Retirement provision study: Who will be able to afford to retire early in the future?
Half of all retirees today retired early. Will current workers be able to take advantage of this option to the same extent? The new study "Early retirement: The path is becoming more difficult" by the Credit Suisse Research team explores this issue and reveals the true cost of early retirement.
Early retirement in the future: Possible scenarios
"Can I afford to retire early?" Many in gainful employment will ask themselves this question sooner or later in life. (Asking this question sooner rather than later will definitely put you at an advantage; find out more below.) When you start adding up the cost, it quickly becomes apparent that taking early retirement is an expensive decision. To give you an idea, the Research team at Credit Suisse has calculated various scenarios, which are presented in its latest study, "Early retirement: The path is becoming more difficult".
Middle-income model calculation: A teacher decides to take early retirement
Daniel Müller started working as a teacher in 1985 when he was 25 years old. Since then, he has worked full time. He will be 65 years old in 2025, at which point he will reach normal retirement age. Assuming a conversion rate of 5.36%, Daniel Müller can expect to receive an annual pension of around CHF 24,000. Combined with his AHV pension, he will have an income of just under CHF 50,000 per year or approximately CHF 4,150 per month.
The examples also apply to women, of course, except that the retirement age for women is 64. That is why, for the sake of clarity, only men are featured in the examples.
Retirement at 63 means a drop of 14%
If Daniel Müller were to decide to retire early at 63, his pension under employee benefits insurance would be reduced by CHF 4,000 per year, to CHF 20,000.
If he were to also start drawing his AHV pension at the same time, he would receive a total pension of CHF 42,742 per year, which would equate to a monthly pension of CHF 3,562. This means that his pension would be 14% lower for the rest of his life than if he had retired at the normal retirement age of 65.
If he were to decide not to start drawing his AHV pension early, from the age of 65 he would receive a total annual pension of CHF 45,789. In the two years prior to that, however, he would have to offset the AHV pension he does not receive using his own savings, such as tied pension provision (Pillar 3a) or personal assets, or else bridge the gap with a bridging pension.
Bear in mind: Pension reductions will apply for the rest of your life.
Retirement at 58 or 70: The differences are phenomenal
The chart also shows that if Daniel Müller were to retire at the earliest possible age of 58, he would have to reckon with a life-long pension reduction of 23% to 28%, depending on whether he started drawing his AHV pension at 63 (earliest possible AHV pension age for men) or waited until the age of 65. The info chart also shows that if he were to decide to postpone his retirement until the age of 70, this would translate into a total pension of around CHF 68,500 per year.
or more can be the extent of your life-long pension reduction if you take early retirement.
Who can afford a life-long loss of income of 20%?
Credit Suisse's 2020 retirement provision study also looked at the impact of taking early retirement on different income groups. The lowest income group includes sales assistants, among others, whereas the higher income group includes lawyers for example. The middle income group includes teachers, like in the previous example.
Marginal differences only at first glance
What is striking is that the differences in percentage terms between the individual income groups are not overly significant. A sales assistant wanting to retire at 58 could expect a pension reduction of 21%, a lawyer a reduction of 24%. Although this difference doesn't seem that big at first glance, the two start from very different positions.
Early retirement if you earn a lower income
A sales assistant retiring at the normal retirement age of 65 could expect to receive an annual pension of CHF 38,112, which equates to roughly CHF 3,200 per month. Giving up work at 63 would put his annual pension at CHF 35,137, and retiring as early as 58 would put it at CHF 30,062, which equates to a monthly pension of CHF 2,500. A person in this income segment would have to think long and hard about whether taking early retirement is financially feasible. After all, the earliest age they would be able to start drawing their AHV pension is 63. Until then, the BVG pension would only be around CHF 9,000 per year. Without additional personal savings, it would likely remain a pipe dream.
