Strategies for early retirement
Early retirement: budget planning and financial impact
Detailed preparation is the key to successful early retirement without any major income gaps. Our tips will help you to avoid financial uncertainties.
Content:
Content:
- Reasons for taking “early retirement” can range from an excessive workload and a lack of free time to the employee’s own health.
- The financial consequences of early retirement should not be underestimated.
- Plan your retirement carefully and at an early stage.
- The financial losses associated with early retirement vary in each individual case.
- Partial retirement offers an alternative to early retirement by allowing a gradual reduction in workload.
- To the conclusion
Early retirement – that sounds like a nice idea! But what sort of income gap would there be? Many losses after retirement can be avoided with good planning.
Anyone who leaves working life to retire before the statutory retirement age is considered to have taken early retirement.
There are many reasons for this. People often want more time for themselves and their family, for a hobby or for an important voluntary position. You are not alone if you are planning to take early retirement: studies show that one in two Swiss people would like to end their working life early. As well as simply wanting more free time, there are also involuntary reasons for taking early retirement.
Less work – equivalent quality of life
However, taking early retirement from working life comes at a price. For example, a man who retires one year before the statutory OASI reference age, i.e. at the age of 64, will have to accept deductions equivalent to an annual salary, corresponding to the reduction in pension fund benefits and loss of earned income. The expenses for maintaining your quality of life are likely to remain the same. That’s why it is so important to calculate the cost of retirement at an early stage to make sure you can cover your usual living expenses.
Involuntary early retirement – job loss, incapacity to work etc.
The decision to take early retirement is not always voluntary. Older employees may have to retire early as a result of corporate restructuring or downsizing. Some people also have to give up their current job for health reasons.
If you are lucky, your employer will support you at least partially until the standard retirement age by paying you a bridging pension. Sometimes, however, the employer does not take into account the lower OASI and pension fund benefits. If you retire five years earlier than planned, your pension will only reach around two thirds of your previous gross income, for example.
Early retirement: here’s how it works
Early retirement: here’s how it works
By law, taking early retirement to receive benefits from a pension fund is possible from the age of 58. However, you can start drawing your OASI pension at the age of 63 at the earliest, two years before the reference age. Under the OASI 21 reform, women of the transitional generation can start drawing their OASI pension at the age of 62.
- You should notify the relevant compensation office a few months in advance if you may wish to start drawing your OASI pension.
- You may be able to claim benefits from your pension fund on early retirement from the age of 58. You can find the exact date in your pension fund regulations.
- You can request the withdrawal of pillar 3a assets at the earliest at age 60 if you specify your age as the reason for payment. Again, you should look at the contract signed with the bank or insurance company.
- Opting for the staggered withdrawal of your pension fund and pillar 3a assets can reduce your tax burden under certain circumstances.
- After the OASI reform, special regulations apply to women born between 1961 and 1969. Women in this transitional generation will be the first to be affected by the gradual increase in the retirement age for women from 64 to 65.
How is your retirement provision?
The free UBS Pension Check gives you a reliable overview of your current financial situation. Based on the results, you can optimize or increase your private retirement savings.
Early retirement as an employee – what do you need to take into account?
Early retirement as an employee – what do you need to take into account?
The financial consequences of early retirement should not be underestimated. To gain a realistic picture of the future, you should make definite plans as soon as you can: proactive budget planning is the only way to avoid major pension gaps.
Budget planning for early retirement
The sooner you plan your retirement and look into the different options available, the easier it will be to cope with the financial consequences of early retirement. By the time you reach the statutory retirement age, you will have accumulated an income gap amounting to several years’ income.
Each year of early withdrawal of your OASI benefits will cost you 6.8% of your pension until the end of your life; early withdrawal is possible up to two years before the statutory retirement age (under OASI 21, reduced early withdrawal rates apply to women of the transitional generation). In addition, if you take early retirement before the reference age, you will contribute to OASI for those not in gainful employment, as you will continue to pay OASI contributions in early retirement.
Your pillar 2 benefits will also be reduced. This is because you have built up a certain amount of capital with your contributions, but if you withdraw it prematurely, the amount will be lower than originally calculated and it will generate less compound interest. In addition, the pension calculation is based on a lower conversion rate, and you will no longer be saving any additional capital in the years of early retirement. As a general rule, you should expect your pension fund benefits to decrease by 7 to 8%.
