Hi RIP friends,
Welcome to post Number 100!
Yes, this is the 100th retireinprogress post in slightly more than 2 years! I originally planned to post twice per week, but ended up below once per week on average (but 3x average post length according to “351 SEO tips”).
I wish I had more time.
Anyway, today we’re celebrating the triple-digit-post event with our first reader case study!
We have Mr ATM, who lives in Switzerland and wants to know if his family can retire in 10 years, abroad, on a budget of 2500 EUR/Mo.
Here follows his story, see you in a while 🙂
Table of Contents
Enters Mr. ATM:
Thanks for offering to review my financial situation and provide any advice to help guide my future plan.
I am married with two children (Age 48 and Wife is 40), I am currently living in Switzerland for more than eight years. I consider myself frugal however I have tendency to overspend on gadgets and electronics (InterDiscount and Digitec are my favorite shops in Switzerland).
My plan is to retire in less than 10 years back home with a net income of 2500 EUR per month (expected taxes on dividends and capital gain about 26%), and a Safe Withdrawal Rate (SWR) between 3.25% and 3.5%, as Big ERN suggests.
Household Income: 121,400 After tax and pension Pillar 1 & 2 contributions.
We’re a single Income family, my wife is looking after the kids which are approaching teen years.
Yearly Expenses: 56,008 Per year.
Breakdown of the yearly expenses below:
|Rent and House Expenses||19308|
|Insurance & Medical Bills||11542|
|Electricity & Internet||1140|
|Foods, Toiletry, House Supplies||9450|
|Trains Tickets & Half Tax||1381|
|Banks & TV Licenses and Other Fees [Insurance and etc]||528|
|Family Gifts & Charities||1712|
|Clothes & Shoes||690|
|Schools and Children Expenses||1308|
|Misc [Furniture Gadgets & etc ]||819|
- Stock and Bonds ETFs (Mainly iShares and Vanguard): 437,780 CHF (end of Sept 2018)
- 60% Stock, 40% Bonds
- Average portfolio profit Yield 2.5%
- Pillar 2: 207,123 CHF (0.5% Interest…)
- Pillar 3: 52,340 CHF
- 75% Stock
- 25% Bonds
- Am I on the right track to reach the goal within the next ten years?
- Any recommendation for my cost optimization?
- I am considering buying a property using Pillar 2 fund and 10 years fixed interest rate Mortgage due to the low interest rate and to help reduce my largest expenses (Rent). I am worried we are in a Real Estate Bubble in Switzerland.
Thanks again Mr RIP for the blog and the information provided to the FIRE community.
Let me start with a round of applause: you accumulated a net worth of almost 700k CHF and you owe nothing to nobody!
And you’re still able to spend less than 60k per year for a family of four! In Switzerland!! You have something to teach me, I’m all ears 🙂
I’m very motivated to work on this reader case, since Mr ATM situation resonates with mine: we have a similar situation, almost similar monetary target, both of us save more than 50% of our income and so on.
Ok, let’s get started!
First, let’s define the target FU Money.
Mr ATM said he would like to retire abroad with 2500 EUR/mo net. That means we need to reconstruct his gross monthly allowance.
To do that, we first need to take a look at the different taxes:
- Profit Tax: how dividends and other explicit profits are taxed.
- Capital Gain Tax: how the difference between sale and purchase prices is taxed.
- Wealth Tax: how your total wealth is taxed each year.
The impact of profit tax is usually easy to understand. It’s either a fixed percentage of your investments’ profits or it is taxed as regular income, which means it depends on your income marginal tax bracket.
If profits are taxed as income, tax amount is negligible for early retirees since they don’t have other income. Unless the retiree is relying heavily on a “high profits portfolio”, like dividend stocks, preferred shares, high yield bonds and so on.
If profits are subject to a fix rate tax, then it really matters how “profits heavy” your portfolio is. The impact of profit taxes can be translated into a fixed drift on your desired safe withdrawal rate.
I suggest Mr. ATM to optimize his portfolio (growth vs value) at retirement time to match what’s best in his new tax regimen.
Impact of Profit Taxes on SWR
Mr ATM expects fixed 26% taxes on both Capital Gain and Profits, with no Wealth tax. It smells like a country that I know something about…
Mr ATM’s portfolio is 60% stocks and 40% bonds, and his average Yield is 2.5%. The impact of a fixed 26% profit tax on your portfolio can be modeled as 26% of 2.5%, i.e. 0.65% of your portfolio each year.
