current form, to the extent that the retirement age may have to be raised sooner or later.

AHV benefits do not represent colossal sums and only guarantee the minimum subsistence level. Old-age pensions are calculated on the basis of years of contributions and average annual income. At present, the maximum annual pension is CHF 27,840 for a single person and CHF 41,760 for a couple. The
minimum pension corresponds to half the maximum pension.

To find out how much pension you will be entitled to, you can order your individual AHV account statement at
www.ahv.ch
If you are over 40, it will be sent to you free of charge.

Maximum annual AHV pension:

• 27'840 CHF for single persons
• 41'760 CHF for couples

The 2nd pillar: occupational pension provision (BVG)

Pension funds have been in existence for over 100 years, yet occupational pension provision remained optional for a long time; it was only incorporated into the Federal Constitution in 1972, to form the 2nd pillar of old-age provision. And it wasn't until 1985 that the "Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans" instituted the compulsory 2nd pillar.

Occupational retirement provision is based on the following principle: a portion of income - representing between 3.5% and 9% of the insured salary, depending on the age of the person concerned - is credited to an individual account instead of being paid directly to the employee. The employer pays into this account an amount at least equal to the employee's contribution. The individual account is thus topped up every month by between 7% and 18% of the insured salary, depending on the employee's age group.

The money invested in this account over the years constitutes the retirement savings capital, which earns interest at the BVG minimum interest rate. Currently, in 2011, this rate is 2%. When you retire, you can withdraw this capital as a lump sum, or ask for it to be converted into a life annuity. For further details, please see page 18 of this brochure.

In contrast to the AHV, the 2nd pillar is not a solidarity scheme; in principle, everyone saves for themselves. Employees aged 17 or over must be insured with a pension fund through their employer, if they pay AVS contributions and earn at least CHF 20,880 a year. Until January 1 following their 24th birthday, employees who pay BVG contributions are only insured against death and disability; thereafter, they start building up their retirement assets.

The persons listed below are not subject to the compulsory occupational pension scheme:

• the self-employed,
• employees with a contract of employment of no more than three months,
• people who work on a farm and are members of the farm owner's family, and
• people who are at least 70% incapacitated according to the AI.

For higher incomes, the salary is not fully subject to compulsory insurance. The part of the salary above the maximum BVG/LPP amount, which is CHF 83,520, is called the over-compulsory part and is not subject to any legislation. You will find full details of the extra-mandatory portion of your retirement capital in your pension fund regulations.

The benefits paid out by the pension fund and the AHV are intended to ensure that insured persons maintain their accustomed standard of living after retirement. But due to the many changes that have taken place since the introduction of the BVG, this objective is rarely achieved today.

The return on retirement savings, for example, has been significantly reduced. The conversion rate, which defines how much of the accumulated retirement savings is paid out to policyholders each year in the form of a pension, has also been lowered. When the BVG was introduced, this rate was set at 7.2%. But as the population ages, it is to be reduced to 6.8% by 2014. This small difference in rates is not without consequences: for an old-age savings of CHF 400,000, the annual pension was CHF 28,800 with the initial rate, whereas in 2014 it will be just CHF 27,200.

Maximum annual pension under the mandatory BVG scheme: around CHF 27,000.

The 3rd pillar: individual pension provision

If 1st and 2nd pillar benefits are not enough to maintain your usual standard of living, you can fill the pension gaps - at least in part - with the 3rd pillar.

Individual pension provision comes in two variants:

• Pillar 3a, also known as tied pension provision, comes with tax advantages: you can deduct the amount paid into Pillar 3a from your income, and thus achieve tax savings of up to CHF 2,000. A reduced tax rate is applied to subsequent withdrawals of Pillar 3a retirement capital. However, there is a limit to the amount that can be transferred to Pillar 3a each year.
• Pillar 3b, also known as free pension provision, is more flexible, but offers no tax advantages. Pillar 3b includes all forms of private savings other than Pillar 3a: savings accounts, cash, various savings and investment products, life annuities, home ownership, valuables, etc.

Pillar 3a saves up to CHF 2,000 in taxes per year.

"It's imperative to include your partner in your planning."

Why plan for retirement when the law has provided for everything?
Bruno Kaufmann: There are many things you can and should prepare for yourself, starting with the following aspects: do I intend to take early retirement? How do I manage the transition from working life to active retirement? How can I organize my time wisely when the time comes? Should I withdraw the assets I've saved with my pension fund in the form of an annuity or a lump sum?

