About 50 years ago, if you had a long-term career in a reasonably substantial company or the government, you didn’t have to worry about saving enough money to retire. Indeed, you would have been automatically enrolled in your employer’s defined-benefit (DB) pension scheme, which was supposedly enough to cover all of your post-retirement needs.

These days, things are very different. In fact, the state of retirement provision is a major concern for the Swiss population. According to the Credit Suisse Worry Barometer, pension provision/AHV consistently ranks among the top of Swiss citizens' concerns. This widespread concern stems from issues with mandatory employee benefits insurance, which are making Swiss citizens fearful of pension reductions.

Credit Suisse Worry Barometer 2023
Source: Credit Suisse

Following the realization that sponsoring pension funds with guaranteed returns through defined benefit (DB) plans resulted in a heavy liability on their balance sheets, companies began closing these schemes to new members. This is why “nowadays, defined benefit plans have become rare in practice.” Today, apart from Publica, the scheme for Swiss federal government employees, very few DB schemes remain open to newcomers.

What does that mean for you? Well, the most important consequence is that, like most countries, Switzerland has, in effect, abandoned the certainty of DB occupational pension schemes. Instead, most employees have DC (defined contribution) plans, wherein the pension you receive cannot be guaranteed. Rather, it depends completely on the types of assets held, for how long, and your retirement income needs. This uncertainty has prompted – and continues to prompt – prudent individuals to seek additional income sources to ensure a worry-free retirement after the age of 65.

How Much Should You Save and How Long Will It Take?

Moonshot 2024 findings suggest that, to ensure a worry-free retirement, a pension should be equal to at least 70% of pre-retirement income. Based on this, Moonshot concluded that the average Swiss pensioner needs a total third-pillar savings of nearly CHF 400’000.

As with any long-term estimates, you should be as conservative as possible when calculating your potential retirement fund, seeing as anything can happen from now until you retire. With this in mind, assuming that CHF 400’000 earns an interest rate of just 3%, it would provide an income of around CHF 12’000. This is in addition to an estimated income of about CHF 70’000 from the mandatory first and second pillars, assuming both your current and estimated pre-retirement incomes are close to the national averages.

Having determined the amount of capital needed, another crucial factor to consider is time. How many years do you have until you reach the official retirement age of 65? The more time you have, the easier it will be to achieve your savings target with greater certainty.

Assuming you’re around 30, there are some 35 years left for saving. This length of time makes the task relatively simple due to the power of compounding. To make it work best, you should not only make regular, preferably monthly, contributions to your savings pool, but you should also reinvest any interest or dividend income that you earn from it.

Compounding Effect On Retirement Savings

The simple steps mentioned earlier will not only ensure that your regular payments into the plan earn income in the form of interest or dividends but also that through being reinvested in the plan as well, that income earns further income (which is also reinvested, and so on, and so on).

For example, taking the S&P 500 as a reference, dividends have contributed approximately 32% of the total return for the index since 1926, while capital appreciations have added 68%, according to the S&P Dow Jones Indices. Additionally, since 1960, 85% of the cumulative total return on a hypothetical USD 10’000 investment can be attributed to reinvested dividends and the impact of compounding.

Growth of a hypothetical USD 10’000 invested in the S&P 500 in 1960 with and without reinvested dividends
Source: Hartford Funds

Providing you maintain that saving discipline with regular monthly contributions and reinvestment of dividends and interest, an initial large lump-sum investment will be unnecessary for securing a comfortable retirement. Over the past 20 years, the average dividend yield for the Swiss Performance Index (SPI), which tracks almost all of the shares listed on the SIX Swiss Stock Exchange, has been 2.4%.

Consequently, if you were to invest just CHF 650 every month into a portfolio that more-or-less represented the constituents of that index, the dividend income alone, excluding any capital gains, would produce a total of CHF 427’188 by the time you are 65. Now, you may be wondering how to invest such a small sum as CHF 650 across the 200-plus issues that make up the SPI. The solution is simple and much cheaper than buying the actual shares: simply invest in an exchange-traded fund (ETF) that holds all, or nearly all, of the issues in the index, thereby ensuring a high level of diversification within a single instrument.

In Switzerland, one of the most popular ETFs of this kind is the iShares Core SPI ETF. Launched more than 10 years ago, it has a proven track record of closely tracking the index, with a correlation coefficient of 1 and a tracking error of just 0.1%.

Growth of a hypothetical CHF 10’000 invested in the index and the ETF tracking the index since 2014
Source: BlackRock

This ETF has over CHF 3.2 billion in assets under management, ensuring deep liquidity, and allowing you to buy the shares almost instantaneously on any trading day. It also enables the manager, which is the Swiss subsidiary of US giant, BlackRock, to charge an annual management fee of only 0.1%. Ultimately, this ETF is, as they say, a no-brainer and a perfect entry point for many investors.

Can It Be Made Easier and Handled as a One-Off?

For some people, maintaining the discipline explained above, a.k.a. setting up a monthly payment plan with your bank, making sure it’s being implemented in full and on time, revising it when your salary is increased, keeping an eye on the progress of your savings, and so on, might be too much of a chore. Is there not a simpler method, one that requires only a single action and can then be forgotten?

Indeed, there is. Simply kick-start your entire 3a pillar plan with a one-time investment. However, you will need to have the necessary capital at hand. Using the assumptions that we have already applied for your age and retirement savings needs, the required initial commitment would be around CHF 200’000. Compounding at 2.4% annually, this will produce nearly CHF448’000.

However, CHF 200’000 is a pretty substantial sum for the average Swiss 30-year-old to have available in hand. More importantly, compared to a monthly commitment of just CHF 650 that can produce almost the same result, why is a one-time investment so much less rewarding?

Again, it comes down to the effect of compounding. For instance, a one-time investment in the iShares ETF will only receive dividend payments from the fund, at most, four times a year. In reality, it pays out “ad hoc”, according to the fact sheet linked above, but has done so, historically, at least three times annually, and more often four, or exceptionally, five. This means that the reinvestment of those dividends to create the compounding effect can only take place on those three or four occasions. On the other hand, a monthly contribution will capture the same effect 12 times a year, as many as four times more often.

Discipline and Time Are Crucial

As Benjamin Graham, the investment author and father of value investing, once famously said, “successful investing professionals are disciplined and consistent.” With a little due diligence, therefore, you can use the three or four ETF distributions to buy more of it, adding those compounding events to your annual total. This could result in a significant bonus upon your retirement, as already examined.

Consequently, this demonstrates that the apparent simplicity of achieving your pension target with a one-time investment entails a significant opportunity cost in terms of the returns it will produce. In other words, the most effective approach to kickstarting your retirement savings is not to opt for a one-time investment. Instead, it’s best achieved through regular contributions and ample time.

At Le Bijou, we made it possible to invest in portfolios of our fully operational properties in Zurich and Lucerne with as little as CHF 500 per month. With a strong track record of delivering double-digit average annual returns since inception and remaining profitable in both years of the pandemic, these portfolios are a perfect entry for those seeking to invest in lucrative Swiss real estate with no institutional-sized checks. The core to this approach, as our findings suggest, is that there’s no time to waste: the sooner you start, the more rewarding it will be.

Start InvestingInvest  Book CallCall  Join NowApply