Even though it’s not 100% mathematically correct, I’m going to model this 0.65% as a drift on his SWR. This is a pretty high fee.
Mr ATM’s desired SWR is between 3.25 and 3.5%. I lean toward 3.5%, given that his portfolio allocation is between 50% and 75% stocks and I’d say time horizon after retirement is optimistically between 40 and 50 years. Under these conditions he should be safe with a 3.5% SWR.
If Mr ATM lives above age 108 I’ll personally take care of him (so I won’t get bored at age 101).
Since 0.65% is profit tax, ATM’s plan needs to work on a 2.85% net SWR.
I said “not mathematically correct” because he pays 0.65% of current portfolio value, while he withdraws 3.5% (SWR) of initial portfolio value (and inflation adjust the withdraws over time). Anyway, our assumption is stricter, since in case of bad sequence of returns during early years, 0.65% of current portfolio value is less than 0.65% of initial investments. Which means withdrawing 3.5% lets Mr ATM retain more than 2.85% after profit taxes.
In other world, this is a self sustaining tax: the more you pay, the better you’re doing. While if things go south, you pay less of it.
On a side note: in a fiscal regimen where dividends are taxed so high I’d recommend to reallocate investments toward growth instead of value, which also happens to increase expected returns (and volatility too).
“But RIP, Capital gain tax is also 26%… doesn’t it mean that it doesn’t matter whether a stock raise in value or issues a dividend?”
Impact of Capital Gain Taxes on your Target Monthly Allowance
A couple of notes on Capital Gain Tax (CGT):
When you sell, you don’t pay 26% of the whole sell price, you only pay CGT of the price difference (sell price minus buy price).
Which means, in a “constant exponential” simple world model, where your assets grow a fixed X% per year, your initial withdraws contain very little capital gain. On the other end, your withdraws 30 years from now will be the result of selling strongly appreciated assets, i.e. you pay CGT on a growing fraction of sell price. Asymptotically, you pay CGT on the whole sell price.
In few words: your effective CGT on your withdrawals (tax paid divided by sell price) over time increases concave down, starting at 0% and asymptotically trying to reach the full CGT rate (in our case, 26%)
In the graph above I’ve modeled constant (real, after inflation) asset growth of 5%, inflation rate 2%, and CGT 26%. As you can see it takes ~12 years for effective CGT to reach half of nominal CGT. And mind that this is a rosy scenario, where your assets grow above your SWR.
Since the world is not linear though, when you withdraw from your investment you usually sell assets that are performing better, thus using withdraws to rebalance, which means that the effective CGT curve ramps up faster.
Another factor that makes the curve ramp up even faster is inflation in your currency area. I believe that investing money in stocks is a perfect edge against inflation, because if prices go up, then companies profits and evaluations go up as well. But you (usually) pay CGT on the nominal price difference, not on the discounted delta. For example: let’s assume a 100$ bill 30 years ago had same purchasing power of 1000$ today, if you purchased a stock for 100$ 30 years ago and sell it today for 1000$ you still pay CGT on 900$, even though the stock is essentially worth the same.
I said “inflation in your currency” because if your local currency depreciates 10x Venezuelan-Style overnight, then your 1000$ investment that today is worth, say, 1000 New Italian Lira (NIL) is suddenly worth 10k NIL tomorrow, and you must face a CGT on 9k NIL even though the investment is still worth 1000$ and 10k NIL has same purchasing power of 1k NIL the day before.
Since Mr ATM is living and accumulating in Switzerland, a nation that doesn’t tax capital gain, it’s strongly recommended that before leaving Switzerland he sells all his investments that are positive at the moment of leaving Switzerland, and buy again once in target country, using the best broker he can find in target country.
He will sadly incur in 2x trade fees on his entire portfolio, hopefully. In my case that would mean between 0.1%-0.15% of invested value (1M –> 1k+ fees) with current Interactive Brokers pricing structure. Of course, if an asset is just slightly positive and a double trade is more expensive than its current CGT (in case you were to sell it in your target country that day), then you don’t “clean it”. Do your math.
