How to integrate second pillar in your net worth

Posted on Categories Budget, FIRE, Goals, Investment, Switzerland
How to integrate second pillar in your net worth

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 results. I just was too lazy before to do it.

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.

Adding my second pillar to my net worth

Before the how let’s see the why. 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.

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:

Net Worth Graph April 2018
Net Worth Graph April 2018

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 it will make for a better reporting.

Asset allocation

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 a 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:

Asset Allocation April 2018
Asset Allocation April 2018

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:

Asset Allocation Over time (April 2018)
Asset Allocation Over time (April 2018)

I have successfully reduced the amount of cash of the allocation. 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.

Conclusion

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.

8 thoughts on “How to integrate second pillar in your net worth”

  1. That is indeed an interesting article! I’ve now been thinking for a while, whether I should take my 2nd pillar into account while computing my net worth. Even though I only started working recently, it would account for a fews thousands…

    Basically, you are right, one should account for it in his net worth computation and accordingly I will take it into consideration in my next worth update ;) It shouldn’t even be an effort for since I can reach my second pillar statement in a few clicks!

    But then, if you account for it in your net worth, you should also take it into account when computing your saving rate, which will “artificially” boost your saving rate each month… This imply that you will include forced contributions (even the one of your employer) in your saving rate. Basically, your employer will contribute to your saving rate and the older you will get, the greater the portion of your total saving rate will be directly linked to the second pillar contributions.

    From an economic perspective, I do agree with you, it makes sense to account. But knowing that the total 2nd pillar contributions of my father amount to approx. 25% of his gross salary, I find it a bit flawed to consider this 25% as part of his saving rate :D.

    I still didn’t tackle the most important issue of the 2nd pillar, how will it look like in the future? Is it reasonnable to fully account for the 2nd pillar contributions knowing that the conversion rate (taux de conversion) might decrase in the future?

    Anyway, very interesting topic!

    1. Hi Mr. RTF.

      Good that you liked this article.

      I don’t think you should account for it on your savings rate. Otherwise, you’ll also have to account for increase or decrease of the net worth. Which you should not either. For me, the savings rate is simply based on income and expenses. The fluctuations of your assets should not be considered for this. I agree it is flawed. On the other hand, you are right that this will flaw the computation of the Financial Independence since you won’t take into account the increasing rate of net worth, but I think it’s fine.

      As for the future, I don’t know. I’m pretty sure the conversion rate will decrease even more until I am officially retiring (in 35 years, will also increase). If you are able to take your second pillar as a capital, you should not worry too much about this. However, some pension fund do not let you take out 100% in capital and the state wants to avoid people taking the capital out. I agree that it’s a bit optimistic to consider for the net worth completely in the computations. However, if in 10 years, the amount of my second pillar is reduced, I will simply change my computations and adapt my strategy.

      Thanks for the very interesting points you make :) I’m writing a series of posts on the three pillars, I’ll try to answer these questions.

  2. My second pillar would be social security. Unfortunately it might not be solvent by the time I retire. I also started a retirement account in 2018 i.e. Roth IRA. I would consider that my second pillar for now. It will be available to me tax free when I turn 60 :-)

    1. hi dividendgeek,

      If I’m not mistaken about USA, you social security is more related to the first pillar in Switzerland, since it’s not dependent on salary.
      The second pillar equivalent in USA would be a 401K I think. And Roth IRA would be the equivalent of third pillar b (3b).

      I do totally agree that there is a big risk for social security to not be solvent, even in Switzerland. And even the second pillar is not totally risk free. It’s in such a long time that I’ll be able to touch this money that it is quite possible that I don’t see it. For now, I prefer to be optimistic and hope to see my second pillar money. As for the first pillar, I don’t account for it.

      Good luck with your retirement plan

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