Is early retirement viable to maintain a good standard of living in retirement?

Early retirement is a delicate decision that deserves careful consideration. The transition from working life to retirement involves many changes that influence your financial situation. Currently, in Switzerland, the legal or ordinary retirement age is 65. In principle, it is at 50 that you start to worry about your retirement.  

Of course, early retirement is an attractive choice for those who want to pursue their personal projects, travel or simply enjoy their free time. However, this choice can be costly.  

You must then ask the following questions:

How will early retirement impact my financial situation? Would it be possible to keep my lifestyle in retirement? My heritage planning is it enough to ensure a comfortable life for me and my family? How can I secure my future with a reduced annual income?

The solution lies in financial planning !

Impact Financial Engineering dissects the difference between the concept and reality of early retirement by showing you the possible financial consequences of such a decision. We also advise you on how to prepare for early retirement so that you can enjoy a peaceful period following your professional life.

First, let's look at the pension items that in most cases make up the bulk of your retirement savings. In the event of early retirement, the AVS amounts should be anticipated pension fund benefits and private contingency funds.

Old age and survivor insurance (AVS) or 1^er pillar : It is possible to receive your public old age pension one or two years before ordinary retirement age.

The pension fund or 2^e pillar or LPP : Employees affiliated to schemes within the framework of professional pension provision (LPP) can retire at the earliest from the age of 58. There is the possibility of taking full or partial retirement allowing you to gradually withdraw from working life. In this case, part of old age pension is paid in the form of capital or annuity calculated with a reduced conversion rate. At the same time, the benefits of the LPP are maintained in 2^e pillar. You can reduce your activity rate twice before you fully retire.

As early retirement structures differ from fund to fund, the corresponding pensions also vary depending on the model. You can improve the reduced pension by additional redemptions from the pension fund.

3^e pillar or private pension : Pillar 3A payments can only be received five years before ordinary retirement age. Pillar 3B, on the other hand, offers more flexibility than 3A. Pillar 3B payments are free with the possibility of withdrawing savings at any time.

What are the financial consequences of early retirement?

Early retirement involves the removal of your annual salary, but not your tax liability. Retirees' pensions are fully taxable and significant tax deductions such as business expenses, business travel and meals are no longer possible. In addition, the absence of income subject to AVS hinders l’tax advantage of your payments at pillar 3A.

AVS contributions are compulsory until ordinary retirement age, even if AVS is received early. In addition, advance payments are reduced significantly (reduction of 6.8% per year of anticipation). For example, your ordinary AVS pension of CHF 29,400 will be reduced to CHF 25,402 if you anticipate 2 years (13.6%: (2x 6.8%). Benefits are therefore reduced by 3,998 francs per year. Additionally, as a non-active person, you are likely to contribute more.

Contributions to the LPP cease in the event of early retirement and, consequently, the effective pension is lower. Early retirement leads to a significant reduction in LPP benefits, of around 7% per year. This phenomenon, combined with rising interest rates impacting stocks and bonds, also leads to a reduction in savings.

How to properly plan for early retirement?

Here are some solutions.  

Consider partial retirement, as this option is tax advantageous. Indeed, by reducing your activity rate to 80%, you can withdraw 20% of the old age capital and receive the remaining 80% later. Thus, retirement in stages allows you to receive a salary and contribute to your pension.

Check if your pension fund offers a transitional retirement model that will complement occupational pension provision during years of inactivity under 1^er pillar. In some cases, the employer can financially support the early retirement process. Employees could also finance their transitional pension in advance with additional contributions during their years of gainful activity.

In general, the services of 1^er and 2^e pillar are not sufficient to cover the costs of early retirement and, ultimately, you will have to resort to your savings. The solutions of 3^e pillar (A&B) are particularly useful in this regard. Invest as much as possible in funds from 3^e pillar. These investments will allow you to fill income gaps by retiring early. If necessary, you can also make a partial withdrawal of pillar 3a (in the presence of several 3A accounts or policies). Pillar 3A payments are also taxed at a reduced prime rate and separately from the rest of the income.

Our advice for better planning your finances

Retirement planning, anticipated or in ordinary age, requires financial planning. We know that the three pillars of the Swiss pension system offer diverse possibilities with many subtleties. So you must plan your finances as early as possible. By establishing a budget with which expenses are comfortably covered by income, you will be more confident and reassured about early retirement opportunities.  

When setting your budget, pay attention:

• to your monthly expenses,
• your fixed and variable expenses, such as rent or leisure-related expenses
• to your major and unforeseen expenses such as renovations or the purchase of a car and medical or accident insurance respectively and    
• the tax consequences of early retirement, without forgetting AVS contributions which remain due until age 65

Early retirement is beneficial if you make the right financial choices. As independent wealth planning consultancy, our specialists are available to examine your financial options and advise you on an optimal and wise choice regarding your early retirement. 

Contact us now to discover the solutions we can offer you.