Other than non-linearity (sell to rebalance) and inflation risks, CGT is also a self sustaining tax: the more you pay, the better your portfolio is performing. Its self sustainability is even stronger than profit tax because even if market collapses 50% companies would still issue some profit, hence some tax for you. If you retired just before the 1929 crisis, you’d have paid not much CGT over the following 20 years, while still some profit tax.
We’re here to study the worst case scenario though, which for early retirees is dominated by Sequence of Returns Risk, i.e. experiencing a financial crisis in the early years of your retirement, which is a scenario where taxes don’t impact your plan too much.
So, how to model the impact of CGT on your retirement planning? I’ll simply model it as extra monthly allowance needed. I will only consider a fraction of its nominal value for the above mentioned reasons. Let’s assume half of it, 13% for Mr ATM.
At the beginning, for the first 10-15 years, he will pay less CGT than that, i.e. to achieve is target net allowance his gross withdraws could be less than planned, strengthening his financial situation.
Later he could pay more CGT than planned, leaving his family with less net monthly allowance (even though expenses will probably go down due to kids leaving the nest), but that’s a good thing because it means that his portfolio is growing better than the worst case scenario we’re trying to cope with, which would lead to a redefinition (increase) of his monthly allowance as well.
So the initial target monthly gross allowance is 2825 EUR (2500 + 13%) and SWR is 2.85%.
Target FU Money
Under these assumptions, Mr ATM’s FU Money is 1.189 M EUR. Incredibly similar to mine.
- I don’t put inflation here, all numbers for future earnings and investment growth are inflation adjusted as of today. High inflation will impact CGT though.
- I’m also assuming that EURCHF is stable, which is a big question mark. What to do if the CHF gets stronger compared to EUR? Well, that plays in our favor. What to do if the EUR gets stronger compared to CHF, without that being compensated with inflation and a salary raise in Switzerland? That would be a big problem and it’d impact Mr ATM’s plan.
We’ve defined the target, but where is Mr ATM today compared to the goal?
Let’s take a look at Mr ATM’s Net Worth:
Investments (Brokerage Account)
Initial Investments: 437,780 CHF (60% Stocks, 40% Bonds).
This is at Mr ATM complete disposal: once he leaves Switzerland, his investments will follow him.
For investments growth I’ll use a conservative 3% inflation adjusted per year.
Pension Pillar 1
Mr ATM contributed to mandatory Pension Pillar 1 during these 8+ years in Switzerland so far. Pillar 1 pension is “Swiss social security system”. It’s not an account with your name on it, it’s a pay-as-you-go system. You can’t cash it out if you leave Switzerland (well, there are very few exceptions but I don’t think Mr ATM qualifies for this).
I consider Pillar 1 pension in this model though, since Mr ATM can expect to receive a Pillar 1 pension once he reaches 65 with a very high certainty.
As I’ve mentioned in a previous post, future cash flows have a present net value.
What’s his household expected Pillar 1 pension as of today, i.e. if the ATM family would leave Switzerland tomorrow?
Let’s also assume his wife never worked in Switzerland, but she’s been insured since Mr ATM contributed more than twice the minimum for Pillar 1 each year.
What’s the initial present net value of this cash flow? How is this going to grow over time?
Please, take a look at my post on that topic.
Mr ATM’s actual numbers will be in the model spreadsheet 😉
Pension Pillar 2
Initial Pillar 2: 207,123 CHF.
Once you live Switzerland you can cash the extra mandatory part (under some conditions the mandatory part as well), and I strongly recommend to do so.
Let’s see how much of Mr ATM Pillar 2 is mandatory and how much extra mandatory. I assume he always earned more than the Pillar 2 cap (84.6k CHF gross) during his 8 years of work in Switzerland so far. In that case his mandatory portion is:
- 6k per year (10% of max Pillar 2 insured salary which is 60k) before he was 45 years old.
- 9k per year (15% of max Pillar 2 insured salary) after age 45.
More info on my post about Swiss pension system.
So his mandatory portion should be more or less 60k CHF (4x6k=24k age 40-44 plus 4x9k=36k age 45-48)
I like to split them because you can easily withdraw the extra mandatory portion if you leave Switzerland (paying a Lump Sum Tax, that here I’m going to model as 6%), and at pension age the mandatory portion will convert better into annuities: currently 6.8%, doomed to get lowered but still better than the extra mandatory portion which has no regulation (Hooli extra mandatory Pillar 2 if annualized converts at 5%).
