Asset planning Investment in old age: growth and asset depletion

When most people retire, an important part of their income situation changes, as their salary is replaced by their pension, which in turn is made up of OASI (pillar 1) and pension fund benefits (pillar 2, also called the occupational pension) and paid out monthly. As a rule, the pension from pillars 1 and 2 is 30 to 40 percent lower than the last income before retirement. Other income components such as rental income or investment income are not directly affected by retirement. The contributions paid into pillar 3 are paid out shortly before or in the year of retirement and increase assets.

After retirement, expenses often decrease less than expected. If expenses remain virtually unchanged and exceed the new, lower regular income, the difference can be made up with contributions from assets. Over time, this reduces the capital saved up. However, this can be partially offset – with a targeted investment strategy.

Another thing that changes on retirement is your investment horizon. A proportion of your assets should remain available in the short term to cover living expenses, but also to finance travel and other purchases. The other proportion of your assets can remain permanently invested, but over a shorter time horizon. By adopting an investment strategy geared to your new situation, assets can be deployed in such a way that firstly, they will help to cover running costs and secondly, they will continue to grow and generate income.

Whereas income after retirement can be calculated rapidly by means of statements from the OASI and pension fund and an overview of other income depending on your personal situation, budgeting your expenses is a greater challenge. Many people assume that expenses will decrease on retirement. However, experience shows that they usually remain just as high or even rise, for instance as soon as a pensioner needs nursing care. Without gainful employment, various income tax deductions also no longer apply.

It is therefore important for financial and asset planning to be familiar with your revenue situation and to budget your expenses as realistically as possible. In addition, assets must be set off against liabilities such as mortgages or other loans.

On the basis of your financial planning for the period after retirement, you can decide whether you want to have part of your pension fund assets paid out as a lump sum. You can choose once and for all whether you want to draw your pension fund capital as a lifelong pension or in one go as a lump sum – or a combination of the two. The best choice for you depends on many individual factors such as your health or life expectancy, inflation trends, tax considerations, inheritance plans and your investment strategy for any pension fund capital you withdraw. This is often a suitable topic to discuss during a consultation with an expert.

If your income exceeds your expenses, the question is easier to answer. You should make sure that your OASI and pension benefits cover your regular expenses, and have the rest paid out as capital. You can invest this for the long term, use it for extra expenses or even bequeath it.

If your financial and asset planning concludes that your expenses exceed your income, this usually results in asset depletion that should be quantified by month or year. As a next step, it is advisable to divide your existing assets into two tranches: one tranche for the depletion component, which will cover the income gap over the next five to ten years, and a second tranche that represents the growth component.

Money you need in the first few years after retirement is best kept in a personal or savings account, depending on interest rate trends. The remainder of the depletion component should be invested at low risk, for example in fixed-rate bonds, defensive equities and similar investment fund solutions. When it comes to investment funds, a redemption plan can also be a good choice. If you opt for a redemption plan, you regularly withdraw a certain amount from your invested assets. You can use these payouts to supplement your income without having to worry about selling fund units.

If you need to switch long-term investments to investments with a shorter investment horizon for the depletion component, ideally you should proceed in stages over a longer period of around two years – for example with the UBS Investment Plan. This reduces the risk of selling shares or other investments at an inopportune time. If you seek regular advice from your bank, your UBS advisor will contact you in good time, work out the best solution for you and accompany you.

You now have an investment horizon of ten years for the growth component of your assets. This means that more risky investment strategies are possible than with the depletion component, which will allow you to make up for some of the asset depletion. Equities are suitable for investing the growth component, as are real estate and gold. To spread the risks, it is best to diversify using investment fund solutions or a mandate solution such as UBS Manage.

What’s more, depending on your age, it may make sense to talk to your children when determining your investment horizon. If a child does not need their inheritance immediately when the time comes, it may make sense to maintain the investment for a longer period – for certain assets, possibly even well beyond the own death. Otherwise, you should consider shortening the investment period.

The period of five to ten years mentioned represents the investment horizon, but this does not mean that nothing will happen during this time. The development of your investments and your current wishes should form the basis for adjusting your strategy and aligning your portfolio accordingly on an annual basis.

Bonus recommendation: renovation work does not necessarily have to be financed from the depletion component

If you own your own home or rent out property, you may be wondering how to finance renovation work after retirement. The answer depends on your financial situation: if there is a growth component, it is usually easy to apply for a new mortgage for a renovation project, provided that the overall loan-to-value ratio is financially affordable.

As you can see, investing pays off at any age, even after retirement. Start out on the right track as early as possible thanks to comprehensive financial and asset planning. The experts at UBS will be happy to help you. Then you can look forward to retirement knowing that you are well prepared and with the confidence that your finances will be sufficient in old age.