Can I Afford to Retire Early?
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Can I Afford to Retire Early?

Can you afford early retirement? If so, what is the earliest possible age? Find out what to look for and you can make the financial implementation of this project a success – for example, with bridging pensions, a staggered retirement, and private pension provision.

Life expectancy is increasing, but we're not just getting older. Just 20 or 30 years ago, 70-year-old people were considered ancient, while today, there are many 80-year-olds who would describe themselves as fit, spry, and adventurous. It's no surprise that a growing number of people are interested in an early or staggered withdrawal from the working world: Two out of every three Swiss people would like to retire early. After years of demanding professional life, they want to spend more time with their grandchildren, partners, and hobbies. It sounds simple – but it's easier said than done. The financial implementation of this project is much more complex. The biggest challenge lies in addressing every facet of the pension provision, and ensuring that the various elements are coordinated with one another.

Advance withdrawal means pension reduction

Pillar 1, the mandatory state pension provision, grants the AHV retirement pension when you reach the normal retirement age. An advance withdrawal by a maximum of two years is possible for the AHV pension. 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.

Early withdrawal is also possible for the 2nd pillar, the mandatory employee benefits insurance (BVG). An early retirement can be carried out from the age of 58 at the earliest. According to Federal Councillor Alain Berset's recent paper on reform, this barrier for the AHV and BVG should be standardized at 62 years in the future. Today, very few people retire earlier than 62 due to the substantial pension reductions.

Saving for less time yields less interest

A rule of thumb says that for each year of early retirement, the life-long pension amount is reduced by 5 to 8 percent. Why? For one thing, it reduces the amount of time spent saving and earning interest on retirement capital. The reduced capital then 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 will employ a lower conversion rate.

Flexible solutions for the 2nd pillar

It doesn't have to be that way. Various pension funds offer bridging pensions for early retirees. This makes it possible to financially bridge the time between early retirement and the start of AHV pension payments. However, this is primarily financed with the saved pension fund capital, which in turn leads to lower retirement benefits.

Another option: Since the beginning of 2011, a change in the law has made it possible for pension funds to make early partial retirement more attractive. Insured persons who choose to partially retire but still earn at least 50% of their former salary can continue to pay full pension fund contributions. This provides a significant advantage: The pension retains its original amount.

Staggered retirement – a win for everyone

Even people who are gradually reducing their level of employment (staggered retirement) can reduce the financial losses of an early retirement. According to a study published by the Federal Social Insurance Office, gradual transitions from professional life to retirement are increasing in importance. Many companies are interested in older employees with specific knowledge and expertise. This means that flexible solutions like these represent a win-win situation for both the employee and the company.

Filling gaps in income with private pension provision

In cases of actual early retirement, it is often necessary to fill gaps in income with savings. This purpose is best served by assets from the 3rd pillar, the "private pension provision." This saving option can be used in a targeted manner to address individual pension gaps that may arise from an early retirement. Another option is the tax-privileged early purchase of contribution years in the pension fund, which can partially or fully compensate for reduced retirement benefits.