Early retirement: Can I afford to retire early?
Many people nurture the desire to retire early. However, the financial shortfall associated with early retirement needs to be clarified beforehand. Only if you plan ahead and are aware of your likely pension from the AHV and pension fund will you know whether early retirement is possible.
Early retirement means a reduced pension
Retiring early gives you more time for hobbies, grandchildren, or travel – something many Swiss dream about. By age 50 at the latest, you need to think about how you can turn your desire to retire early into a reality. Although early retirement is a tempting prospect, it does reduce your pension – something that needs to be considered and, if necessary, minimized.
AHV pensions are usually paid out of Pillar 1 – i.e. the mandatory state pension system – once you reach normal retirement age. AHV pensions can, however, be drawn up to two years in advance. But beware: Advance withdrawals of this type lead to a life-long pension reduction, which currently amounts to 6.8% for every year drawn in advance.
It is also possible to draw your pension early in the case of Pillar 2, i.e. mandatory employee benefits insurance (BVG), depending on the pension fund regulations. Early retirement is possible from age 58. Today, however, very few people retire earlier than 62 due to the substantial pension reductions.
Four key questions on early retirement
Anyone wanting to retire early needs to be aware of the consequences. These key questions can help with planning.
Interest rates are lower with early retirement
As a rule of thumb, the life-long pension amount is reduced by 5%-8% for each year of early retirement. The reason? For one thing, it reduces the amount of time spent saving and earning interest on retirement capital. In addition, the reduced capital needs to be spread over a longer period – as increased by the duration of the early retirement. Because the pension will be drawn for longer, the pension fund uses a lower conversion rate.
Pillar 2 offers flexible solutions for early retirement
But it doesn't have to be that way. Various pension funds offer insured a bridging pension. This is intended to supplement the pension fund pension for the period of time until AHV benefits are also paid out. However, its structure varies according to the respective pension fund's regulations. Some employers provide financial support for early retirement. But in most cases the bridging pension has to be financed from the accrued pension fund capital, which in turn leads to lower retirement benefits or needs to be accrued in advance through voluntary purchases.
Using private pension provision to offset income gaps in early retirement
Income often falls after retirement, while financial needs mostly remain the same. This can create a shortfall, which needs to be addressed in a timely manner through savings. A good way to do this is by building up the third pillar, i.e. private pension provision. The additionally saved capital can systematically be used to close individual pension gaps that may arise in the event of early retirement. Pillar 3a assets can be drawn five years before AHV age at the earliest.
Another option is to purchase contribution years in the pension fund, which can be used to fully or partly offset reduced retirement benefits. Contributions can be deducted from taxable income.
Effects of early retirement at a glance
How early retirement impacts the three pillars of pension provision.
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Pillar 1: State pension
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- Persons not in employment are required to make AHV contributions up to the normal AHV retirement age (64 for women, 65 for men).
- It is possible to draw the AHV pension one or two full years before reaching the normal AHV retirement age.
- This results in a life-long reduction in the AHV pension of 6.8% for each year drawn in advance.
- Persons not in employment are required to make AHV contributions up to the normal AHV retirement age (64 for women, 65 for men).
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Pillar 2: Employee benefits insurance
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- A reduction in the retirement pension of around 5%-8% can be expected for each year it is drawn in advance.
- Depending on the pension fund, you are entitled to a bridging pension up to normal retirement age. This too could result in a life-long reduction in the retirement pension.
- According to the regulations, the reductions can be cushioned through the voluntary purchase of pension benefits.
- Accident cover, which was previously paid for by the employer, needs to be included in the health insurance plan.
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Pillar 3: Private pension provision
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- You can only pay into the third pillar for as long as you have income subject to AHV contributions.
- Benefits can be drawn no earlier than five years before normal AHV retirement age; if you are not in employment, this can be done at the latest on reaching normal AHV retirement age.
Planning ahead for retirement
To find out whether early retirement is an option in your situation, it is advisable to compare your assets and pensions against your anticipated expenditures. Any pension gaps can be closed using private pension provision. Should you decide to take early retirement on this basis, you will need to notify your compensation office that you wish to draw your AHV pension three to four months before you reach the age at which you wish to retire.
If, on the other hand, you conclude that early retirement will be too costly, partial retirement could be an option. This can be done on a flexible basis, in one or more stages.
