How to retire early in Switzerland?

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How to retire early in Switzerland?

Many people want to retire early! The Financial Independence and Retire Early (FIRE) movement is taking in a lot of momentum. But, few people want to retire early in Switzerland. So, is it even possible to retire early in Switzerland?

I believe it is possible to retire early in Switzerland. But for that, you need to know the differences between Switzerland and other countries. Since most FIRE people are in the United States, we need to know what changes here. It is necessary to see if it is possible and how to adapt to it.

Even though it is possible, I think it is more difficult to retire early in Switzerland than it is in the United States. But some people, including me, could not retire in another country than Switzerland. I would rather continue working my whole life than have to move.

In this post, I am trying to see whether it is possible to retire early in Switzerland. And also, how can we retire early in Switzerland?

Financial Independence in Switzerland

Becoming Financially Independent in Switzerland is not much different from becoming FI in any other country. The concepts remain the same:

  • You choose a withdrawal rate. It is how much you will withdraw each year, based on your initial portfolio. You must choose a withdrawal rate according to your situation (portfolio and life expectancy). You can base this on your current expenses if you are far from retirement.
  • You compute your target net worth (FI Number). It is your annual expenses multiple by 1/WR.
  • You accumulate this amount in your portfolio. Every month, you save money into your portfolio. And ideally, you invest it to make it grow faster than inflation.
  • Once your actual FI net worth reaches your target net worth, you are Financially Independent.

Now, Financial Independence is mostly discussed for the United States. This makes sense. It is where the movement started. And this is the only country for which the math has been down as to whether this will work. To start at its roots, you can read about the Trinity Study.

Now, there is no reason to believe that this is not possible in Switzerland. This is just pure mathematics.

But, you need to account for the differences between Switzerland and countries where FI has been shown to work. This is true for any country. And actually, you should even consider your local region in big countries. There are some things that will change based on which country you want to retire in.

The retirement system

The retirement system of Switzerland is based on three pillars. All of them are solely useful for official retirement. You will have to wait until the official retirement age to get any of that money. You can also use it to buy a house or start a business. But that is a story for another article.

Once you retire early, you will stop contributing to the second and third pillar. You need a salary to do both these things. This means that you cannot deduct it anymore from your taxes. At this time, you will not receive any money.

Once you reach retirement age (65 for men and 64 for women, at the time of this writing), you will receive money from the three pillars:

  • The first pillar will give you a pension.
  • The second pillar will give you either a pension or a lump sum depending on your choice.
  • The third pillar will give you a lump sum. Since it is optional, not everybody will have a third pillar account.

The good thing is that once you reach retirement age if you worked many years, you will receive either a very nice pension and/or a very nice lump sum. For most people, what they receive from the three pillars is enough to live forever. For this, we have a good retirement system in Switzerland. However, if you have a higher lifestyle, you will need more than the retirement system.

So, the biggest challenge for retiring early in Switzerland is to cover for these years between early retirement and official retirement.

During these years, you will not receive any help from the government. This means you need to rely solely on your withdrawals from your portfolio. You can only have cash and bonds and stocks in your broker account. Or you could rely on some income from real estate properties to lower your effective withdrawal rate.

The difficulties of retiring early in Switzerland

I think there are quite a few difficulties in retiring early in Switzerland. This needs to be taken into account when planning to retire early in this country.

High Cost of Living

Many things are expensive in Switzerland, such as dining out
Many things are expensive in Switzerland, such as dining out

The main difficulty in retiring early in Switzerland is the high cost of living. If you want to become financially independent and live from your portfolio, you will have to accumulate very large net worth.

The high cost of living also has the disadvantage that real estate is very expensive. Many people that retire early in the U.S. own their houses. And for most of these people, their house is paid in full. In Switzerland, it is more efficient to keep a mortgage than to pay it off. Otherwise, you will significantly increase your expenses. And most people rent in Switzerland. If you want a nice house in retirement, you may have to pay a large amount each month. This will increase how much you need to accumulate.

Net Worth Taxes

Compared to some other countries, another disadvantage is that we pay net worth taxes.

Therefore, the more money you accumulate, the more you will have to pay in taxes. This means, once again, that you will have to account for quite some taxes, even in retirement. In some countries, you will almost not pay any taxes in retirement.

Taxes on dividends

Another thing that is not great about retiring early in Switzerland is that we have to pay taxes on dividends.

Once you are in retirement, we will receive a significant amount of money in dividends. And this will be counted as income. You will pay taxes on these dividends as if it was income. It means that we will pay more taxes in Switzerland than in other countries for retirement.

This is also the reason why dividend investing is not as good in Switzerland than in it is in the U.S.

The retirement system

The retirement system in Switzerland is made for people that work until the official retirement age. So, after you retired early, you cannot contribute any more to your second and third pillar.

On the other hand, you will have to continue paying for the first pillar, based on your net worth. Once you reach retirement age, you will receive your second pillar and third pillar. If you retire 20 years before this age, you need to make sure that your primary net worth will not be exhausted before you receive this money.

