Early pension planning? Sure thing! The best tips for young adults.
"My pension won't be enough anyhow!" The 2020 Credit Suisse Youth Barometer shows young adults are thinking about the future. Retirement provision is at the top of their agenda. The reason is that it is currently in serious distress – with dire consequences for the younger generation. So, what can you do? Save for old age as wisely and early as possible! The best retirement planning tips for young people – across all the pillars.
Plan ahead instead of worrying
Even though retirement is still decades away, many young adults are already worried about their retirement provision. And rightly so. After all, the situation is far from rosy. For the first time, more people will retire than enter the job market in 2023. In order to fund their pension entitlements, interest rates on the retirement assets of the younger generation have been low for years. Life expectancy is on the rise as well. This means their savings need to cover more years as they age. Conversion rates will need to continue to go down as a result. In other words, they will receive a much smaller pension than their parents or grandparents did with the same earnings.
Switzerland's current pension system is overburdened, but there are no concrete solutions in sight. So it is even more important to take your own measures to counter this. We'll explain what you can do now to have a better pension.
The best retirement planning tips for young people
1. Avoid AHV contribution gaps
The world is yours to do with as you please – except for the first pillar. Because venturing out can mean financial penalties for your retirement provision. For instance, people who stay in school for a long time or travel for several years quickly get behind on their payments into Old Age and Survivors' Insurance (AHV). This alone creates contribution gaps. Are you unsure whether you have contribution gaps? Simply order a free statement on your Federal Disability Insurance (IV) from your compensation office and have a look. The good news is that you have five years to make up any missed contributions. This is important for you to get your full AHV pension some day.
2. Earn income that requires pension fund contributions
Hustle, hustle, hustle! Ideally, your job should pay you a salary of more than CHF 21,510 per year. Only then do employees and employers pay into the second pillar. If you have jobs with multiple employers, each source of income counts individually. The amounts are thus often below the minimum income required for enrolment in an employee benefits plan under the Swiss Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG). The solution? Check with your employers that both sources of income are insured with the same pension fund. Freelancers can voluntarily choose to join a pension fund.
3. Build up your third pillar
Save up! As soon as you've landed your first job, you should sign up for pillar 3a. Saving private pension assets in a pillar 3a account is the ideal way to compensate for the shrinking pensions from the first and second pillars.
Special features of a pillar 3a account:
- The amount you pay in can be deducted from your taxable income.
- The funds are tied to a specific purpose. Once you have transferred the money, you cannot access it again until five years before retirement. Early payout is permitted only under certain conditions. For instance, if you are buying residential property, becoming self-employed, or permanently leaving Switzerland.
Gainfully employed members of a pension fund are allowed to deposit up to CHF 6,883 in 2022. Don't worry if you can make only small contributions to your account at the start of your career. They pay off too. What matters is that you start early and make deposits each year. Once a payment is missed, you cannot make up for it. The easiest way is to set up a standing order starting with your first salary payment. This keeps you from forgetting to make the deposits, and you won't even feel like this money is missing from your expense budget.
4. Invest your retirement savings
Start investing! You still have decades before you retire. The retirement age will likely be raised even higher. With pensions continually shrinking, what could be a curse is also the ace up your sleeve. After all, the long period gives you the perfect conditions to invest your pillar 3a retirement savings in securities. This does present risks since financial markets are subject to fluctuations. But if you invest money over a long period, the return is typically greater than any losses. This gives you more savings when you retire than if you had only invested the money in your pillar 3a account.
Financial experts also recommend considering securities with large equity components. Why? Equities involve the most risk but also the most profit. By starting to invest at an early age, you can better tolerate this risk over a long-term horizon than older people can.
Young people need to take retirement planning into their own hands!
You have to take some initiative to protect your pension provision. Make sure you avoid any AHV contribution gaps and that you have enough income to insure it with a pension fund. Pillar 3a is by far the most important factor to building up your retirement savings over the long term. Make use of your long time horizon by investing in 3a securities – at your age it's the ideal time to do it.