Pension Pillar 3
Pillar 3: 52,340 CHF (75% Stock, 25% Bonds). This smells like a PostFinance Pension75 fund (0.98% TER) or UBS Vitainvest75 (1.59% TER!) or CSA Mixta-BVG index/equity 75 from Credit Suisse (0.78-1.40% TER). To put it simple: an expensive robot that rebalances between Nestlé, Roche and Novartis.
Anyway, for fund’s growth I’ll assume a conservative 2.5% per year due to high TER and historically non-enthusiastic performances of SMI index:
Even though we should consider the “Total Return” index, since Swiss companies go heavy on dividends. Here we can be more optimistic. Mind that unlike other stocks growth graph, the vertical axis is not log scaled, but linear.
Anyway, 2.5% (plus inflation) seems like a realistic expectation to me.
Once you leave Switzerland you can cash your Pillar 3A, paying the lump sum tax, that I’m also going to model at 6%.
I don’t see any cash in Mr ATM asset list. I assume he has an emergency fund for unexpected expenses. I also assume he doesn’t want to consider it in his net worth. Nice, it would be an extra safety margin that strengthen our plan.
Forces at Play
We need to evolve current financial status into the future.
Let’s take a look at the forces at play:
Net Worth inertial growth.
We have already modeled each component’s growth in the previous section.
Current and future Income.
Mr ATM is earning 121,400 CHF net, “after all taxes”. I assume he’s a C permit holder and he already subtracted income taxes from his income.
I also assume a modest salary growth of 1% (plus inflation) per year.
He mentioned that his family is a single income family and that Mrs ATM takes care of the kids. I safely assume she won’t take any job while in Switzerland (and hopefully forever, if that’s what she wants).
Current and future pension contributions
An important piece of information that Mr ATM didn’t provide is the amount of yearly Pillar 2 contributions. I assume a 25k Pillar 2 contribution per year (in sync with last 8 years) that doesn’t come from his savings. Please correct me if I’m wrong.
Of course, he’ll also keep contributing to Pillar 1, mandatory for every Swiss resident.
I also assume he will contribute to Pillar 3 each year, the maximum tax deductible amount, and keeps investing in the same instrument (75% stocks).
Pillar 3 contributions will come from his savings.
Current and future Expenses
Style note: I hope you don’t mind if in this section I will be referring to Mr ATM in the second person.
You’re spending 56k CHF per year with a family of four… Another round of applause!
You’re doing great! I consider myself frugal and we spend more than you for a family of three. You’re much more frugal than the average Swiss household.
Let’s do a comparison between my household and yours, to see where
I suck you can improve:
- Rent and House Expenses: you 19308, us 19485. My numbers also include cleaning, condo fees and taxes on my Italian useless flat. I don’t know where you live, but if you live where I live you’re doing it super great! I don’t see any improvement possible here, apart from taking a look at cooperatives (Wohnungsbaugenossenschaft in the German Switzerland). We’ll talk later about buying vs renting.
- Electricity & Internet: you 1140, us 1800. You’re doing great.
- Insurance & Medical Bills: you 11542, us 9137. Well, hard to compare. Your family is larger. I guess you’ve done your research, it’s an expense item hard to compress.
- Foods, Toiletry, House Supplies: you 9450, us 7241. I’d say you can cut something here, but given your very low “eating out” budget you’re already doing a good job.
- Trains Tickets & Half Tax: you 1381, us 2016. Wow, congrats!
- Eating Out: you 210, us 3199. Did I read correctly? Only 210 CHF of eating out? Perhaps you missed a zero? That’s uber frugal, just be sure that you’re not erring on the side of “too much frugal”. You know your balance. Anyway, looking at my numbers maybe we – the RIPs – are slipping into the spendypants territory. I Should fix something.
- Entertainment: you 4080, us 3345. Your geeky gadgets addiction compared to my books and board games addiction (and my wife stuff addiction). I was also a geeky gadget fan, but since I work for a geeky gadget company I’m no more interested in things that are over-hyped, become obsolete within 6 months, and essentially are just another ads targeting surface. I hate everything that is “smart”, I only accept passive machine that do what I ask them to do. Maybe you could cut something here, but if it gives you pleasure please don’t.