When should I start planning my retirement?
Ideally, from the age of 50. At this age, children have generally come of age; needs are no longer the same, there's still time to fill any financial gaps and, generally speaking, you enjoy a stable professional situation, and therefore a comfortable income. The self-employed, on the other hand, need to start thinking about retirement as soon as they set up their business, at least from the point of view of succession planning.

How do you plan for retirement? What do you need to pay attention to?
It's very important to always include your partner in your planning. Talk to a specialist pension advisor, who will look at your occupational pension options: can you make a purchase to increase your retirement assets? Can you afford to request a lump-sum payment or consider early retirement? What will be the amount of your retirement pension and your partner's pension in the event of your death?

What steps can you take now to improve your financial situation in retirement?
There are several possibilities. The first is to buy back years of insurance with your pension fund, which offers tax optimization benefits, improves your retirement pension and may even facilitate early retirement. Building up a Pillar 3a tax-advantaged personal pension plan is another solution. But the most important thing, in my view, is to make savings at your own level: eliminate overinsurance and double insurance, and reduce costs, for example by increasing the deductible on your health insurance.

Planning for retirement: taking charge of your future in ten steps

Three pillars, capital withdrawal, pensions, retirement assets - it all sounds very complicated. In reality, however, it's not that difficult to plan financially for retirement. Here's how to do it in ten steps.

1. First of all, start your planning by determining the budget that will be used to cover your day-to-day expenses during retirement. Think about the projects you'd like to realize later, your future lifestyle and the financial and health risks you'll have to assume. Also consider your personal wishes, such as major investments in your home.
   
   Let's assume that your current expenses in retirement amount to CHF 80'000 per year.
2. To find out how much annual AHV pension you will be entitled to, request an individual account statement from your AHV compensation fund.
   
   The pension is capped at CHF 27,840 per year.
3. Contact your pension fund to find out how much BVG pension you will receive each year.
   
   In this example, we assume that the BVG pension amounts to CHF 27'160 per year.
4. To determine your annual pension gap, calculate the difference between your current expenses and the pensions you'll receive from your pension fund and AHV.
   
   80'000 CHF - 27'840 CHF -
   27'160 CHF = 25'000 CHF.
5. Now you can estimate how much capital you'll need at age 65 to close your pension gap. Assuming an average life expectancy of 85 years, you'll need to bridge your annual pension gap for 20 years to raise the required capital.
   
   20 x CHF 25,000 = CHF 500,000 (required capital).
6. Calculate the amount of capital you have today (effective capital), i.e. the assets you already own. Bear in mind that your capital is interest-bearing until you retire.
   
   Sum available today: CHF 200,000. Thanks to interest, this capital will rise to CHF 260,000 by the time you retire (effective capital).
7. Take the difference between effective capital and required capital to determine your capital needs and how much you'll need to save until retirement to then meet your current expenses.
   
   500'000 CHF - 260'000 CHF =
   240'000 CHF (capital needs).
8. How long do you have to save the missing capital?
   To find out, deduct your current age from your retirement age.
   
   65 - 45 = 20 years.
9. You can now calculate the amount you need to save to cover your capital needs.
   
   240,000 CHF in 20 years =
   12,000 CHF per year or 1,000 CHF per month.
10. Compare the amount you need to save with your financial resources. Will you be able to save enough between now and retirement to raise the necessary capital? If not, you have several options for optimizing your budget. The first is to limit your spending after retirement, to reduce your annual financial needs. Another option is not to retire until the age of 67, which gives you more time to close the pension gap. Alternatively, you can reduce your current expenses to save more money until retirement. Perhaps you'll find on your own other ways to optimize your investment strategy and achieve a better return.

Build wealth quickly and use it with peace of mind

Planning your retirement lets you know how much you need to raise to enjoy your retirement free from financial worries. But you need to start building up the necessary assets as soon as possible, and think about the best investment for the period after you retire.

In most cases, income from the 1st and 2nd pillars only covers 40% to 60% of the last salary received before retirement. If you want to maintain your usual standard of living in retirement, you need to build up additional capital. The earlier you start saving, the better, as the effect of compound interest increases over time.

Yield or security
When it comes to investments, there are no big gains without big risks. Unfortunately, no investment instrument can escape the law of the risk/return ratio; an investment cannot guarantee high income while offering maximum security.

Similarly, there is a conflict of objectives between liquidity and profitability: investments available at short notice are often synonymous with lower income.

The interplay between yield, security and liquidity involves constant trade-offs. In any case, choosing the optimal form of investment depends on your personal needs; there are no universal investment strategies that are optimal for everyone.

Rarely anyone can take the risk of losing their old-age capital in financial investments. If you're investing money you'll need for retirement, security must take precedence over return; only take high risks with capital you can afford to lose in whole or in part.

