Cost of living in retirement: how to plan your budget

Retirement is one of life’s most important milestones, alongside your wedding or the birth of a child. Transitioning from the working world to retirement drastically changes daily life and with it, your financial situation. The pension from the first and second pillar only covers about 60 percent of your last salary. However, to maintain your previous standard of living without cutting back, you usually need 80 to 90 percent of your last salary.

Exactly how much money you receive on retirement depends on many factors: For example, if you draw your OASI pension two years early, your payout will fall by 13.6 percent. Early retirement is a reality for many Swiss – whether voluntary or involuntary.

An extended maternity leave or divorce are also reasons why income from the first two pillars may not be sufficient to cover existing expenses. This can quickly lead to a pension gap that you will want to close. To prevent financial trouble in old age, it is worth determining and adjusting your living expenses at an early stage.

Just like life itself, the costs of housing, food, leisure and health is constantly changing. While expenses are usually still low at the start of working life, they rise over time along with your standard of living. For most Swiss people, expenses peak between the ages of 40 and 65: according to a UBS study, average monthly expenses for those in their mid-50s are between CHF 7,000 and 8,000. Items that are difficult to change, such as housing or taxes and social security contributions, are particularly important.

Upon retirement, monthly expenses decrease again – but less than many assume. On average, the Swiss still spend just under CHF 6,000 per month. But this is not the end of the matter, as health and care costs also increase with longer life expectancy and better medical care. These healthcare costs rise exponentially, especially towards the end of life, and amount to an average of CHF 3,000 per month from the age of 95.

Your future pension is calculated based on the contributions you have paid in over the course of your working life. It is made up of different parts from the three pillars of the Swiss pension system. Without contribution gaps in the first pillar, the minimum OASI pension is CHF 1,225 per month, and the maximum pension is CHF 2,450 (as of 2024). The amount of your OASI pension depends on the number of years you have contributed. If you have taken a break and not made any contributions – for example, due to a stay abroad – your anticipated OASI pension will be permanently reduced by a certain percentage.

The BVG pension from the second pillar is managed and calculated by the pension fund. Combined with the OASI pension, this should generally cover 60 percent of your last salary during your working life. With most pension funds, you can choose whether you would like to receive the benefits as a monthly pension, a one-time lump sum payment or a mix of both. The exact arrangements can be found in the regulations of your pension fund. The conversion rate determines how high your BVG pension will be. In the mandatory BVG scheme, this is currently 6.8 percent. Following the rejection of the BVG reform at the ballot box, the conversion rate remains unchanged for the time being, although many funds with nonmandatory benefits have already set much lower values.

You can further increase your retirement savings with the voluntary benefits of pillar 3a and 3b. Your accumulated assets are paid out once when you reach the reference age, but can be withdrawn as early as five years before you reach this age. There are other reasons for earlier withdrawal, e.g., to take advantage of the scheme for promoting home ownership.

To find out how much income you will have available as a pension or lump sum payment, you need to consider all three pillars. An important part of this is the OASI pension (pillar 1). How high this will be depends on the number of contribution years and the amount of your average income. The best way to check whether you have any gaps is to order a free IA extract from the OASI every five years. If you later want to determine an approximate estimate of your future pension as part of your retirement planning, you can also request a pension forecast from the OASI compensation office. This is free of charge from the age of 40.

Your pension fund will tell you how much money will be available to you from the second pillar when you retire. However, the sum from pillars 1 and 2 will generally not cover your living costs as it only covers just over half of your last income. This is where voluntary asset accumulation in the third pillar, the tax-privileged pillar 3a and voluntary saving in pillar 3b, can help. With these assets, you should be able to receive 80 percent of your final salary in retirement. This means you can continue to cover your living costs without having to make any sacrifices.

Once you have calculated your expected income, you should draw up a list of your expenses. Not all living expenses at retirement age are the same as those during your working life. Some expenses will fall sharply or disappear altogether. This is the case, for example, with items such as work clothing or pension contributions.

Transport costs are also reduced by half on average when you retire. The costs of commuting to work are completely eliminated, and you only need your own car for shopping or leisure activities.

The situation is more nuanced when it comes to food and beverage costs. Although expenses for business meals are eliminated, these are often replaced by more frequent get-togethers with friends or family.

Housing costs also do not fall across the board when you retire. Here, you should always consider your individual situation. Would you like to move to a smaller home when you retire? Are you considering age-appropriate living? Facilities with additional care staff are usually more expensive than rented accommodation or your own home and should be taken into account when planning your living costs.

With the free time they gain, many pensioners finally have the opportunity to pursue new hobbies and activities. Plan a budget for this, especially in the first few years, so that you can fulfill your greatest wishes. However, this item will decrease again during retirement and as you get older.

It is the other way around with healthcare costs. In the course of professional life, these play only a minor role for most people: Until the age of 50, Swiss men and women spend an average of CHF 1,000 per month on medical services. In retirement, this item doubles and continues to increase until the end of life. As your expenses depend on many factors such as your lifespan and the severity of your illness, it is advisable to set aside a separate savings amount. This way, you always have a portion of your assets in reserve without putting too much strain on your monthly pension.

A financial plan will show the exact breakdown of living costs and the budget required to cover them. You should keep and review this not just once, but on a regular basis. This allows you to determine changes and average costs over a longer period of time. A breakdown into monthly and annual costs ensures that no one-off items are forgotten.

If this comparison over several months or even years reveals that you will face a pension gap when you retire, you either have to save additional money or reduce your living costs. You have minimal influence over many areas, such as your tax burden. However, with a little ingenuity, you can minimize an appreciable part of your fixed costs. For example, you can car-share with friends or family. Residential groups for retirees are also becoming increasingly popular. More and more pensioners have recognized the potential of the sharing economy and are organizing themselves into flat-sharing or car-pooling groups. Even supposedly high expenditure items offer opportunities for savings.

Nevertheless: Even if there is potential for savings, you should always calculate your expenses generously. A buffer protects you from the high costs of unplanned purchases or expenses in the event of illness. You can also better meet the challenge of rising inflation. Always ensure that your budget is not too low and that you think realistically rather than idealistically.

Questions about the cost of living accompany us throughout our lives. Our expenses change over the years – children are born, earnings at work increase and a home has to provide space for the whole family. The start of retirement brings another major change that should be well planned.

Planning your living costs in advance will protect you from unpleasant surprises and safeguard your standard of living in retirement. Ideally, you should start planning ten to fifteen years before you actually retire in order to identify a potential pension gap. This will enable you to build up assets through pillar 3 that will sufficiently cover your living costs in old age.