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I have monitored my net worth since October 2017. But until now I have not considered my second pillar into it. Why? Because I do not get a monthly report on my second pillar. However, I do not really need this monthly report since I can extrapolate from the yearly values. Before, I just was too lazy to do it. But laziness is not an excuse, especially for personal finances!
So, I decided to stop being lazy and do it. In this post, we are going to see why you should integrate your second pillar into your net worth. And we are going to see how to integrate it. It is very simple. And it will make your net worth calculation much more accurate. I believe it is very important to have an accurate view of your net worth.
If you do not know your net worth, first take a look at how to calculate your net worth. I strongly encourage everybody to compute his net worth. It is an important indicator, especially if you want to become financially independent.
Why add the second pillar to the net worth
Before we see how to do it, let’s see why you should do it. Why would one want to integrate the second pillar into the net worth? One could argue that you cannot take it out before retiring. And it is also possible that we may not be able to take it out as a capital at all in the future. Nevertheless, it is your money!
Even if you do not take it out as a capital, it will grant you a pension. This pension will help you in retirement and as such should be part of your retirement plan. Another good reason is to have a complete picture of your assets! The only way to have a good idea of your asset allocation is to take all assets into accounts.
How to add your second pillar to your net worth
Now, to the how! A the beginning of the year, I receive my second pillar report. This report is telling me how much money is inside and how much I would get if I were to take it out. This document contains a lot of numbers and is different from each pension fund. In my case, the number I am using is, pardon my french, “Prestation de sortie effective au 31.12.XXXX “. This is what I would get on that date. For instance, using my 2017 pension fund report, I can know how much I had at the 31.12.2016.
To get the monthly information, I am extrapolating between the numbers of two years. This gives me a monthly update. And for the current year, I am simply using the same extrapolation in the future. Once I receive the next report, I will simply update my net worth backward.
My pension fund company decided to send the report only mid-year, this year. I have to extrapolate values of 2018 from 2017 report. This is not an issue since the actual values will be higher than the extrapolation. It is better to underestimate assets rather than overestimate them.
Update: Since I have started working at a new company, I now have an online report that is updated every month. Like this, I have an even more accurate view of my second pillar value.
My net worth
Enough about that, show us your net worth!
Alright, my last second pillar value is 22’701.80 CHF at 31.12.2016. Once you extrapolate, I have an estimated 31,993.00 CHF as of April 2018. Which makes my net worth 88,421.66 CHF.
Since I have not been tracking my net worth for long. I have also integrated the monthly second pillar values up to the beginning of October 2017. So my net worth graph does not have a big jump. As you can see here:
If you change the way you are computing your net worth, you should probably change it for all your net worth values over time. It could take some work. But this will greatly improve the quality of my reporting.
Not only do I now know more correctly what is my net worth, but I also have a better view of what is my net worth made of. Since before I did not include the second pillar in my net worth, I only had a view on some of my assets. When I was taking a portfolio decision, I was taking a decision based on partial information. Obviously, this is not good. Now, I can make decisions based on the full view of net worth.
My current (will soon change) pension fund is quite diversified. It has a significant percentage of bonds, cash, and real estate. And also a small number of domestic and international stocks. For the sake of simplicity, and because these pension funds are quite safe for now, I will consider it as 100% bonds. It is not totally correct of course but is enough for me to have a full view of my assets. This gives me the following current asset allocation:
Recently, I have purchased some bonds for my portfolio. I am now realizing that I have much more bonds than I thought when taking my second pillar into account. Therefore, I will have to review my portfolio again soon. I made the mistake of not considering the big picture when adding to my portfolio. For now, I do not need any bonds in my investment portfolio. The bonds in my second and third pillars are more than enough.
We can look at my asset allocation over time:
I have successfully reduced the amount of cash in my net worth. However, I also need to reduce the allocation of bonds. For instance, I still have too many bonds in my third pillar. This is because my third pillar is invested in three different PostFinance funds (25, 45, 75). As soon as the 25 and 45 parts are earning again, I will reinvest them to the 75 plan.
As you can see, your second pillar is best considered as bonds. That way you can safely take investment decisions based on a complete view of your net worth. If your second pillar does not give you a monthly report, you can easily interpolate the numbers for each month. That way, you will not have a big bump at the end of the year. It is very important that your net worth reflects your entire situation.
Now that you (and I) know a bit more about me, I would be very interested to know how you compute your net worth? How do you keep track of your second pillar?
I am not the only one computing my net worth in such a way. I was inspired by Mr. RIP’s way of computing the net worth. But you can also find out how MP from Mustachian Post is computing his net worth.