If you're hesitating when choosing an investment for your retirement capital, opt for security, even if the return has to suffer. On the other hand, as you approach retirement, choose investments that favor security, because the more time passes, the more valuable your assets become.

Naturally, it's frustrating to bet everything on security and see people around you making high profits on their investments. But the financial crisis has shown us that a sharp rise always conceals a high risk of fall.

A skilful blend of yield, security and liquidity.

Building up capital with Pillar 3a

When you want to build up assets for retirement, it's usually worthwhile first to exploit all the possibilities offered by Pillar 3a - tied pension provision - since it comes with tax advantages.

You can deduct the annual amount invested in Pillar 3a from your taxable income. Later, when the capital is withdrawn, not the normal tax rate applies, but a reduced rate.

However, a Pillar 3a investment is subject to a number of restrictions:

• The amount you can contribute each year is limited; currently, in 2011, this amounts to CHF 6682 for salaried employees insured under a pension fund, and CHF 32'832 for self-employed people.
• You can withdraw the accumulated capital no earlier than five years before ordinary retirement, unless you move abroad, start a self-employed business or buy a home.

In principle, a Pillar 3a investment solution can take two forms:

• a banking solution, or
• an insurance solution.

With the banking solution, you pay money into a 3a account and benefit from a preferential rate. There are also 3a accounts linked to investment funds, which allow you to participate in the performance of a fund. These accounts offer attractive casco return prospects, but the risks are correspondingly high. You decide how much to invest each year.

As part of the insurance solution, you also benefit from protection: part of the annual premium is used to cover the risks of disability and death. In the event of death, the insurer pays the agreed sum to the beneficiaries. If you become unable to work, the insurer pays the premiums. The lump-sum payment is made when the policy expires. However, the security features of this solution limit the return. As with the banking solution, you can also choose insurance products linked to investment funds.

The choice of one or the other solution will be dictated by your personal situation and plans. You can also combine the two solutions by opening a 3a account with a bank and taking out a 3a savings policy with an insurance company. The total amount invested in either solution must not exceed the maximum deductible amount.

Build up capital with pillar 3b
Don't want to submit to the restrictions of pillar 3a? Then you can invest as you wish in Pillar 3b. The so-called "free pension plan" may not come with any tax advantages, but it does offer a great deal of freedom. It offers a wide choice of banking and insurance solutions, from complex structured products to "bas de laine" and life insurance of all kinds.

Payment into pillar 3a: capped at CHF 6682 for salaried employees.

Diversify your investments
As every type of investment has its advantages, but also its disadvantages, it generally makes sense to diversify your investments by multiplying the forms of investment.
Let's take an example:

Each year, you invest CHF 3400 in a classic life insurance policy and pay CHF 3166 into a 3a bank account linked to investment funds. In terms of the "magic triangle" formed by yield, security and liquidity, this gives the following:

• Yield: pillar 3a linked to investment funds and the resulting tax privileges offer you good yield opportunities.
• Security: life insurance guarantees you a one-off payment of a sum fixed in advance, which you can benefit from at age 65, for example.
• Liquidity: you are free to determine at any time the sums paid into the 3a account, up to the maximum legal amount; should you need a little more available money in a given year, you can simply reduce your payments.

Near retirement, security is key

The closer you get to retirement, the more security-oriented your investments should be. In the years leading up to retirement, gradually reallocate heavily yield-oriented investments into investments that emphasize security.

What to invest in after retirement?

Once retired, most people move from a capital-building phase to a capital-consumption phase, i.e. they start living off their savings. During this period, it's particularly important to find the right balance between returns, security and liquidity for your investments.

At this stage, however, liquidity becomes increasingly important, as you need cash to meet current expenses. This affects your investment options. Some lucrative investments allow you to secure a higher return by locking in your capital over a certain period, but you'll suffer significant losses if you were to be forced to withdraw it before its time.

How much cash do you need?

Make sure you can always meet your fixed expenses, such as housing costs, food, etc. You should also plan for the possible purchase of a new car or heating system, should this prove necessary.

When choosing an investment, therefore, think carefully about how much money must remain available.

Experts recommend always providing a safety mattress by setting aside in a bank account around six monthly salaries, before investing your capital in one of the many financial instruments existing on the market.

A proven strategy for capital consumption is to invest your money after retirement in "compartments" with different investment horizons (short, medium and long term); part of your capital will thus generate an attractive return, while the other part will be available quickly. The amount invested in each instrument and compartment again depends on your personal situation.