- Banks & TV Licenses and Other Fees [Insurance and etc]: you 528, us 1200. You’re doing great. Sadly we can’t get rid of Billag (TV license). Looking at my expenses, this year I’ve been reshuffling my investments a bit and had a somewhat expensive tax consultation. It seems you’re doing your taxes on your own. Good.
- Family Gifts & Charities: you 1712, us 993. Well, Christmas is not here yet… and we don’t give consistently to charities. Don’t cut here, please.
- Holidays: you 3840, us 9271. For us, it varies a lot from year to year, but it’s a huge fraction of our yearly expenses. We do like to travel, and we frequently need to go to Italy back and forth. Consider bringing your kids on an extra trip next year 😉
- Clothes & Shoes: you 690, us 1180. You’re doing incredibly great.
- Schools and Children Expenses: you 1308, us 4417. How come… ok, we need to meet, you’ve got something to teach me. Anyway, Kids will grow and kids related expenses are going to change, probably grow as well in nonlinear fashion. Hard to predict.
- Misc [Furniture Gadgets & etc ]: you 819, us 1165. Great.
I don’t see many trimming options to your yearly budget, I’m actually suggesting you to untighten it a bit. If you feel like your life could be improved by spending more, please do (in moderation). 56k for a family of four is mustachianly heroic, but hard to sustain in the long run in Switzerland.
I’m modeling your expenses as 60k CHF per year, plus 1% adjustment each year (plus inflation) to give you room for relax and let children related expenses grow a bit.
Use of Savings
I assume Mr ATM savings (income minus expenses) go:
- Into Pillar 3A, maximum tax deductible each year (currently 6768 CHF).
- Whatever remains, it goes straight to investments.
Time to play with spreadsheets!
Ta daaaa (link)
Note: All the cells in the spreadsheet with yellow background are variables and can be modified.
So, our diagnosis says that Mr ATM can retire in 5 years!
It was an easy call: nice salary, amazing expenses, fat initial net worth and low requirements for postFI monthly allowance.
Anyway, let’s play with variables and explore few scenarios
No Pillar 1 pension
Mr ATM believes that pension systems are “social tax forced by the government”. He mentioned that he might actually also receive a pension of 2-300 EUR in his target retirement country one day (which I didn’t include in our calculations).
I think Swiss Pillar 1 pension is a reliable cashflow. Regulations may change in the next 17 years (that’s how far Mr ATM is today from his statutory retirement age), but I don’t think they’re going to change too much from Pillar 1 pension. Maybe the amount in real CHF will decrease as effect of not adjusting properly with inflation (or inflation rate being underestimated by the government), but he can be sure he’s going to receive real money from the Swiss Government at age 65 (or later, if they change the rules).
Anyway, we can play with our model and exclude Pillar 1 from the NW via input:
Sadly, retirement date will move to Year 7.
Time to address the elephant in the room.
Currency fluctuations are a serious threat when accumulating in one currency and targeting another one. In a globalized world that’s a lesser risk, since a decline in a currency is usually compensated by price adaptations (inflation), that stabilizes current equilibrium.
Anyway, it seems the world, especially Europe, is heading toward close markets, nationalisms, a decline of European Union… there will still be the EUR currency 10 years from now? If you asked this to me 10 years ago I’d have said “of course! 100% sure”. Today I’m not sure anymore.
Let’s stretch the model and assume a huge EUR drop. Something like EURCHF = 0.8 (1 EUR worth 0.8 CHF)
That’s of course “good news” for Mr ATM, since his hardly earned CHF will be worth more, unless some of the investments are in EUR currency, which is probably true.
On the other side, in case of a weak EUR his family might not be fine with an allowance of 2500 EUR/mo. Prices in his target country will increase, at least for imported goods and services.
What if the EUR becomes king, or if the CHF falls? Let’s assume EURCHF = 1.5.
That’d be a prison sentence for Mr ATM.
Switzerland would lose its accumulation phase goldmine status, but he could still retire in 9 years.
Anyway, I’m assuming all his assets are in CHF, which is probably not true. I guess he’s already edged a bit against currency risks with his investments. Which is not complicated to do, it’s enough to invest in global companies. Coca Cola (but also Nestle, Apple, Sony and every large company today) earns profits in many countries in the world. If tomorrow a dollar is worth 0.001 EUR, sales in Europe would make trillion of dollars for Coca Cola, stabilizing its value. So, under the assumption of globalism, it shouldn’t matter much in which currency your investments are quoted.
