Early Retirement vs. Regular Retirement: What You Should Know

Many people dream of retiring early and having more time for themselves, their family, or their hobbies. However, early retirement comes at a price: those who stop working before the regular retirement age must expect a reduction in their pension. In this blog article, you will learn how significant this reduction can be and which factors you should consider in your decision.

How does early retirement work in Switzerland?

In Switzerland, the retirement provision system consists of three pillars: the AHV (1st pillar), the pension fund (2nd pillar), and private provision (3rd pillar). The regular retirement age is 64 for women and 65 for men.

Early retirement is possible up to two years before the regular retirement age, i.e., from age 62 for women and from age 63 for men. However, you must expect a reduction in your pension, which varies depending on the pillar.

Important: The reference age for women and men will be standardized to 65 years starting in 2028. This means that you can apply for early retirement from the age of 63 starting from that time.

How significant is the pension reduction in early retirement?

The pension reduction depends on how many years you want to retire early and how large your savings are in the different pillars. Here are some examples:

AHV pension

The AHV pension is reduced by 6.8 percent per year drawn early. If you retire two years early, you receive 13.6 percent less AHV pension than with a regular retirement. The maximum AHV pension for a single person amounts to 29,680 Swiss francs per year (as of 2023). With a two-year early withdrawal, this is reduced to 25,402 francs per year.

Pension fund pension

The pension fund pension depends on the conversion rate at which your savings are converted into a lifelong pension. The legal conversion rate is 6.8 percent. Pension funds can set a lower conversion rate for over-obligatory retirement savings, often between 5 and 5.5 percent. In the case of early retirement, the conversion rate is further reduced, as the pension is paid out for a longer period.

Suppose you have a balance of 500,000 Swiss francs in your pension fund, of which 200,000 francs are in the obligatory and 300,000 francs in the over-obligatory area. At regular retirement, you would receive a pension of 31,400 Swiss francs per year (200,000 x 6.8% + 300,000 x 5%). With a two-year early retirement, this would decrease to about 26,600 francs per year.

Conclusion

Early retirement can give you more time and freedom in retirement, but it also has its price. You will have to cope with a lower pension that may not cover your usual standard of living. You must plan your provision well and invest your assets sensibly to avoid a provision gap.

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