My dad is turning 64 this year and he has asked me to accompany him to some pension planning meetings, that he set up with his financial / retirement planner . I of course said yes. It is a good opportunity to help my dad ask the right questions, and to see how the Swiss financial planners calculate the financial figures past a traditional retirement age.
A bit of background
My dad is the oldest of four kids. In many ways he lived a stereotypical Italian immigrant life. His dad (my grandpa) was a saisonal construction worker during the 50s and 60s, spending 10 months out of the year in Switzerland working his butt off, while his wife and children made ends meet in South Italy. After a decade of hard work and lots of sacrifices, my grandfather had saved enough money to buy a house in Switzerland, which was the prerequisite back then to be allowed to re-locate your family.
When my father came to Switzerland at 9 years old, he not only had to learn German, he also had to learn the Swiss way of life. He quickly adapted and not only learned the local dialect, but also did well for himself. He started working as a foreman at a ceramic and tiles company after finishing his apprenticeship. Forty years later he still works for the same company, but has worked himself up into the management, running the day-to-day of the business.
In recent years the discussion about his retirement age came up quite a few times . He likes to work, but has grown weary of the changes and the politics in the company. That is why he has considered to retire early at 64 years (retirement age in Switzerland for men is 65). The decision, however, was dependent on the monthly payments he would receive.
Meeting with the retirement planner
In our meetings with the financial planner the main goal was to get a full picture of the financial situation of my father and to asses all the income streams available during retirement:
- What assets do you and your wife own?
- What is the value of your pension accounts, your 3a pillar accounts?
- When would you like to retire?
- When did your wife retire, how much is she getting from her pension accounts now?
- What is your estimated cost of living per month?
- Any large purchases or special plans scheduled during retirement?
- Do you wish to take a partial lump sum payment of your pension?
All these questions were recorded, with the goal of making a detailed cash flow projection of the next 25 years.
The question that the financial planner asked all made sense and it was especially interesting for me to see how they calculated some of the details of the spreadsheet. One thing that became clear, however, was how conservative some of the underlying assumptions were:
As you would imagine, the Swiss financial planner has a very conservative approach, they overestimate cost and underestimate profits in order to make the final calculation as safely achievable as possible.
Assumption 1: Inflation rate
For example: the planner calculates a yearly inflation rate on their expenses of 1.5% until 2045! That seems extremely high, especially considering that the last six years looked like this:
|Change in %||0.0||-1.1||-0.4||0.5||0.9||0.4|
Average annual inflation in Switzerland: https://www.bfs.admin.ch/bfs/en/home/statistics/prices/consumer-price-index.html
When looking at the historical inflation rates the average comes out to be somewhere around 0.5%. That seems a more truthful average number for Swiss inflation.
Assumption 2: Three Percent Growth Rate on Capital
I find it difficult to assume a growth rate for my invested capital. Generally, and this should be obvious, the expected growth rates are closely linked to the risk within each asset class. So a pure bond portfolio is not going to give the same return as a pure sotck portfolio. The Swiss financial planner that helped my dad assumed a 3% growth rate on the invested capital.
That seems low, but I am not sure what assumptions she had in terms of distribution of funds across asset classes. My dad has a follow-up meeting with her to plan the investment strategy specifically. He has asked me to join again, so that should be interesting.
A number “good” number to assume, that gets quoted often is 6-7″ annual return in the stock market over the long haul. that seems to come from a quote by Warren Buffet.
“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”Warren Buffet
In terms of historical values, Mr. Buffet is not wrong. When we look at the historical S&P 500 data since 1927 the average growth rate comes out to be 7.6%. But a typical portfolio won’t invest in the S&P 500 only. Let alone be in stocks only. It’ll be interesting to see what the recommendations are for a retirement portfolio.
Assumption 3: No Value Increase on House
As an additional cushion the financial planer did not assume any value increase on the house that my parents own (partially).
This seems really odd to me. Especially given, that the neighbors just sold the exact same house 20 years after buying it at the same time as my parents for almost a 50% profit! That would equate to 8 percent a year in 20 years. I understand that many factors play into the valuation of a house such as location, current real-estate market, mortgage rates, state and standard of the house.
Personally I am assuming somewhere between 0.25 and 0.5 % value increase on the house, without subtracting any investments done on our end.
The lady did a good job preparing for the meetings and was good at answering my dad’s questions. I probably could have come to a similar conclusion, but sometimes having a third person confirming what your family member already explained to you is helpful and reassuring. I do believe that she was a bit too conservative in her estimate, but that’s what you should expect from a retirement planner.
My dad feels confident that he can retire this year and looks forward to it. He is a few months away from what I am working towards now. Our goal though is to be done working for a salary by 50!
Give me some feedback
Have you met with a financial or retirement planner? What was your verdict? Do you have a question you would like me to ask the Swiss financial planner the next time I see her?