Small stock market

Most people in the U.S. invest mostly in U.S securities and bonds. Some also have a small allocation to international stocks. If we try to do the same in Switzerland, that would mean we have a large allocation to Swiss stocks, some Swiss bonds, and a small allocation to international stocks. There are a few issues with that approach.

First, historically, Swiss stocks have not performed as good as American stocks. They performed well, but not great.

Second, Swiss bonds are currently in a terrible place. They currently have a negative yield. So you will lose money by having Swiss bonds.

Also, Switzerland is about 2.5% of the world stock market. This is tiny. It is not great diversification to own such as large allocation to Swiss stocks. So, we need more international allocation.

That means we will have a large portion of our portfolio in foreign currencies, most likely U.S. dollars. This means we need to take exchange risks into account in our planning.

Health System

I think that the health system in Switzerland is really a burden for early retirees. In some countries, it is included in taxes. And once you retire, you will pay fewer taxes. In Switzerland, however, you will have to pay for your health insurance until you die.

And health insurance is not cheap. On the contrary, it is really expensive and its price increases year after year. Also, as you age, you pay more for it. And even though it is really expensive, it does not cover everything.

And it includes a large deductible (2500 CHF), that you need to be ready to pay. This means that even though you pay a lot of money to your insurance, you may well never get anything back.

So, you need to account for a large amount of money to be spent on health insurance in retirement.

Real Estate

The price of houses make it difficult to retire early
The price of houses make it difficult to retire early

There are two main schools of thoughts for retiring early: the house haters and the fully paid house people. I have nothing against houses. In the end, it is always up to you to decide which way you want to go. And this decision should not be driven only by your finances!

If you want to retire early in Switzerland, there are some advantages to owning your house. Given the current interest rate, you probably will pay less each month by having a house. We still have to consider the opportunity cost, of course. But over the long-term, you will have to accumulate less money for your retirement.

But the houses are very expensive in Switzerland. You cannot hope to find a house below 500’000 CHF.  And most houses will be more expensive than that. This makes it difficult to accumulate the money for the 20% downpayment.

Moreover, it is generally more efficient to keep a mortgage in Switzerland than to pay it off like in most countries. You can keep 65% of the mortgage for a very long time. You can pay it off of course. But in that case, you will increase your taxes since the mortgage will not balance your taxes anymore.

The advantages of retiring early in Switzerland

Even though there are many disadvantages if we retire early in Switzerland, there are also a few advantages.

Low inflation

One of the advantages in Switzerland is that historically, inflation has been quite stable. Lower inflation can significantly help when you want to retire. It will greatly increase the chance of your portfolio sustaining your lifestyle for a longer period.

No capital gains tax

Another advantage is that we do not pay capital gains tax. Now, this is only true if you are not considered a professional investor. But for normal investors, like you and me, this is very helpful. Since we are going to sell shares in retirement, it is very good to not pay capital tax gains on it.

Low Income Taxes

If you get some income in retirement from instance from your side hustles, the taxes on that income will be lower in most other countries.

We are lucky in Switzerland to have quite reasonable taxes. The tax system in Switzerland is fair. If you get a small income in retirement, you do not want to pay much taxes on it.

Stable country

Generally speaking, Switzerland is less impacted by recessions than other countries. This means the country economy and inflation will be more stable during recessions.

Of course, the Swiss stock market has a high correlation with the rest of the world. So even though it may be less impact, it will still be impactful.

Safe country

Switzerland is currently a very safe country. Most places in the country are extremely safe to live in, even in the night. This is one of the things I love about Switzerland.

Of course, there are some exceptions. There are some places I would not go to. But these places are well-known and are still relatively safe when compared with some dangerous places in other countries.

When you want to retire, you want to do so in a safe country. You want to be able to live in peace for a long time.

Why retire in Switzerland?

Isn't that a great place to retire early?
Isn’t that a great place to retire early?

I think that retiring early in Switzerland is more difficult than retiring early in the United States or in most European countries. This is especially true if you earn Swiss income during your working life and move to a cheaper country when you want to retire.

So, why retire in Switzerland?

Honestly, I could not imagine my life outside of Switzerland. I really love this country. It is really beautiful with its magnificent countryside. And it is a very safe and stable country. We have a very nice quality of life in this country. I really would not trade it for any other country.

I know that retiring in Switzerland will make it more difficult for me to retire early. But I would rather continue working more years and retire in a country I love than in another one. I am ready to pay the premiums for that. I also have the advantage to really like my job for now. So, it is not a big deal for me to imagine working for more years. But of course, this could change in the future.

How much do you need to retire early in Switzerland?

How much you need to retire in Switzerland is not an easy question.

As I said, your needs before official retirement will be higher than your needs after it. Moreover, your net worth will be different. You cannot count your third and second pillar into your FI net worth. This is only for computing what will happen before retirement age.

Keep in mind that this section only reflects my plan. I do not know anyone who retired early in Switzerland. This is based on math and the current state of the economy and the country. It may well be different in five years. But hopefully, by that time, I will have updated this post!