Early retirement if you earn a higher income
In comparison, a lawyer retiring at normal retirement age could expect to receive an annual pension of CHF 80,804. If he decided to retire early at the age of 58, he would receive 24% less pension – or CHF 61,181, to be exact. Although the reduction in pension is substantial, his pension would still be double what the sales assistant would be likely to receive. Not only that, but during his years at work the lawyer would also have had more of an opportunity to build up his Pillar 3a pension and his personal savings.
Early retirement today
Between a dream and a hard reality
Male, university graduate, higher-income earner
Around half of retirees today retire at least one year before they reach normal retirement age according to data collected by the 2019 Swiss Labor Force Survey (2019 SLFS). As the compiled data shows, an early retiree in Switzerland tends to be a male homeowner with a university degree and a higher income. In addition, the percentage of early retirees in the French-speaking part of Switzerland is bigger than in any other of the Swiss regions.
of retirees today no longer wanted to work
of all early retirement is involuntary
Early retirement: Dream versus reality
50% to 80% of people would like to retire early
Various surveys suggest that one in two gainful employed currently dream of taking early retirement. This is confirmed by financial planners at Credit Suisse, who would even put this figure as high as 80% based on responses they have received in client meetings.
Decreasing pensions diminishing people's options
Will there be even more gainfully employed retiring early from working life in the future? The current generation of retirees is benefiting from decades of high returns. Not only this, but current conversion rates are also set too high in actuarial terms. By contrast, because of the low interest rates the pension assets of the gainfully employed are growing at a much slower rate than those of their predecessors. If measures are not taken to counter this, future generations will see their pensions decrease. For many gainfully employed, taking early retirement is therefore likely to remain an unattainable dream.
Survey of the next generation of retirees
But future retirees seem to be aware of the changed situation. The analysis of the 2019 SLFS found this to be the case. Responding to the question about the age at which they were planning to retire, 19% of female respondents over the age of 54 and 29% of male respondents in the same age group said that it would be below the normal retirement age of 65 and 64. However, these figures do not factor in involuntary early retirement due to health problems or company difficulties. In other words, the final number of early retirees is likely to be slightly higher.
These factors can help people to make their dream of early retirement come true
Anyone dreaming of taking early retirement can actively take steps to make this option viable for them. The latest retirement provision study shows that the earlier people start saving, the better their opportunities.
Private pension provision
As a result of the uncertainties surrounding the pension system, tied pension provision (Pillar 3a) is becoming an increasingly relevant option. The annual maximum contribution, which you may also deduct from your taxable income, is currently CHF 6,826 per year for people who are members of a pension fund. For self-employed persons without a pension fund, this amount is CHF 34,128 per year. Due to ignorance or because many people cannot afford it, only a small percentage of those eligible make use of this attractive pension provision option.
The early bird catches the worm
People who start paying into Pillar 3a early give themselves a considerable advantage. The "early starter" who pays in the maximum contribution every year will be CHF 25,000 better off compared to the "late starter" who doesn't start making Pillar 3a payments until ten years later. The difference is even greater if the "early starter" opts for a slightly higher-risk securities option due to the long investment time horizon, resulting in a good chance of a higher return.
Voluntary purchases of pension benefits
There are various reasons that make it possible to purchase benefits in employee benefits insurance, such as career breaks, a decline in retirement capital following divorce, or salary increases over the course of a person's career. Not only this, but paying into a pension fund is also attractive from a tax perspective. The amount of benefits that you are permitted to purchase is shown on your pension fund statement.
The bridging pension
The 2019 SLFS shows that a third of current early retirees have a bridging pension. This allows them to bridge the gap between drawing their pension from the pension fund and receiving the additional AHV pension. This is because BVG funds can be withdrawn from the age of 58, whereas the AHV pension can be drawn no earlier than two years before normal retirement age. This bridging pension can be funded through the pension fund. In the best-case scenario, your employer will contribute. To ensure that taking a bridging pension does not further reduce the pension amount, many pension funds offer an early retirement pension pot. Making voluntary payments into this pot gets around the problem of reductions.