After retirement, invest in short-, medium- and long-term investments.

Are your investments safe?

Each investment product has a unique positioning within the magic triangle; the characteristics of return, security and liquidity vary greatly from one product to another.

While bonds are reputed to offer a high degree of security, it is advisable to invest only in corporate bonds deemed solid by the rating agencies.

Equities, on the other hand, are subject to very wide fluctuations in value. The share price of a public limited company that becomes insolvent can even fall to zero!

The current crisis has shown that investments in seemingly safe investments are not immune to losses in value. Some major companies have not been spared by massive price falls, or have even gone bankrupt.

A bank account does not offer foolproof security either, since banks too can find themselves in a state of insolvency. The Swiss Federal Law on Banks and Savings Banks has, however, instituted "depositor protection", whereby funds deposited in a bank enjoy privileged treatment up to a maximum of CHF 100,000 (currently) per customer and per bank.

In the event of the bank's bankruptcy, depositors recover their funds up to this maximum amount, and have priority over all other creditors. Assets in excess of this amount are assigned to third-class claims. The CHF 100,000 limit applies to each customer, not to each bank account.

Special circumstances apply to state-guaranteed banks: most cantons guarantee the liabilities of their cantonal banks, including deposits in excess of CHF 100,000.

Things are a little different for insurance companies. The insurer must guarantee claims arising from life insurance contracts by constituting so-called tied assets. In the event of bankruptcy proceedings, life insurance policies guaranteed by tied assets are not dissolved, but transferred to another insurer or to FINMA, the Swiss Financial Market Supervisory Authority.

Life insurance offers a high degree of security.

Investments: the five golden rules

1. Don't be over-ambitious
   Don't harbor illusory hopes of returns; be satisfied with poached gains and don't regret missed opportunities.
2. Be determined
   Do I buy or not? There's no return without making a decision. Don't be too rash, but be determined.
3. Patience is golden
   Don't always be "effervescent"; impatience can lead to rash behavior. Especially in times of crisis, you sometimes have to say to yourself, "Let's wait and see."
4. Diversify your investments
   Even if you think you've found the best deal, don't put all your eggs in one basket: opt for diversified investments.
5. Acknowledge your mistakes
   If you've made a bad decision, know how to acknowledge it, otherwise you'll correct your mistake too late and lose even more money. One of your stocks is starting to fall and doesn't seem to want to stop? Don't waste any more of your money by buying more shares.

"You should check every five years to see if an investment is holding up."

How can you achieve high returns with low risk?
Beat Lang: It's virtually impossible. If you want your capital to generate a substantial return, you have to be willing to take high risks.

What are the big rules of investing?
All investments operate within the magic triangle of investing, which involves return, security and liquidity. When planning for retirement, we need to bear in mind that we're moving from a wealth-building phase to a capital consumption phase; we can afford to take greater risks in the first phase than in the second. Sometimes, I advise opting for investments offering 100% protection, and investing the gains thus obtained in more aggressive investments.

How do we know which form of investment is best suited?
We determine with our clients their willingness to take risks and their ability to assume them. To this end, we use a questionnaire, which we ask them to complete. To build up capital, I generally recommend taking out endowment insurance with guaranteed interest, i.e. a pillar 3a or 3b solution. This type of insurance includes risk coverage for the partner. It is also possible to choose products linked to investment funds, which offer slightly higher return opportunities.

How often should you review the orientation of your investments?
It all depends on the nature of the investments. For long-term investments such as equities, it's best to maintain your strategy over the long term, except perhaps in the event of sharp fluctuations. Roughly speaking, you need to check every five years or so whether the investment is holding up. This means taking the time to seek professional advice before making a decision, and above all, not changing the new strategy too quickly, as any arbitrage will incur costs.

Retirement before its time?

The aging of the population in Switzerland is accelerating. One of the likely long-term consequences of this is an increase in the retirement age. Yet few Swiss want to work longer: early retirement is a widely-held dream. A dream that can become reality if you plan ahead and fill the pension gaps in good time.

Goodbye stress and marathon meetings, free time and jogs in the forest. Many people find the time until the "big final vacation" a long time coming. Surveys have shown that around three quarters of Swiss people dream of taking early retirement.

In fact, almost 50% of people in gainful employment in Switzerland leave the world of work prematurely; 30% take early retirement three years before the ordinary retirement age, 20% one or two years before.

Many of them can afford it ... but many even have to.
At first glance, these figures may come as a surprise, as early retirement comes at a cost. Retiring early means forgoing a salary and seeing your old-age pension seriously dented.