FatFIRE in 10 years
Let’s do the other way around: let’s assume Mr ATM wants to work another 10 years anyway, even if they reach their current definition of FI (2500 EUR/mo net monthly allowance) before. What would be their nest egg, and the corresponding monthly allowance?
Still assuming 3% pessimistic but constant portfolio returns over time, and EURCHF as of today (Oct 12th 2018) their Net Worth after 10 years will be 2.076M CHF (1.807M EUR).
In 10 years the ATMs will be in their 50s. With an horizon of 40 years, and a 60/40 asset allocation, even a 3.75% SWR leads to a success rate above 95%. Let’s consider 3.75% SWR.
Playing with inputs, we can raise the net monthly allowance up to 4130 EUR/mo. Let’s not forget these are today’s money, inflation adjusted to present day. Nominal value will be higher.
Feel free to copy the spreadsheet and play with the other variables to see what would happen in different scenarios.
The answer to the original first question is YES, they can retire in 10 years. They can actually retire in 5 years even in a conservative and moderately pessimistic scenario.
That was an easy call. Think about it: in 10 years Mr ATM will be 58, just 7 years close to Swiss Pension. Just converting the 3 stream of Swiss Pensions (Pillar 1, Mandatory Pillar 2, Extra Mandatory Pillar 2) into annuities would provide 3107 CHF/mo (gross).
I enjoyed a lot studying this user case study, and I’m going to need same kind of analysis for myself soon! Our conditions are similar: single income family with kids, relatively high income, relatively low expenses, aiming to retire abroad in a European country, nicely sized current Net Worth.
We’re on the same path 🙂
Ok, we’re almost done. Few more questions to answer.
Buying a house instead of renting
This would require a completely different analysis, and this post is already long enough. So I’m going to throw some personal speculation not backed by data, just my gut feeling.
Short answer is: NO, I don’t think it’s a good idea.
Long answer is (as always): it depends.
main variables worth thinking about are:
For how long are they staying in Switzerland?
My model is “if I’m staying in this house for more than N years I better buy it“, with N being very situational. In Switzerland N is big. Purchase fixed costs, house prices, mortgage interests payment, property taxes and high repairing costs push N toward high numbers. Somewhere around 10 years at least.
Since you’re on track to FIRE in 5 years, my gut feeling is: NO, don’t do it.
How expensive is the house you want to buy?
Houses in Switzerland are very expensive. Even for the small one we live in (50-55 square meters, old building, no elevator, no washing machine, sink in the corridor due to lack of space in the bathroom) I think 600k CHF won’t be enough to buy it.
Plus, having a huge amount of wealth locked in a single asset is risky. I don’t know if we’re in a housing bubble, but for sure we know that low interest rates do push house prices high.
Do they plan to keep the house once retired abroad?
Managing your house from abroad will be a tough challenge, or an expensive one (if asking someone to manage the house for you). Renting is not a high profitable business in Switzerland. Renting from abroad will probably generate negative returns.
You know why Pillar 2 interests are shitty 0-0.5%? Because they can only invest in “safe assets”, like rented houses. Most of the houses in my neighborhood are pension funds or insurances owned houses. My landlord changed 3 times since I’m here, and nobody came to visit the flat!
Renting is not a profitable business in Switzerland.
Once leaving the country they would have to sell the house, which could happen in 5 years or less. Extra costs, taxes, realtors… Plus volatility on the sale price. I feel confident in saying that a 3% growth on your portfolio is a “pessimistic expectation“, I’m not as confident in saying that your house will appreciate by 3% per year.
What would be the cash flow difference?
Once paid the initial costs, the down payment, the realtor, the notary, taxes, furniture, etc… you’ll experience a cashflow benefit: your monthly expenses will go down. Mortgage interests, taxes, and maintenance costs should add up to a lower amount than you’re paying as rent right now.
I say “should”, because at Hooli I saw some numbers from homeowners in terms of CHF/sqm difference between owning and renting. My own CHF/sqm as a renter is similar to the CHF/sqm of many owners, thanks to a cheap rent locked 10 years ago by the previous tenant.
Do your math.
Mortgage interest rates are tied to central bank interest rate.