So, you will need to make two simulations: one before the retirement age and one for after. Unless you plan to retire very early, you will probably have a longer time in the second part.

Before Retirement Age

We have to rely solely on withdrawals before the retirement age. This means your expenses will be exactly what they are now. And this also means that your income will only be your income that is not your main salary.

The first basic idea would be to use the 4% rule or any other withdrawal for that period. But if you choose a correct withdrawal rate, you would ideally never exhaust your principal. So if you use twice the withdrawal rule, you will end up with too much money.

You could use a higher withdrawal rate for the period before the official retirement age. For instance, 5% would not be a bad idea for a period of 15 or 20 years. But then, you will have to compute a second period with a lower withdrawal rate for the official retirement. And if you double both numbers, your effective total withdrawal rate will be very low, and it will be difficult to accumulate such amount of money.

The important thing is that you should only consider the part of your net worth that is available. This should be everything but your second and third pillar. It would be wrong to run your numbers with these two components.

From that, we can get that you will need a large portion of your net worth in cash and investment accounts. This will have to get you through these years.

For me, I would estimate that I would need a minimum of about ten years of living expenses ready for the years between 50 and 65. During that time, my second and third pillar will continue to grow, and I will not make any withdrawal from them.

And of course, my entire net worth should be higher than my FI Number!

After Retirement Age

After retirement age, we can use the withdrawal rule.

You can now consider your entire net worth. You will have access to your second and third pillar at this stage.

You will need to choose a withdrawal rate for your situation. It will depend on how many years you plan to live (impossible to predict) and your portfolio returns (only possible to estimate). Since it is difficult to estimate these two, it is better to be on the safe side. I am aiming for a withdrawal rate between 3.5% and 3.75%.

Unfortunately, I cannot give you a formula for your withdrawal rate. You will have to run simulations. I am currently working on a withdrawal rate calculator that should be useful for that. In the meantime, you can take a look at the Trinity Study Results. This will mainly depend on your risk tolerance.

Since you are officially retired, you will receive a pension from the first pillar. If you have a large enough salary and have paid every year, you will receive 2350 per month — this is 28’200 CHF per year. A married couple could receive up to 3525 CHF per month. (42’300 CHF per year).

It is very important to know that this could change before you retire. It could even disappear. If you believe you will receive this when you retire, you can remove it from your yearly expenses. You also need to consider that you may not get this amount if you retiring in another country. If you are Swiss, you will always get this amount regardless of where you retire. However, if you are not Swiss, it will from where you are and where you are retiring (Source).

Once you know your withdrawal rate and your yearly expenses, it is really easy to know how much you need. You need to divide your yearly expenses by your withdrawal rate in percent (0.04 for 4%).

With the first pillar, we would need about 20’000 CHF to cover our expenses. With a 3.5% withdrawal rate, this would give us 560’000 CHF to accumulate. Without the first pillar, this would give us 1’736’000 CHF. As you can see, the first pillar can make a huge difference.

This computation is not entirely exact since you need to account for taxes on the pension. And your retirement expenses are likely to be different from now. But it is already a good estimation.

I think we will still have a first pillar pension when I retire. However, I think it could be lower than now. Moreover, I would like to account for some more risks. I would only account for half of the first pillar. The closer you are from retirement, the more confident you can be of whether you will receive it or not.

With half of the first pillar, we would need about 1’148’000 CHF net worth. This seems reasonable to be able to retire at about 50 years old.

The Complete Picture

Now, let’s consider the big picture. There are several important things you need to think about if you want to retire early in Switzerland.

First, you will need a significant amount of available money for the years before official retirement age. These are the years where you cannot count on any of the three pillars of retirement.

Then, in official retirement, the first pillar should cover a good part of your expenses. It means that the expenses that you need to cover from your net worth will be significantly lower. In practice, this means you need to accumulate less money. And starting from that point, you can also account for the second and third pillar.

Finally, you need to be careful with the usual withdrawal simulation. These are based on the U.S. stock market and inflation numbers. They could be different in Switzerland. I would simply use a lower withdrawal rate in Switzerland.

All things considered, we can simply use the withdrawal rule. We just need to make sure to not rely too much on the second and third pillars. And we need to account for the local returns.

Conclusion

I think it is entirely possible to retire early in Switzerland. It is probably not the country where you can retire the earliest. But, you may have a great retirement in this country.

As you saw, there are many things you need to take into account. But once you do, the principle remains the same to retire early in Switzerland. It is not rocket science!

And if you live a frugal life and have a good salary, it should not be too difficult to reach these numbers. It will take some dedication, of course. But most people do not realize how much they could save by cleaning up their budget.

To retire early in Switzerland, I would recommend reading about Taxes in Switzerland.

If you want more inspiration, I recommend this great post by Mr. RIP, my favorite Swiss blogger.

What about you? Do you think it is possible to retire early in Switzerland? Did I forget anything?

Mr. The Poor Swiss

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.