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, and travel – something many Swiss people dream about. By the age of 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, alleviated.
Advance pillar 1 withdrawals
The AHV pension will be paid for the first time, from the compulsory first pillar state pension provision, once an individual reaches the reference age. Applications for the early withdrawal of an entire pension or of between 20% and 80% of a pension can be made from the age of 63. The AHV 21 reform will make this possible as of January 1, 2024. The share withdrawn early can be increased on one occasion, after which the remaining pension must be fully drawn. It is therefore a good idea to check whether deferring proportional withdrawals makes sense if taking phased partial retirement.
Do be careful, however. Withdrawing a pension early will result in a life-long pension reduction, although the reduction rates for individuals with an annual income of less than CHF 58,800 are expected to be 40% lower from 2027 due to the reform. The current rate is 6.8% per year of early withdrawal. However, the first rate reductions are expected in 2027 at the very earliest. If you are considering advance pension withdrawals shortly before these new, lower rates enter into force, it may therefore be worthwhile to wait and take advantage of them. The Federal Council is yet to determine just how low these new rates will be.
Under the new reform, the reference age for women will be 65 in the future, as is already the case for men. Beginning in 2025, this age will be increased by three months every year until it reaches 65 years of age, in 2028. Women who were born between 1961 and 1969 and therefore reach the reference age during this transition are entitled to a pension supplement. They can choose to forgo this if they alternatively opt for lower reduction rates that apply when withdrawing their pension early. These special reduction rates are based on the applicable average annual income. Various factors determine which of the two options is more beneficial and decisions must be considered on an individual basis.
Advance pillar 2 withdrawals
Early withdrawal of a pension möglich. is also possible for the second pillar – compulsory employee benefits insurance (BVG).Depending on the pension fund, early retirement is possible from the age of 58. However, the entry into force of the AHV 21 reform means that advance withdrawals of all pension funds must now be permitted from the age of 63 and it must be possible for withdrawals to be deferred until the age of 70.
Interest rates are lower with early retirement
As a rule of thumb, the life-long pension fund amount is reduced by 5%–8% for each year of early retirement. This is because retirement capital is being saved and is earning interest for less time. In addition, the reduced capital needs to be spread over a longer period – as increased by the duration of the early retirement. Since the pension will be drawn for longer, the pension fund uses a lower conversion rate.
Pillar 2 offers flexible solutions for early retirement
It doesn't have to be that way. Various pension funds offer members a bridging pension. This is intended to supplement the pension fund pension until AHV benefits are also paid out. However, its structure varies according to the respective pension fund regulations. Although some employers provide financial support for early retirement, 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 provisions to offset income deficits 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, the private pension provision. The extra capital saved can be specifically used to cover individual pension shortfalls that can materialize if early retirement is taken. Pillar 3a assets can be drawn five years before the reference age at the earliest.
Another option is the purchase of contribution years within the pension fund, to partially or fully offset the reduced retirement benefits. The maximum purchase amount is reduced if someone is currently drawing a retirement benefit or has already drawn such a benefit and then makes a pension fund purchase. The amount is reduced in proportion to the retirement benefit previously drawn and must be reported to the pension fund using the purchase form. Purchases are strictly tax deductible.
Effects of early retirement at a glance
How early retirement impacts the three pension provision pillars.
State pension provision – 1st pillar
- Individuals who are not gainfully employed are required to pay AHV contributions until they reach the reference age.
- Advance withdrawals from the AHV pension are possible from the age of 63. For women belonging to the transitional generation, this age is 62.
- As of 2023, this currently results in a life-long reduction in the AHV pension of 6.8% each year drawn in advance. However, rates are expected to decrease from early 2027.
Employee benefits insurance – 2nd pillar
- 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, individuals who have not yet reached the reference age are entitled to a bridging pension. 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.
Private pension – 3rd pillar
- You can only pay into the third pillar for as long as you have income subject to AHV contributions.
- The earliest point in time at which benefits can be drawn is five years before the reference age; if the pension fund member does not have gainful employment, the latest point in time at which they can draw benefits is when they reach the reference 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 the private pension provision. If this comparison prompts you to bring your retirement forward, you can apply at any time from the beginning of 2024 to draw your AHV pension at the beginning of the month after the month in which you would like to retire and are eligible to do so.
If, on the other hand, you conclude that early retirement will be too costly, partial retirement could offer an alternative. This can be done on a flexible basis, in one or more stages.