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Saving for the future is generally not considered a very exciting topic. And young people are usually the least interested in it. Because retirement is eons away! Who knows if social security will even be around by then? And anyway, if you don’t pay in the maximum into your Pillar 3a account, you might as well not pay in anything at all. Is all this true? We will talk about the five biggest myths surrounding personal retirement savings using Pillar 3.
1. “It doesn’t matter if I don’t start saving until later for retirement”
Actually, it does. A lot of people think that it’s only worth saving for retirement if you earn a lot. But that’s not true at all. If you start saving early on and invest your money wisely, you could have one million francs by the time you’re 65 without making any risky investments. Saving for retirement is the same as any investment: The longer your investment horizon, i.e. the time period over which you invest, the greater the risk you can take on. Which adds up to more profit. Then you have what’s called compound interest – the interest you earn on interest – which increases exponentially with time to make your money grow faster. And on top of this: If you pay into Pillar 3 every year, you will save on taxes every year – which means more ready cash for you. And who can’t use more cash?
By compounding interest, your money grows even faster over the long term. How does it work? The interest that your investment generates every year is reinvested. Then the next year, you earn interest on this interest too – which is why it is called compound interest. This is how your earnings grow year after year. If you invest over a longer period of time, compound interest really adds up. Investing your retirement savings over 30 or 40 years is even more worthwhile because not only are you earning interest every year, but even more compound interest too.
2. “If you don’t pay the maximum into your Pillar 3a account, you might as well not do it at all”
Of course this is not true either. It’s worth it paying in even small amounts, especially if you can invest these over a period of 40 years. And you’ll also be saving on taxes on whatever portion of the maximum amount you pay in.
3. “Investment funds are much too risky”
A lot of people believe that you shouldn’t take any risks with your retirement savings, which prevents them from making more out of their savings. This is a mistake. If you are able to invest for 30 or even 40 years, then you should invest in the markets as well instead of just parking your money in a retirement account where you earn comparatively little interest.
Investment funds are one way to invest the money that would otherwise just be sitting in a Pillar 3a account (individual retirement plan). They give you the opportunity to earn more. As with all retirement plans, individual retirement plans include various financial products – usually stocks and bonds. If you want to invest your money in an individual retirement plan, then you can choose how much risk you want to take.
4. “It’s smarter to just save your money because the money that you put into Pillar 3 is restricted – and it’s not easy to take back out”
“I can save for my retirement simply by transferring my money to my savings account – at least this way I can get my hands on it if I really need it.” This is true, of course. But you shouldn’t confuse saving with saving for retirement. Having some money to fall back on in your savings account in case of emergencies is always important. Life is full of surprises – even if it's just a doctor’s bill or an invoice for back taxes. The good thing about Pillar 3 is that it is restricted so you can’t simply take the money out whenever you want to. This way you won’t be tempted to use the money you’ll need when you’re older to splurge on a vacation or new clothes. Then there’s also the tax savings options we mentioned before. And you can actually access your Pillar 3 retirement savings for specific purposes like setting up your own business, taking it with you if you leave Switzerland or buying a house.
5. “By the time I retire, there won’t be any money for me anyway”
Luckily this isn’t true either. The AHV/OASI contributions we’re paying in now are being paid out to people who are currently retired – this is called a pay-as-you-go retirement system. But when you open a Pillar 3a personal retirement account, this money that you save on your own account or custody account will be paid out to you and you alone. No one can take any part of it away from you.
Nadine Graf is a theme manager and writes texts for AXA on topics related to insurance and beyond.
