Switzerland has long been renowned for its exceptional standard of living and security, which also holds true for its retirees. According to the Natixis 2023 Global Retirement Index, based on four main categories such as health, quality of life, material well-being, and finances in retirement, Switzerland ranks 2nd, while taking the top spot in the Finances in Retirement sub-index.
Those high ratings seem to be a reasonable benchmark for a comfortable retirement. Yet is it really that simple?
Top 10 countries from the 2023 Global Retirement Index
Source: Natixis
The problem in evaluating comfort in retirement is not the comparative level of pension payment, but the assessment of what it costs to live comfortably in Switzerland. That requires knowledge of the level of comfort to which each pensioner has become accustomed at the end of a long working career.
Based on the average contributions from the first two of Switzerland’s three-pillar pension system, retirees should receive an income equal to at least 60% of their final salary. While this may appear reasonable compared to other countries, it still falls below the OECD’s recommended minimum of 70%. Moreover, the actual pension of an average retiree is less than 50% of their final income.
Gross pension replacement rates in OECD countries for workers with average earnings (in %)
Source: OECD
These replacement rates, as they are known, are based on averages and are, at best, a very rough guide. Another caveat is that mandatory pension payments tend not to consistently keep pace with rising salaries, therefore, replacement rates can lag behind salary inflation. As luck may have it, this just might happen in one of those crucial years leading up to retirement.
On top of this, while the mandatory state pension (the first pillar) can be increased at the will of the government, payments from occupational pension schemes (the second pillar) are dependent on the performance of the underlying investments. That could fall short of your expectations – and your needs.
Consequently, for a worry-free retirement, people may find it essential to improve the return from the pension savings by setting up their own “pension fund” under the voluntary Pillar 3.
Let's consider a scenario of a typical worker in Switzerland. This, sadly, takes us back to the rather problematic topic of averages, which only serve as general guidelines. It also means basing this calculation on assumptions of what an income might be in the year before our test-case retires.
For someone between 25 and 30, holding a bachelor’s degree, and employed in a professional or managerial role – their salary* could be close to the national annual average of CHF 81’456.
* Average salaries have risen slowly in Switzerland, with gains even lagging behind consumer price inflation in recent years. Assuming this will change much, if it does so at all, would be unwise, so let’s assume the current salary grows by no more than 1% annually when extrapolated. That is an extremely conservative approach, not taking into account career promotions or job changes that could substantially boost income.
Annual Swiss wage change (in %)
Source: Trading Economics
Nonetheless, working 35–40 years leading up to retirement, your final pre-retirement salary is estimated to result between CHF 115’390.79 and CHF 121’276.88. Consequently, you should aim for a pension income of at least 70% of that amount, ranging from CHF 80’773.56 to CHF 84’893.82. How much do you need to have saved in your third pillar account in order to receive that level of income?
Let's assume you have full entitlement to AHV, the state pension, which mandates 44 continuous years for men and 43 for women of contributions for a maximum annual pension of CHF 44'100 for a married couple. Additionally, it is reasonable to expect the maximum pension from the mandatory second pillar, which comprises occupational pension schemes** managed by large employers such as banks or on behalf of self-employed professionals.
** Their benefits are a much more complicated calculation. The amount payable upon retirement varies with the level of the retiree’s contributions, for how long they were made, and the performance of the underlying investment portfolio (bonds and cash, mostly).
Based on our earlier finding that the first and second pillars combined provide a pension equal to at least 60% of pre-retirement income – and taking CHF 118’333.84 as that income (the midpoint of the range previously estimated for an average worker’s expected pre-retirement income), the two mandatory schemes would provide a minimal annual pension of only CHF 71’000.
The voluntary 3rd Pillar, therefore, must contribute no less than an additional annual CHF 11’833.38 to achieve a total retirement income of CHF 82’833.68, representing the mid-point of the range already calculated to be at least 70% of the presumed pre-retirement income.
The total saved capital needed will vary based on the assets chosen to invest in. Historically, Swiss investors have leaned toward risk aversion. Despite boasting the highest savings rate among OECD countries, almost 80% of Swiss adults still rely heavily on bank savings accounts, a choice that tends to diminish wealth over time – and what is more, about half of them would like to rely more on this form of investment in the future.
The household savings rate in selected OECD countries in 2022
Source: Statista
This trend persists, even though inflation, despite having fallen to less than 2%, makes interest rates of a little more than 1% close to negative in real terms.
The annual inflation rate in Switzerland over the last 10 years
Source: Trading Economics
Therefore, relying solely on bank savings accounts is not a viable option, whereas a portfolio of Swiss equities might be a better choice. Currently, those are enjoying a period of above-average growth in dividend payments and are yielding about 3%. An investment of CHF 395’000 should, therefore, provide the required CHF 11’833 from both your 3a and 3b pillars.
However, that means ignoring the risk of public equity markets, which can be damagingly volatile. While you are likely to achieve the necessary income, the accompanying rises and falls in the value of your 3rd Pillar portfolio could be uncomfortable for extended periods and, therefore, a source of worry – which can undermine the comfort that is assumed to be a part of retirement.
At Moonshot, we believe the best answer could be private markets. Funds investing in private equity or credit post valuations quarterly rather than daily or weekly like on the stock market. They require patience and look to secure above-average returns over 8–10 years or longer. As the next chart shows, that smooths out the returns profile. Not only are time-weighted rates of return (TWRs) well above those for equities, but they are much more regular and consistent.
All private equity 10-year rolling TWRs (in %)
Source: Hamilton Lane
As one who is just starting the journey as a private investor with, probably, no more than moderate wealth at their disposal, private equity must seem a frustrating choice. The closed-end funds that invest in those unlisted assets require minimum investments of, at the very least, CHF 250’000, 1’000’000, or even more.
Yet, as a Moonshot member, you can tap into exclusive individual opportunities in private equity with a minimum commitment starting at only CHF 25’000, or portfolios starting from CHF 10’000 one-off investment or CHF 300 per month via the subscription model, based on the dollar-cost averaging (DCA) strategy.
Additionally and lastly, make sure to take the fullest possible advantage of time and start maximizing your second-pillar contributions and building your third-pillar investment portfolio without delay. Time will be on your side.
Invite your network to discover our exclusive private market investments, such as Synhelion or SpaceX, and earn lucrative rewards. If you share Moonshot as a logged-in user, you automatically make 2% (and up to 5% with our ambassador program) on your referral's first investment.
