Swiss Middle-Class Trap

[Rebecca]

In the US FI community there is a lively debate about the risks of the “middle-class trap”.

In a nutshell the middle-class trap is trapping your wealth in home equity and retirement accounts that cannot be withdrawn without a penalty.

However, there are viable solutions to escape the middle-class trap in the US due to generally lower real estate values and flexibility within the retirement system.


Yet in Switzerland I think the middle-class trap is a real risk and should be avoided if you want to achieve financial independence.

In many places in Switzerland including where I live (near Zürich) home ownership often seems to involve forking over a significant portion of your life savings for the privilege of being a million francs in debt and the minority owner of an exorbitantly priced piece of real estate.

The mandatory 2nd pillar pension and optional 3a pillar account cannot be accessed prior to age 60 except under very limited circumstances. Early retirement is not to my knowledge one of those circumstances.


(**UDPATE: Please see my post below to see version 2 of this analysis with tax considerations.**)

Personal Case Study

I acknowledge that my situation is probably not at all similar to many of you reading this post. (I am an expat with assets both in Switzerland and the US.) Everyone’s personal finances are different so my reasoning may not be applicable to you.

Baptiste recently suggested that I do the math to calculate the tax savings of investing in a 3a account versus a brokerage account. After a financial analysis I concluded that Baptiste was right, it is worth it to invest in a 3a due to tax savings. In the long run that I would earn more on my investments investing in a 3a account compared to investing the same amount in a brokerage account.

Table 1 assumptions:

· Annual contribution to 3a pension of CHF 7’258​

· Investment returns of 8% annually in both Vanguard and finpension​

· Vanguard’s VTSAX expense ratio (ER) is 0.04%​

· finpension’s expense ratio (ER) is 0.39%​

· Investment period of 20 years​

​

Table 1

Base Interest Rate​	VTSAX ER 0.04%​	Finpension ER 0.39%​
8.00%​	CHF 301’862​	CHF 290’960​

Table 2 assumptions:

· Estimated tax savings of investing 7,258 annually in 3a pension is 1,383 CHF annually​

o I used this finpension website to calculate my estimated tax savings​

· I ran the estimated earnings of investing the 1,383 CHF saved annually on my Swiss taxes into Vanguard’s VTSAX​

Table 2

Base Interest Rate​	VTSAX ER 0.04%​
8.00%​	CHF 57’519​

Analysis

· Brokerage account​

o If I invest only in VTSAX I will earn CHF 301’862.​

​

· 3a pillar account​

o If I invest in a finpension pillar 3a I will earn CHF 290’960 from that account plus CHF 57,519 that I invest from the tax savings so a total of CHF 348’479​

o The performance of the 3a pillar account option under these conditions “wins” versus the brokerage account by CHF 46’617​

Conclusion

So after running the numbers will I invest in 3a pillar account? No.

My reasoning is that I already have money locked in a Swiss 2nd pillar pension that I likely cannot access until age 60. In my opinion this is an example of the Swiss middle-class trap but the 2nd pillar is obligatory so I can’t avoid it.

I also have assets in US retirement accounts. Although it is possible to withdraw contributions, I would have to pay a tax penalty on earnings if I accessed those funds prior to age 59.5. Obviously, I would prefer to not pay tax penalties if possible.

This means that I must have enough money in my brokerage account that I can flexibility liquidate as a “bridge” during my early retirement years until I am old enough to access retirement accounts. This is why I choose to forgo the 3a pillar account tax savings and instead invest in a brokerage account. It is my first strategy to avoiding the Swiss middle-class trap. My second strategy it to avoid Swiss real estate like the plague.

 

[Baptiste Wicht]

Thanks for sharing your analysis, Rebecca! And well done for going through the analysis thoroughly for your situation.

It's a very good point that except for exceptional circumstances, the retirement assets in Switzerland cannot be withdrawn before we are 60. So, they will not contribute directly to early retirement.

So, if someone is retiring early, they have to plan to be able to live without this part of the money for many years. For instance, by retiring at 40, you would need to live at least 20 years (likely more in the future) without 2nd/3rd pillars.

When you consider the longer picture (retirement from 40 to 80), I still believe they are worth it, but one should be careful not to have too much money "stuck" in the pillars.

And money in a house is not even stuck for retirement, it's useless. We have a house and this house equity is not counted towards our FI Net worth. Buying a house allowed us to reduce our expenses, so reducing our target, so it's not useless either, but the house equity itself will not be useful in retirement.

 

[CPMB]

Are you aware that even after 60yo, you have to pay tax on the 3rd pillar funds when withdrawing them? Which is not the case of capital gains made in your brokerage account.

I'm pretty sure that taking that into account, in no conditions the 3rd pillar is better, even on the paper.

