Big decicions ahead (2): Second pillar

[Omainec]

Hi everybody

I'm sure one of the older guys in here. I'm 58 and planning to retire with 63 in about 5 years. Now, as I have maxed out my second pillar for tax reasons, my biggest financial decision yet will be the amount I take out in cash vs. the amount I convert into rent (5,8% per year, if there us no further deterioration untill 2029).
There are so many variables going into this decision that I of course cannot expect an actual advise on optimal amount from you guys. Nevertheless I feel a bit lost about this issue. There seems to be little sound advice on this topic out there.

Recently I have started to think about a decision strategy, that aimes at linking portfolio performance (of my stock investments) and conversion percentage (if the capital in the 2nd pillar) .
Let's say:
PP = Portfolio performance accumulated during the next 5 years (untill pension age(
C = share of 2nd pillars in cash
R = share of 2nd pillar converted in rent
As an example, if
PP > 20% then R/C = 80/20
PP 10-20% then R/C = 70/30
PP 0-10% then R/C = 60/40
PP < 0% then R/C = 50/50
PP under -10% then R/C 40/60

Is this reasonable thinking, assuming that high valuations lower the expected return on stocks and therefore make a conversion of the 2nd pillar into a pension rent (instead of investing cash in stocks) more attractive? Or should I take into account the possibility of "safer" bond investments instead ?

 

[Baptiste Wicht]

Have you validated with your pension fund that you can split in pension + lump sum? I am not sure they all allow to split.

Your strategy makes some sense to me, but it feels like a bit more market timing. It's very difficult to put a mathematical model on it.

I would do with a few questions:

1. Are you capable of managing 1+ million on IB yourself?
2. How risk-averse are you?
3. Do you need bonds? The second pillar pension is like an excellent bond.
4. How long do you expect to live? This matters because the second pillar pension is gone once you die (in most cases) while the lump-sum will go to your spouse/children.

 

[Max]

Now, as I have maxed out my second pillar for tax reasons, my biggest financial decision yet will be the amount I take out in cash vs. the amount I convert into rent (5,8% per year, if there us no further deterioration untill 2029).

What is your motivation for splitting?

I can think of two criteria, and both are subjective:

• How much rent do you need to feel secure?
• How much tax on your rent would make you feel that you pay too much?

 

[Omainec]

You are right, those 2 criterias are the most important, inflation risk is a third consideration (there is a fourth one which might come into play, but that one has to do with long term visa requisits of a third country). And yes: maxing out my rent would mean also maxing out income tax (and inflation risk), that's not very attractive. Taking out all the capital would make my rely more on capital consumption (and expose me more to market risks and maximise the wealth tax by the way, which is considerable after a certain threshold). I think I should find a sweet spot somewhere in between, but "it depends" ...

 

[Omainec]

Thanks
Yes ... they allow it.
1) Yes I think so
2) More risk-averse than I wished
3) I don't have bonds now ... I'm just thinking what to do with the money from the second pillar, maybe taking all out and converting sone in bonds would be an option as well.
4) Good question, hard to say. I have started to live healthy(er) a while ago ... On the other hand: wko knows? We will see, I guess ... If I reach 82 or so and inflation doesn't hit to hard, the rent will be worth it

 

[Max]

You are right, those 2 criterias are the most important, inflation risk is a third consideration (there is a fourth one which might come into play, but that one has to do with long term visa requisits of a third country). And yes: maxing out my rent would mean also maxing out income tax (and inflation risk), that's not very attractive. Taking out all the capital would make my rely more on capital consumption (and expose me more to market risks and maximise the wealth tax by the way, which is considerable after a certain threshold). I think I should find a sweet spot somewhere in between, but "it depends" ...

You are totally right - it depends. This is why those criteria are so subjective. My idea is that the purpose of rent (as opposed to free capital) is sleeping well at night. The price for this security feeling is the tax. And the task is to find out how much rent would let you sleep well without regretting the tax.

 

[Baptiste Wicht]

My idea is that the purpose of rent (as opposed to free capital) is sleeping well at night.

That's a very good criteria that almost always works