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Eight mistakes to avoid when it comes to retirement planning

If you want to be financially secure in old age, you need to plan early – and consider a few more things.

Jörg Marquardt

First mistake: underestimating money requirements in old age

In retirement, you will have to make do with less income: the state and occupational pensions cover only about 60% of your last salary. Many people ignore this or believe that the expenses in old age would be lower. They often forget that the purchasing power of pensions decreases from year to year. In addition, the tax burden in old age is underestimated because work-related deductions are eliminated. Therefore, you should create a post-retirement spending budget early on and determine your monthly financial needs. You then set this off against expected income from OASI and the pension fund. If the financial requirement is higher than this, a coverage gap is created.

Second mistake: building up assets too late

With private assets, you can usefully supplement state and occupational pension plans. Compared with conservative financial investments such as gold or bonds, equities offer significantly higher potential returns. But for this type of investment you need time. The compound interest effect, which comes into play when the income from an investment, i.e. interest and dividends, is reinvested, is crucial for stock market success. The longer your investment horizon, the more pronounced this effect will be. People aged 40 and over are best off investing in equities. Even regular, smaller amounts are worthwhile. If you invest 50 Swiss francs a month, in ten years – with an average return of 8% – you will have built up a balance of around 9,068 Swiss francs.

Third mistake: not paying into Pillar 3a

With the third pillar, you make private provisions for your old age. In doing so, you can benefit from tax advantages. Thus, all amounts paid in are deductible from taxable income. In 2023, all gainfully employed persons who are affiliated with a pension fund will be able to pay up to CHF 7,056.00 into Pillar 3a. The capital is tied up, which means that apart from a few exceptions (for example, the purchase of residential property), you do not have access to it until five years before reaching the regular OASI retirement age. If you want to increase your earning potential over the long term, you should invest the money from your retirement account in a pension fund. The proportion of equities can be selected according to the personal risk profile.

Fourth mistake: not buying into the pension fund

A break to look after children or part-time work, but also an increase in salary, may result in a pension gap: a difference between what you could have paid into the pension fund and what you have actually paid in so far. Voluntary contributions to the pension fund can close the gap. This not only improves the financial situation in old age, but also saves taxes: the payments are deductible from taxable income on the tax return. How much you are allowed to pay in is determined by the amount of the coverage gap. Whether and to what extent purchases into the pension fund make sense should be assessed based on the health of the pension fund and your financial situation. The maximum possible purchase is shown on the pension fund statement you receive each year. If there are significant gaps, it is worth staggering purchases over several tax periods to break the tax progression. However, the additional taxes when withdrawing the capital from the pension fund should then not be higher than the tax savings as a result of the payments.

Fifth mistake: ignoring gaps in OASI

In order to receive a full pension, you must not have a gap in OASI contributions. This means that women must pay OASI contributions without gaps from the age of 21 until the age of 64 (from 2024 until the age of 65), and men from the age of 21 until the age of 65; even if they are not currently gainfully employed. For each missing year, the pension is reduced by 2.3%. A gap can be caused, for example, by several years of study or a longer stay abroad. You can pay the missing OASI contributions later – but only within five years. To keep track of your OASI and any gaps, you should order a free social security account statement every four to five years. All contributions relevant for the calculation of the OASI pension are recorded in it.

Sixth mistake: having only one 3a account

Taxes are incurred when pension assets are paid out from Pillar 3a. The higher the assets saved therein, the higher the tax rate applied (with the exception of some cantons that apply flat-rate taxes). To break this increase, you should withdraw the 3a funds in stages over several tax years. But for this you need several 3a accounts. It is not possible to have only partial amounts paid out (except in the case of an advance withdrawal to finance home ownership). If you have saved up assets of around 50,000 Swiss francs, it is worth opening a second account. There are no legal restrictions that would prevent you from opening additional accounts. However, some cantons limit staggered withdrawals to a certain number of accounts and impose taxes for additional Pillar 3a withdrawals.

Seventh mistake: underestimating real estate costs

If you own a flat or a house, the question arises whether the mortgage can still be financed after retirement – or whether the property may have to be sold. It is therefore important to clarify the affordability and the maximum loan-to-value ratio of the property at an early stage. Regular fixed costs (interest on debt, any amortisation, ancillary costs) should not account for more than one-third of disposable income. You can permanently reduce the mortgage debt through (partial) amortisation. Important: if possible, amortise the mortgage indirectly by offsetting it against the 3a capital at the end of the term. In this way, the interest on debt is deducted in full for tax purposes over the entire period. Repayment of the mortgage from Pillar 3a funds is permitted every five years.

Eighth mistake: not preparing a financial plan

Retirement changes your personal situation – and with it your financial goals and needs. An individual financial plan can help to create an optimal foundation for retirement planning. Only if you set the right course early on can you exploit the full optimisation potential. To do this, contact your local bank to prepare a financial plan together.

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