How can I estimate my financial needs for retirement and plan my savings targets accordingly?
Are you approaching retirement age and wondering how to ensure your financial future? Did you know that, according to a survey carried out by the newspaper Le Temps, the Swiss are more concerned each year about the level of their future retirement income? In 2022, 59% were concerned, compared with "only" 50% in 2020. To approach this new stage of your life with serenity and avoid unpleasant surprises, we advise you to set your financial goals for retirement by anticipating your needs. In this guide, we explain in simple terms how to go about it and the essential factors to consider.
Drawing up a realistic budget
To plan your budget, start by taking stock of your current expenditure and projecting it to the time of your retirement. To help you do this, you can refer to the Swiss consumer price index. According to the Federal Statistical Office, the consumer price index has risen by almost 12% in 20 years.
Start by dividing your budget into 2 main categories: fixed and variable costs.
Examples of fixed costs:
- Rent or mortgage.
- Insurance
- Tax
- Household cleaning
- Meals
- Telephone/TV/Internet
- Travel (subscriptions, fuel, vehicle maintenance, etc.)
Examples of variable costs:
- Medical expenses
- Dental expenses
- Leisure (restaurants, outings, museums, recreational activities, etc.)
- Clothing
- Holidays
- Other (decorative items, gifts, interior design, etc.)
Providing for unforeseen expenditure
Once you've completed this exercise, remember to add in the inevitable contingencies because some major expenses arise unexpectedly and weigh heavily on your finances. These could include replacing your car or household appliances or installing auxiliary devices. In view of inflation and its long-term impact, systematically add a sufficient margin for each item.
What expenses will change when you retire?
Your projected budget is taking shape. Now, it's time to anticipate the changes after retirement. Certain expenses linked to your professional activity, such as transport costs, dry cleaning, and meals, will disappear. On the other hand, other costs will automatically increase with age. This is particularly true of supplementary insurance. LAMAL premiums have risen by more than 159% since 1996!
Because you'll have more free time, you may want to travel and enjoy more leisure activities. Statistically, these expenses tend to increase in the early years of retirement.
Determine whether your projections are realistic before considerably increasing or decreasing a given costs. For example, the costs of taxation are often higher than expected.
Anticipating the fall in your income
When you retire, your income comes mainly from the Swiss 1st and 2nd pillars, i.e. the AVS insurance and your pension fund. These generally correspond to between 60% and 70% of your final salary prior to retirement.
To determine the sum of your future AVS pension ask your cantonal compensation office for an advance calculation.
For the 2nd pillar, the pension fund certificate you receive each year shows the capital accumulated and the drawdown options available.
Add income from your assets (dividends, interest, annuities) to this basic income as well as any gainful activity after retirement. To do this, you must list all components of your wealth, whether financial (bank accounts, investments, life insurance, etc.) or real-estate (principal residence, second home, rental property, etc.).
Choosing early retirement
In Switzerland, the legal retirement age is 65. However, you could choose to take early retirement.
From a financial point of view, this is not a trivial decision, as it can lead to:
- A reduction in AHV income ranging from 6.8% to 13.6%.
- A fall in pension income or capital.
If you opt for early retirement, you must, therefore, have sufficient capital to compensate for these reductions in income.
Managing your capital at retirement
To manage your monthly costs, you need to decide whether you want to receive your 2nd or even 3rd pillar in the form of an annuity or a lump sum. This is another important decision.
- The choice of annuity: it is paid for life, which provides greater security. In the event of the death of a married person receiving an annuity their spouse receives a survivor's pension that cannot exceed 60% of the initial retirement income.
- The choice of retirement capital: receiving capital offers considerable flexibility in terms of financial planning. What's more, it is taxed at a reduced rate when it is paid out. On death, any remaining capital savings are passed on to your heirs.
As you can see, each option offers advantages and disadvantages in terms of security, flexibility, potential growth and taxation. To draw up a financial plan for your retirement, it's essential to compare these in detail, by taking into account your personal and family situation.
Make up for a drop in income and boost your finances
You now have a clear view of your costs and options for income. You may therefore define your personal financial goals and implement a tailored strategy to achieve them. Here are a few examples:
- Increase your 2nd pillar benefits on retirement by making pension fund buy-backs.
- Reduce your tax burden by paying into a 3a account.
- Build your retirement capital
- Boost your assets.
- Purchase property
Regularly reassess your income and saving needs
Once you have established your strategy, remember to reassess the situation regularly by monitoring evolution in your wealth. You may need to adapt your investments depending on market conditions or changes in your personal situation.
Planning your retirement in Switzerland is not easy, but it is well worth the effort. At Piguet Galland, we are at your side to help you build up the savings and income you need to fully enjoy your retirement and realise your dreams with complete serenity. Contact us!
Would you like to learn more about pension planning? Join our webinar on 29th February: Initiatives for a 13th AVS pension and secure and sustainable old-age provision, what are the challenges?
