Whilst our vision of retirement will often differ, many of us share the same essential challenge; a drop in our income levels when compared to our previous earnings, with the risk of a corresponding fall in our standard of living.
As studies of behavioural finance show however, many investors are often overly optimistic about potential outcomes. This tendency, when coupled with an inclination to procrastinate, especially when our lives and careers are progressing well, can have major long term repercussions.
It is essential therefore, that we regularly ask ourselves a number of key questions if we are to keep our retirement strategy on track:
- How long might I expect to live?
- How much money am I likely to need in retirement?
- Should this be pension income alone, capital assets or a combination of the two?
- When should I start planning for retirement?
- What are the best ways to save for retirement?
The good news is that Switzerland has one of the most advanced pension systems in the world, based on what is termed the Three Pillars System. The aim of this is to provide you with a combination of annuity and lump-sum payments when you retire, as follows:
Swiss Pension Pillar System
1st Pillar – State Pension
Designed to cover your basic living expenses in retirement.
2nd Pillar – Occupational Pension
A defined contribution pension funded in part by your employer, aiming to cover around 70% of your current income (assuming a lifetime of contributions – 44 years).
3rd Pillar – Private Retirement Savings
A voluntary savings solution which aims to reduce the savings gap between your desired income and what you might generate from the combination of the 1st and 2nd pillars
Under certain conditions, the 2nd and 3rd pillar funds can be accessed earlier than normal retirement age, making the three pillar system a savings scheme with tax benefits and still a certain level of flexibility.
Nevertheless, if you have an ambitious retirement plan or a high salary, or even if you have moved around from country to country, it is quite conceivable that you may want to complement the three-pillar system with additional voluntary financial solutions, if you want to maintain your life standards
If your salary is high, you may find that there is a significant gap between your current income and your future pension, so you should plan ahead if you want to minimise this shortfall.
It is therefore crucial that you analyse your personal situation and understand the implications of each decision.
Two key points to remember are those of flexibility and accessibility. Whilst tax efficiency is important, the tail should not wag the dog, which in this respect means you should always ensure adequate liquidity in your finances, both whilst working and also, most importantly, when retired.
An experienced Financial Planner can help you clarify your retirement goals and explain to you the pros and cons between the range of investment and savings options available.