When you buy a house in Switzerland you usually mortgage ~80% of the purchase price. Many never repay the 80% principal, just the interests. What if tomorrow the central bank raises interests? They are very low as of today, they can easily double. Your 1% mortgage can become a 2% mortgage. It’s a 1% difference, but it doubles your monthly bill.
Yes, interest rates affect rent too, but is a limited way. A 1% reduction of the interest rate lowered my rent by 90 CHF out of 1500. Even worse, an increase in interest rates will lower your house market evaluation, eating all your equity on it (you own 20%, first 20% loss in equity is yours).
Evaluate your risk tolerance and don’t assume current interest rates will last forever.
Is there a chance they will early retire in Switzerland if they buy the house?
That’s a completely different story.
If buying a house will make the ATMs consider early retirement in Switzerland, then it might be a good idea. Number of years spent in the house will be “greater than N” (see above).
Current spending level of ATM family, nice taxation system, and reduced (maybe not much) housing costs could open the door to early retirement in Switzerland.
I’ve run some number, under the following assumptions:
- No house appreciation in today CHF (just keeping up with inflation)
- Downpayment of ~150k CHF all from Pillar 2 Extra Mandatory (oversimplification)
- Yearly expenses below 55k (it seems reasonable, you’re at 56k now with a rent)
They won’t make it in 10 years under the pessimistic market hypotheses. But probably in 11 🙂
So they could buy the house and still be on track to be FI in 10-11 years, in Switzerland.
But don’t trust this last one: the math is not precise and too many lighthearted assumptions has been made. Take it as a back of the envelope calculation.
Anyway, for a more detailed report on “how to buy a house in Switzerland” I recommend checking out the post series on MustachianPost blog.
The other elephant in the room, that we didn’t talk about here is: there will still be Euro in 10 years?
Can we be 100% sure your target country won’t leave the EU and print monopoly money? It seems it’s trending these days.
This is another level of risks that I apologize but I have no idea how to handle. That’s a black swan.
That’s all for today’s reader case study, I hope you enjoyed it.
If you want to be featured in a reader case study please contact me via mail or contact form here in the blog 🙂
I am speechless with gratitude for the quality and the quantity of information provided in this post, also it is an honor to be the 1st reader case and the post number 100 on this amazing blog. 🙂
Will raise some questions and comments here hopefully this will enrich the discussion on the post.
a. I didn’t know the wife are entitled for Pension (Pillar 1) if she has never contributed in the Pillar 1 at all and the husband contributed more than double the minimum. thanks for the valuable information.
b. Cash: Yes I do keep 6 months of living expenses just in case of emergency. it is not part of the assets as it has ZERO interest .. but it is good for emergency.
c. Pillar 3 it is with SwissConto BVG 75 Index Fund : CH0353690909
d. Use of saving is usually on Pillar 3 and Investing in Stock and Bond.
Again thanks for the post.
As I said, I enjoyed working on your case since I’m going to reuse most of it on my own situation 🙂
About your points:
a) take a look at https://www.axa.ch/doc/aa5l4. “If the employed spouse has paid at least double the AHV/IV/EO minimum amount (2 × CHF 478 = CHF 956), the contributions of the spouse who is not gainfully employed are deemed to have been paid.” Contact your compensation office (Ausgleichskasse) anyway: https://www.ahv-iv.ch/de/Kontakte/Kantonale-Ausgleichskassen
b) soooo maybe you can retire in Switzerland in 10 years instead of 11 🙂
c) TER 0.43%, maybe we can raise the expected return to 3% instead of 2.5%.
Another wonderful post, very inspiring as all the previous ones 🙂
I’d like to ask Mr. ATM if he can go a little more into details of what ETFs is using and how he choose them (not a full blown strategy, just some hint for someone that is starting to think about FIRE and is about ten years younger).
Here is the ETFs list :
a. VEVE Vanguard FTSE Developed UCITS ETF .
b. EIMI iShares Emerging Market UCITS ETF.
c. SCHH Schwab US REIT
a. VUTY : Vanguard USD Treasury ETF.
b. VDET : Vanguard USD Emerging Market Government
I know I have no Europe based Bond ETF, This intentional as the yields on EUR Bonds is very small thank to ECB and other europe central banks. for the negative interest rates. 🙁
I would like to propose a minute of silence for EIMI ETF…
Or cause for Celebration, remember the stock Market is the only market where is everyone run out of when everything on Sale. 🙂
Good learn, great post as always. Will start detailing my expenses to see where I can make some cuts. Thanks!
