Reader case study second pillar pension or capital for François?

When you reach retirement age in Switzerland (currently 65 years old), you must decide whether you want to withdraw your 2nd pillar as a pension or as a lump sum. A pension will provide you with a monthly salary until your death, while a lump sum will give you a large amount of cash that you can invest yourself, but which you will have to manage until your death. You can also decide to take part of it as an annuity and the other part as lump sum.

For those of you who have no idea what I’m talking about, the 2nd pillar (also called LPP/BVG meaning in English “Swiss Federal Law on Occupational Benefits”) is part of the three-pillar pension system in Switzerland:

• 1st Pillar (also known as AVS/AHV meaning in English “Old Age and Survivors’ Insurance”)
• 2nd pillar, which is the money you contribute throughout your professional career
• 3rd pillar, which is the individual, i.e. non-compulsory, provision allowing you to have a supplement of cash at retirement

As you can imagine, the subject of whether I would take out my BVG as an annuity or as a lump sum seems so far away to me that I haven’t given it any thought yet. Especially since by the time I turn 65, I think a lot will have changed.

Nevertheless, I’ve had several readers emails telling me that they’re well over 40, but that they would still take a dose of advice from the Team MP :)

This is the case of François.

François, 59, wants to early retire at age 60

Here is the email I received from François at the end of last year:

Hi MP,

So my biggest challenge will be to maintain my assets of CHF 800'000 (including BVG capital), without drawing on them. I will stop working in March 2021 at the age of 60 (I am currently 59), and the aim is to make my current cash and the amount of my future pension fund grow. All this in order to keep my fortune at CHF 800'00, and to live off the interest. At the age of 65, I will also receive my AHV/AVS pension, i.e. CHF 2'000 per month.

Here’s my BVG figures (forecast for March 2021):

• Lump sum : CHF 515'846
• Annuity : CHF 25'018

As for my strategy, I have several options:

1. BVG pension per month
2. Withdrawal of the entire 2nd pillar capital
3. Mixed: withdrawal of part of the LPP/BVG capital and the rest in an LPP/BVG pension

Not that bad the life in Valais/Wallis !

Option 1: BVG pension
If I take a monthly pension, it will amount to CHF 25'018 per year, or CHF 2'084.85 per month.

Option 2: Withdrawal of the entire 2nd pillar capital
At the age I wish to retire, I could withdraw CHF 515'846 (before tax from the 2nd pillar lump-sum payment). The tax will depend on the canton, but for me it will be Valais/Wallis.

Option 3: Mix of capital and BVG pension
Multiple variants here are possible with the amount of capital withdrawn. A variant is half capital and half annuity, i.e.:

• Withdrawal of half of the BVG capital: CHF 257'923 (before tax)
• Pension on half of the BVG capital: CHF 1'042.38/month

At the moment I prefer the option of taking the entire capital, with the choice of various investments at a minimum of 10%, investing CHF 400'000 (the remaining of the CHF 515'846 will be kept in cash), which represents an income of CHF 3'333 per month, which is CHF 1'248.15 more than the annuity. Currently it is quite easy to invest between 14 and 18%, with all the risks that go with it.

I already have 2 apartments in Thailand under hotel management (10% return), stocks, bonds, and investments in P2P loans (currently 12-18% return). And, as these lines are being written, a questioning about the security of P2P platforms is in order, and this following the various scams in the Baltic countries (I have just lost CHF 9'000 between Envestio and Kuetzal).

When I told you I would invest my CHF 400'000, I’m thinking of choosing 10 P2P platforms to diversify, and possibly the purchase of an additional apartment in Asia.

What do you think about that MP? What would you do if you were me?

A beach in Thailand where François will spend part of his retirement :)

My first reaction: “Phew, I’m not the one who has to make this decision because I don’t know what the hell I’d be doing!”

Then my rational brain took over: “Okay, let’s do some calculations, and only base our thinking on math. Let’s let this emotional brain freak out on its own ;)”

So I went on to ask the following questions:

• How much cash do you have and how much money are you currently investing?
• How much do your apartments in Asia pay you per month and since how many years?
• How much do you need per month to live frugally but without depriving yourself?

François’ answer:

Concerning my various investments and my cash, I have CHF 130'000.