If you want to maintain your accustomed standard of living, your expenses may remain high. You will still have to pay rent, telephone bills, taxes, mortgage repayments, insurance premiums and potential travel costs. Even if you restrict your expenditure as much as possible and move into a smaller home, these considerations should be taken into account when planning your retirement.
How to close income gaps
You can prevent this and bridge the gap by making targeted use of other assets.
For example, if you own a plot of land, a house or an apartment that you do not use yourself, you could sell it or rent it out. You could also take out an additional mortgage on your property. However, you should think about doing so before you retire, as the financing conditions may no longer be the same once you start drawing your pension.
An even easier way to close a retirement income gap is with a financing concept comprising up to five pillar 3a solutions tailored to your situation.
Financing from pillars 2 and 3
Flexible, tax-privileged pillar 2 and 3 pensions can help you to reduce your loss of income.
There are two options under pillar 2:
You can choose to pay additional amounts into your pension fund to increase your future benefits. Many pension funds allow you to do this until shortly before retirement. The pension fund statement that you receive from your pension fund shows you how much you can pay in. You can deduct these additional payments from your taxable income. However, to make better use of the tax benefits, you should spread payments over several years. It is important to remember that no lump-sum withdrawals are permitted for three years after making any additional payments (tax restriction).
Other pension funds offer bridging pensions, but these are generally financed from your capital saved in the pension fund or additional contributions. This solution will enable you to avoid the early withdrawal of your OASI pension. It can be advantageous if your employer contributes to the financing.
Pillar 3a could actually be the most important resource for closing income gaps in early retirement: early withdrawal (e.g. for home ownership) is legally possible up to five years before the statutory retirement age. From this point onwards, partial withdrawals are no longer possible, and assets can only be paid out for age reasons. Ideally, you should therefore have build up additional capital in two or more pillar 3a accounts. You can choose between retirement savings accounts and retirement custody accounts. You can then stagger the withdrawal of your assets. This will give you flexibility for reducing any gaps in your finances. You can also save on taxes with this option. Use our pillar 3a tax calculator to calculate the reduction in your tax burden.
Feasibility of early retirement: how much does early retirement cost?
Feasibility of early retirement: how much does early retirement cost?
To illustrate how much early retirement at the age of 64 will cost, let’s take the specific example of a single man with a net salary of 90,000 francs. Our rough calculation takes into account the lower OASI contributions and income tax following early retirement. The OASI and pension fund pensions will decrease as a result of taking early retirement one year before the statutory retirement age. The total losses are as follows:
Loss until statutory retirement age:
- around 30,000 francs.
Loss from the age of 65, for life (total):
- more than 90,000 francs.
Worth knowing
Early retirement can lead to considerable financial losses. The actual impact of early retirement varies in each individual case. Obtain information so that you know what to expect, for example by contacting the OASI compensation office and your pension fund.
Here are some tips for your calculation:
- Take into account any potential reductions in your pillar 1 benefits if you are entitled to draw your OASI pension early.
- Check the regulations of your pillar 2 pension fund for the earliest possible date you can start to claim benefits. Plan bridging options. Perhaps it would make sense to opt for a lump-sum payment instead of an annuity?
- In terms of living expenses, try and identify potential savings and ways to reduce your costs at the end of your working life.
Do I have a pension gap?
If the benefits from pillars 1 and 2 are not enough to maintain your desired standard of living in retirement, you’ll need to save more. Find out how much today.
If early retirement is not possible because you would lose out too much financially, there is an alternative: partial retirement or a reduction in workload without starting to withdraw your pension fund benefits.
- By gradually reducing your workload, you can organize a smooth transition to retirement. Ask your employer whether you can reduce the number of hours you work. For tax reasons, this is possible in 20% increments.
- If you wish to make a lump-sum withdrawal from your pension fund, you can spread it over a maximum of three years by taking gradual partial retirement. This may enable you to save additional tax.
- You can partially supplement your lower income by drawing retirement benefits from your pension fund.
- This will reduce your financial burden at the same time because you do not have to pay any additional OASI contributions on taking partial retirement. You can often meet the obligation to pay contributions with a part-time workload if you work more than 50% of normal working hours.
People often decide to take early retirement to find ways of achieving new goals in life. This is understandable, but these objectives must remain affordable. Early retirement often results in an income gap.
You should clarify your exact plans and financial possibilities early on. You can also ask for professional advice to help you to find new solutions for safeguarding your financial situation. Make sure that your personal journey to discover new horizons in retirement gets off to a good start by planning your budget carefully.
Disclaimer
Disclaimer