 

[Max]

Are you aware that even after 60yo, you have to pay tax on the 3rd pillar funds when withdrawing them? Which is not the case of capital gains made in your brokerage account.

I'm pretty sure that taking that into account, in no conditions the 3rd pillar is better, even on the paper.

There are at least some constellations where the 3rd pillar is better: Aktien oder 3a? Steuern (video in German).

 

[Lelouch]

I agree with you on buying a house/apartment, I'll keep renting. I see a lot of people living with this pressure of "I have to own" and to each their own but to me it came down to two reasons:

• Flexibility. If you rent, you move when you want for any reason you want (work, family, neighbors, new start, etc.)
• Peace of mind: Something breaks? heating problems? Water problems? If you rent, you call the owner and that's it; if you own, be ready to sign some big, fat checks.

These two reasons alone are enough for me to continue renting.

For the 3rd pillar... I still use it, but mostly because I can save on taxes. And also if, say, I retire at 50 and change my 5 portfolios to minimum risk strategy or even cash, it could be a safe net to withdraw it during bear/down markets (instead of selling 4% when the markets are down).

 

[Rebecca]

Are you aware that even after 60yo, you have to pay tax on the 3rd pillar funds when withdrawing them? Which is not the case of capital gains made in your brokerage account.

I'm pretty sure that taking that into account, in no conditions the 3rd pillar is better, even on the paper.

You make a really good point CPMB. I did not consider tax implications in my initial analysis and decided to redo the analysis.


Financial Analysis Version 2 with Tax Considerations

3a pillar versus (US) brokerage account

(Please refer to my initial post to see more details about my personal case study.)

Table 1 assumptions:

· Annual contribution to 3a pension of CHF 7’258​

· Investment returns of 8% annually in both Vanguard and finpension​

· Vanguard’s VTSAX expense ratio (ER) is 0.04%​

· finpension’s expense ratio (ER) is 0.39%​

· Investment period of 20 years​

Table 1

Base Interest Rate​	VTSAX ER 0.04%​	Finpension ER 0.39%​
8.00%​	CHF 301’862​	CHF 290’960​

Table 2 assumptions:

· Estimated tax savings of investing 7,258 annually in 3a pension is 1,383 CHF annually​

o I used this finpension website to calculate my estimated tax savings​

· I ran the estimated earnings of investing the 1,383 CHF saved annually on my Swiss taxes into Vanguard’s VTSAX​

Table 2

Base Interest Rate​	VTSAX ER 0.04%​
8.00%​	CHF 57’519​

(New table)
Table 3: Adjusted for Taxes

• Estimated taxes on my third pillar are 5.46%
  • I optimized by splitting my third pillar into two accounts that I would take a lump sum from (the first at age 60 and the second at 61)
  • I used this finpension website to estimate my tax liability
• I plan on having 0% tax liability for my US brokerage account capital gains
  • US taxes on capital gains are not levied (0%) under a certain threshold of income
  • To minimize my tax liability I will strategically use capital gains harvesting

Table 3

Base Interest Rate​	VTSAX after 0% tax ​	Finpension after 5.46% tax​
8.00%​	CHF 301’862​	CHF 275’074​

Analysis

· Brokerage account​

o If I invest only in VTSAX I will earn CHF 301’862.​

· 3a pillar account​

o If I invest in a finpension pillar 3a I will earn CHF 275'074 (after tax) from that account plus CHF 57'519 that I invest from the tax savings so a total of CHF 332'593​

o The performance of the 3a pillar account option under these conditions technically wins versus the brokerage account by CHF 30’911 (or 10.2% higher than the brokerage account)​

Conclusion

The monetary advantage of investing in a 3a pillar account (10.2% higher earnings) versus a US brokerage account does not outweigh the disadvantage of locking the money until I am 60 years old.

10.2% should be considered within the margin of error. This analysis was performed with estimates that could vary widely depending on future tax regulations in two countries, market volatility, and unknown future retirement account rules. For example, if the Swiss government decided to allow people to invest up to 20'000 CHF annually in their 3a instead of just 7'258 CHF then my calculations would look very different.

After considering the tax implications I am not convinced that the 3a pillar offers any significant monetary advantage compared to a US brokerage account. If the performance projection for the 3a had been at least 25% higher than a brokerage account then I would invest in a 3a. As I mentioned in my initial analysis I already have money locked in a Swiss 2nd pillar and partially locked in US retirement accounts. I prefer to have flexibility with my other assets.

Additionally, I think it is prudent to carefully consider whether investing in 3a pillar could be considered falling into the Swiss middle-class trap. I encourage everyone to analyze all of your options while planning your journey to financial independence.

 

[CPMB]

Thank you for updating the case study!

