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The previous three posts of the series covered the three pillars of retirement in Switzerland:
- The first pillar: A state pension for everybody
- The second pillar: An occupational pension for retired workers
- The third pillar: A private pension to complete your retirement
In this final post of the series, I am going to summarize the entire system. I am also going to talk about how early retirement works in this system.
It is very important to
If you are interested in early retirement, you have seen that none of the three pillars covers it. You can withdraw the second and third pillar only 5 years before retirement. Currently, this means that you can withdraw money at 60 years old. But early retirement means retiring earlier than 50. Some people even retire before 40. If you plan to retire earlier than the legal age in Switzerland, this will not help you a lot.
But, the current system is still helping for early retirement. While the three pillars may not cover your expenses after retirement, they will cover most of it. If you have invested enough in the second and third pillar, you should be covered. That means you only need to save for the years between early and official retirement. I say, but it is not easy. But after official retirement, you will have new income (first and second pillar) and new savings (third pillar). Also, since you get tax advantages, you will be able to save more before you retire.
But you will have to pay the first pillar for these middle years. Indeed, you are entitled to pay it until your official retirement age. And it is based on your net worth. So, if you accumulate a lot, you may have to pay significant first pillar fees each year. However, I do not think this is a large problem.
If you are not interested in early retirement, you can focus mostly on the three pillars. If you want to retire early, you should focus on both the three pillars and on saving money to cover your expenses for several years. You will need an investment portfolio in order to cover expenses for many years.
The three pillars system
Personally, I like the retirement system in Switzerland. Of course, it is not perfect. But I do not think any retirement system is perfect. Overall, it is pretty good.
Let’s start with the good. It is somewhat flexible. You have many choices for the third pillar and some choices for the second pillar. It is somewhat fair. The first pillar is socially fair. Indeed, the rich will pay significantly more than what the poor will receive. And they will not receive significantly more. It forces you to save for retirement. The first and second pillars are forced savings. This means that everybody will save at least something. With this, everybody will have at least something. This is a good thing in my opinion.
Only the basic part is mandatory. Those that want complete coverage, can use second pillar buy-in and a third pillar. There are tax advantages. Contributions to both the first and second pillar are tax-advantaged. This encourages people to save money for retirement. Your employer is contributing. This is also really good. Your employer will match your contributions. Moreover, your employer could also offer you a very good pension plan.
Areas of improvement
Now, let’s see what could be improved. As I said, it is a good system. But it is far from being a perfect system in my opinion.
It is too complex. It took me over 6000 words to cover all the details in the first three posts. And I did not cover several things such as divorce, death, foreigners or self-employment. While doing my research, I learned a lot. I had to gather information from many sources. In my opinion, it could be simplified. Or at least, there should be a complete source of information. Moreover, the biggest issue is that it depends on each state. There are big differences from one state to another.
One thing that is really missing is the ability to invest this money in the way you wish. I am talking here about the second and the third pillars. For the third pillar, you have the choice of retirement funds. However, we should be able to choose index funds ourselves for both these pillars. This would lower the expense ratios, especially for the third pillar. This would also improve the returns, especially for the second pillar. This should definitely be an option.
Finally, another issue is that you contribute more and more as you age. This makes it less interesting for early retirement. Moreover, the first years should be the one with the biggest interest compounding. And therefore, it would be interesting to contribute more in the first years.
Three Pillars Strategy
Let’s recap the main things about the three pillars to get the most out of it.
For the first pillar, there is not a lot you can do. Depending on your life expectancy, you could choose to take it early or take it later. This could significantly change the pension you are going to receive. But of course, nobody knows its life expectancy. So this is only an educated guess.
As for the second pillar, there are a few things you can do. If you are still working, you can try talking to your company about increasing your contributions. This could be interesting to reduce your taxes and increase your safe allocation in your portfolio. You can also do voluntary contributions to your second pillar for the same reasons. When you are not working, you need to make sure that your second pillar is in the best second pillar provider there is.
Finally, for the third pillar, you have a bit more freedom. You need to make sure that you are contributing the maximum every year. This is very important. Then, you need to make sure you are using the best third pillar provider. This is very important if you want your third pillar to be invested. For most people, the best way to invest in a third pillar is to invest in a third pillar in a bank, not in life insurance.
That should cover the basics of each three pillars. If you want the details, you can read again the other parts of the series!
Finally, here is my current strategy regarding the three pillars:
- First pillar: Nothing to do, simply continue to pay for it
- Second pillar: I plan to do some buy-ins starting next year if my budget allows it
- Third pillar: I plan to move all existing money in PostFinance 75. Once that amounts to around 25’000 CHF, I plan to create a second third pillar. I may do a term life insurance for couples since my state has some tax-advantages to it.
Here it is. I think I have covered pretty much everything important about the three pillars system. I hope this will be helpful! If you live in Switzerland, it is important to know these things.
You need to make the best use of these three pillars if you want to retire properly in Switzerland. They are even more important if you do not plan to retire early. They will really be the pillars of your retirement!
What about you? What do you think about this retirement system? Do you have any question for this system? Do you have any tips to optimize your retirement?