But the financial argument seems far from discouraging, at least for the better-off. Statistics show that the higher the retirement capital accumulated in the 2nd pillar during working life, the more likely early retirement is.

When talking about early retirement, we shouldn't forget that there are also many cases of forced early retirement. Around a third of those taking early retirement had to stop working due to health problems, company restructuring or downsizing.

All in all, around a sixth of employees in Switzerland take early retirement against their will. Many find themselves at a loss when faced with this unexpected destiny, especially as financial concerns often outweigh the happiness that this new freedom brings.

The tendency to retire early from working life and the high number of forced early retirements show that it pays to worry early enough about the financial consequences of early retirement, whether or not you've considered the possibility.

One in six working people takes early retirement against their will.

How much money do you need? How much can you count on?

What exactly does worrying about early retirement mean? It means that you should start thinking about your retirement from working life and taking stock of your financial situation no later than your fifties. This will give you enough time to close any gaps in your pension provision.

AVS: significant benefit reductions
If you wish, you can apply to draw your AVS pension one or two years before this age. In this case, as it is statistically estimated that the duration of pension payments is longer than if you were to retire at the ordinary age, the annual pension is reduced. The reduction amounts to 6.8% per year of anticipation.

According to the 2007 pension register, barely a third of women received their AHV pension one or two years earlier, and only 8% of men. This means that the majority of people who take early retirement do not receive their AHV pension until they reach ordinary retirement age, in order to avoid a reduction in their pension.

When applying for an early pension, you must normally continue to contribute to the AHV until you reach ordinary retirement age; the minimum contribution is CHF 475; the maximum is CHF 10,300 per year.

If you wish to receive your AHV pension early, you must apply to the relevant AHV compensation fund. You should apply at least three months before the due date. You can find the address of your compensation fund at
www.ahv.ch

One-year early retirement: OASI pension reduced by 6.8% for life.
Pension funds: the situation varies from case to case

Pension funds can tailor their early retirement models as they see fit. Contact your pension fund to find out whether it offers early retirement. Some pension funds compensate for the absence of an AHV/AVS pension with a bridging pension, in addition to the early retirement pension. The bridging pension can be financed by additional contributions during working life; most employers pay half of the contributions.

Early retirement significantly reduces the pension. The pension fund pays you a certain percentage of your retirement capital in the form of an annual pension. This percentage - known as the conversion rate - and your retirement capital are significantly lower in the case of early retirement than in the case of ordinary retirement.

• The pension fund reduces the old-age pension because when it pays an early pension, it incurs a shortfall in earnings because the employer and employee no longer make contributions and there is no longer any interest generation; it must then finance more pensions with lower contribution income. The pension reduction is 6 to 7% per year of anticipation.
• Policyholders build up around a quarter of their total retirement capital during the last five years of gainful employment, as this is often the period when their salary is highest and their contributions are therefore the highest. In addition, the effect of compound interest weighs a little more heavily each year.

Filling pension gaps
The pension gap resulting from early retirement can be filled in a number of ways. For example, by finding a good investment for your own assets. It is also possible that your employer will pay you a severance package to facilitate your early retirement.

Don't forget that severance packages are taxable. If, in the opinion of the tax authorities, the severance payment is a pension benefit, the preferential tax rate for pension benefits applies. Otherwise, it is taxed as replacement income, along with your other income.

The reduction in the pension fund annuity is 6% to 7% per year of early retirement.
Early retirement: your checklist

1. Around the age of fifty, decide when you want to retire.
2. Contact your pension fund to find out if early retirement is an option
   at your desired date.
3. Think about the lifestyle you intend to adopt in retirement. Draw up a realistic budget that takes all expenses into account, and don't forget about risks such as illness that could lead to high medical costs.
4. Ask your AHV compensation fund to provide you with an individual statement of account, and contact your pension fund to find out the amount of your retirement assets.
5. Check with your employer to find out if they pay transitional pensions in the event of early retirement.
6. On the basis of your budget, calculate the amount of the income gap.
7. Take stock of your assets: real estate, account balances, 2nd and 3rd pillar pension funds, securities, life insurance, shareholdings, foreseeable inheritance, etc.
8. Calculate the amount of additional capital you need to close your pension gap and consult your pension advisor.
9. If you wish to withdraw your retirement assets in the form of a lump sum, inform your pension fund of your decision within the stipulated period. As far as AHV is concerned, you should assert your rights approximately three months before you retire.

Postal codes served:

1977  1978, 3978 , 3975, 3971

• 1977 Icogne, 1978 Lens, 3978 Flanthey, 3975 Randogne, 3971 Chermignon
• In the center of Crans resort