You’re welcome 🙂
Wonderful post indeed. One thing I am not sure about.
You wrote “Downpayment of ~150k CHF all from Pillar 2 Extra Mandatory (oversimplification)”
I thought 10% must be cash (not 2nd pillar).
I don’t know the details, didn’t investigate it yet.
I know that you can mortgage no more than 80%, and the remaining 20% can come from Pillar 2. Not sure if all of it, I don’t care.
It was just an (oversimplified, as stated) example of a 20% downpayment of 150k, on a house worth 750k.
Ok, thanks. AFAIK only 10% may come from 2nd Pillar. But maybe that is just a limitation to the mandatory part.
Mr. RIP, are you planning to do more if these in the future? Let us know if you are looking for volunteers haha
Maybe there is a business model for post retirement for you.
Of course I plan more of these in the future, if you want to volunteer please do!
Just know you’ll have to wait, my blog schedule is super full and time is tight 🙂
“Since Mr ATM is living and accumulating in Switzerland, a nation that doesn’t tax capital gain, it’s strongly recommended that before leaving Switzerland he sells all his investments that are positive at the moment of leaving Switzerland, and buy again once in target country, using the best broker he can find in target country.”
Can you do such a reset even if retiring in Switzerland? I ask, since retiring early could trigger being treated as professional trader (capital gains taxation) if more than 50% of your income comes from capital gains.
Well, you could split in 2 years, cleaning first the assets who increased in value the most.
I’m not sure about that 50% capital gain rule. Can you point some official source?
I don’t think it’s about long term capital gain.
There are certain criteria which are used to assess whether you qualify as a professional trader. If so you must pay income taxes and social contribution on your capital gains. This could easily take 30% of our gains away. 30% would be a huge impact on FIRE.
Here is the source: https://files.static-nzz.ch/2017/6/23/4d8fd2ad-f810-4b69-90a2-5f78a0efbdf7.pdf
I know about the 5 criteria, which are btw “necessary but not sufficient”. And none is related to long term capital gain. It’s more “if THIS year your investment grew more than X% of your regular income we’ll investigate”. And it’s well known that it’s hard to be classified as a professional trader if you clearly are not. I don’t have data backing my claim now though. I’m going to investigate further in the near future
I REALLY wish your understanding would be correct. I will also try to investigate.
I am most concerned about criteria nr. 3. I mean: in early retirement (before you get 1st and 2nd pillar money) you live 100% off you capital gains + dividends, right? Hence this criteria seems to be met. What I don’t know if there has been any case when an early retiree was categorised as pro trader just for living off capital gains.
That’s my big question mark and I’m going to investigate it while working on my Switzerland country review for EERG.
Anyway, it shouldn’t impact your “cleaning” phase before you move away
Super detailed! Great post. I’m glad I found your site. As a numbers nerd this is really interesting.
Welcome to retire in progress, Tim 🙂
Great post and wonderful analysis ! I have a question for you, Mr. RIP : Why do you consider taxes in FU Target formula for Mr. ATM spreadsheet, and this is not the case in your own monthly spreadsheet FU formula updates? Thank you for your work – I enjoy your blog everyday.
First, I consider my 3500 EUR/Mo target spending “tax included”, but that’s not a satisfying answer I guess 🙂
Reality is: when I started blogging I put this number as a “not-precise & pessimistic target”, then I’ve run the math on top of this weak basis.
I’ve evolved in the meantime, and When I’ve run Mr ATM’s math I used my way more detailed knowledge on the topic.
As a consequence, I’ll soon (hopefully before end of the year) run the math with more precision for our ER plans, which are not clear yet.
In case we decide to move back to Italy, I would plan for 2-3k EUR/mo net and redo the math accordingly.
But it’s also possible that I won’t do the exact math, and stick with the fact that the 4% rule (or 3.5% or whatever%) is a “rule of thumb”, and when I feel confident enough I don’t need to be FI to start living my ideal life. Because I still plan to generate an income stream out of my passions
TL;DR: my math is using an old model, but maybe a new one is not required because once one is ~70% safe can close the gap with confidence instead of money
Thank you Mr. RIP, your answer has been very satisfied. Keep the plan/”rule of thumb” is better than struggle with “over-needed” math! Have a nice day