The yields of the 2 apartments in Thailand are about CHF 2'000 per month, CHF 1'000 since December 2018 for one apartment and CHF 1'000 since September 2019 for the other.

I’ve put three variations below (with my address in Switzerland) which are obviously not fixed:

Variant 1 — Very frugal — CHF 3'450.67/month
Living in Asia and without a car (with 1 trip to Switzerland per year).

Variant 2 — Frugal — CHF 3'906.42/month
Living six months in my bus in Switzerland, and six months in Asia (rent in Asia).

Variant 3 — Affluent — CHF 5'956.42/month
With my bus, an apartment in Switzerland, and traveling a lot.

What solutions are viable for François?

OK, so now it becomes clearer ;)

Let’s test the 3 hypotheses of BVG pension, withdrawal of the entire BVG capital, and mix of pension and capital.

Option A: BVG monthly pension

I am deliberately very conservative with his current fortune, given the possible rates in 2020 for bonds.

With this option, François could live between frugality and a comfortable life from 60 to 65 years of age. After the age of 65, he would receive an additional CHF 2'000/month in AHV/AVS. This would put him in his “Affluent” category for the rest of his life.

A piece of advice for him nevertheless remains to take into account the cost of an EMS which, according to the RTS in 2016 cost no less than CHF 8'700/month on average…

Option B: Withdrawal of the entire capital

I have taken into account a BVG capital of CHF 480'000 in order to take into account the taxation of the 2nd pillar capital payment.

In a very conservative world (2% return is really very little), this option B would not even allow François to live with his “very frugal” variant of life.

Option C: Mix of BVG/LPP pension and capital withdrawal

In this last option, François can hope (still with very conservative calculations) to live out his early retirement frugally, and then at the age of 65 move up to the “Affluent” category.

In order to have a different point of view on these conservative tables, I will now calculate the same 3 options but with average annual returns of 5% to be a little more realistic, as well as 8% in case he can still invest in rental real estate in Asia:

And to get the full picture, here’s what it would look like for François’ retirement after his 65th birthday, including his AHV pension of CHF 2'000/month:

What would I do if I would be François?

If I was very risk-averse, I would go directly to the BVG pension to ensure a frugal and comfortable early retirement. And enjoy a retirement after age 65 without worrying about financial returns.

But not being (yet!) that scared, I think I would ultimately hesitate between withdrawing the entire Pillar 2 capital (option B) and a mix of pension and BVG capital (option C).

If I know that I can trust my knowledge of bonds and real estate investment (i.e. what to choose as a bond or as an investment property and that it doesn’t put too much extra workload on me), I would go for option B (full principal withdrawal).

If, on the other hand, I prefer more security and don’t want to worry about my rental returns once I retire, then I would opt for Option C (mix of pension and BVG capital).

Frugal or affluent lifestyle, this Thai nature will remain free for François!

What I get out of it as learnings for my own retirement

It was really interesting to put myself in the shoes of François because it makes me see what’s ahead of me.
It’s easy for me right now to pretend that it’s all easy and put all my cash into equity ETFs, value investment, and real estate investment, because I’m in a phase of wealth accumulation, and not wealth consumption as it’s the case for François.

So what I get out of it is that I need to further improve my knowledge of bond yields (article currently being written) and rental real estate. And this is so that I don’t panic at the idea of generating at least 5% with my portfolio when I pass the 40 year mark…

Another thing I knew in theory but see here applied is that leading a basic frugal life can only help you in retirement. Typically, François can afford to consider retiring 5 years before the legal retirement age.

And the last point I asked François: does your BVG conversion rate drop over the years once you retire? He replied that it does not. So once you start collecting your pension (if you choose this option), it remains constant for the rest of your life.

And you, what would you do if you were in François’ situation? Would you be rather conservative and take all your BVG as an annuity to ensure you have a basis for retirement, or on the contrary, 100% in capital?

‌Note: many thanks to the 3 new patrons @Fabrice, @Simon, and @Cédric for their blog sponsorship via Patreon. That’s it, we’ve reached the first objective of securing the hosting part of the blog and forum. I find it hard to realize it honestly. Thank you!

Net worth and savings rate update January 2020 CHF …

How to value investing (10%+ expected return)