Last comment I would do after reviewing it is regarding this assumption:
· Investment returns of 8% annually in both Vanguard and finpension

I've taken a look to Finpension's funds, and the composition of the "Equity 100" one is pretty different than the VTSAX, having only 37% of US equities and 40% in Switzerland. Swiss stocks are typically "blue chips" offering less volatility but a lower growth.

It's of course extremely difficult (if even possible) to predict this kind of numbers over the next decades, especially since US politics can be very unpredictable, but if we consider at least the past performance:

Finpension "Equity 100" annualized performance

3 years	5 years	10 years
3.14%	8.16%	n/a

VTSAX annualized performance

3 years	5 years	10 years	25 years
11.32%	15.04%	11.63%	8.15%

I suppose you made your assumption based on the fact that the longest available period performance is 8% for both. But this in my opinion a mistake, because the periods considered are significantly different. We can see that considering similar periods, the overperformance of VTSAX over Finpension is significant.

Once again, who knows if the US will continue overperforming the rest of the world? But I think it would be reasonable and fairer to at least consider a 2 p.p difference in performance in favor of VTSAX... (even if that doesn't really change your conclusions )

 

[Rebecca]

Thanks for looking into the assets allocation of finpension's "Equity 100" versus VTXAX. US stock market returns have greatly surpassed the rest of the world during the last 15 years. Yet I still think that 8% is a reasonable assumption for returns due to the long-term average performance of the US market.

JL Collins is the author of my bible, "The Simple Path to Wealth" (this book has also been translated into German and Spanish).

I recently heard JL Collins speak on this episode of the Choose FI podcast. JL said that is it natural to have a home bias towards investing. Most people want to invest in their own home country rather a foreign country. And for the past couple of decades this has made investing really easy for Americans because our stock market and economic performance has significantly exceeded that of other regions including Europe. As an American this does not surprise me because I know that my home country is capitalism on steroids. The US also continues to attract millions of skilled and ambitious immigrants who are highly motivated and sometimes start wildly successful companies.

Will the US always be the best place to invest? Probably not. As you mentioned politics in the US are unpredictable and from a long-term perspective countries rise and fall. Probably within the lifetime of my kids or grandkids another country or region will dominant the global economy.

So for now it is easy for me to invest in the US because it provides the best returns and satisfies my home bias. Also, most companies in the US stock market are multinational corporations so investing in VTSAX is actually quite a global endeavor.

But if I were British, German, Japanese, or dare I say Swiss what would I do? Well that's difficult. Every person has to decide what is more important, retiring early or investing in their own nation.

 

[CPMB]

Well, my point wasn't to put in doubt the US economy or stock market - quite the contrary, actually. I'm saying that if the assumption is 8% for VTSAX (US), then it should probably be max 6% for Finpension (CH/US), which would significantly change the results of the simulation.

 

[Rebecca]

I'll rerun the simulations with your suggested percentages later and post the results on the thread.

After looking at the table you posted I can see why you think VTSAX should be assumed to have higher returns than finpension. The performance of VTSAX during the last three years of 11.31% far surpasses finpension's 3.14%.

Assuming VTSAX returns 8% is consistent with long term US stock market returns.

Do you know of any data sources that would support the assumption of finpension's return of 6%? Such as long-term data for the entire Swiss equities market? With this data it might be possible to roughly estimate finpension's Equity 100 expected returns based on the current assets allocation in the fund.

 

[Rebecca]

Financial Analysis Version 3 with Modified Finpension Returns

3a pillar versus (US) brokerage account

(Please refer to my initial post to see more details about my personal case study.)

CPMB made a compelling case that it should be assumed that a Finpension 3a account will earn at maximum 6%. I’ve updated my simulation to reflect that.

Table 1 assumptions:
· Annual contribution to 3a pension or Vanguard brokerage account of CHF 7’258
· Investment returns of 8% annually in Vanguard
· Vanguard’s VTSAX expense ratio (ER) is 0.04%
· New: Investment returns of 6% annually in Finpension
· finpension’s expense ratio (ER) is 0.39%
· Investment period of 20 years
Table 1

Base Interest Rate	VTSAX ER 0.04%	Finpension ER 0.39%
8.00%	CHF 301’862	CHF 290’960
6.00%		CHF 236’675

Table 2 assumptions:
· Estimated tax savings of investing 7,258 annually in 3a pension is 1,383 CHF annually
o I used this finpension website to calculate my estimated tax savings
· I ran the estimated earnings of investing the 1,383 CHF saved annually on my Swiss taxes into Vanguard’s VTSAX

Table 2

Base Interest Rate	VTSAX ER 0.04%
8.00%	CHF 57’519

Table 3: Adjusted for Taxes

• Estimated taxes on my third pillar are 5.81%
  • My previous simulations incorrectly assumed that I could split my 3a pillar account. After further research apparently I learned that is not allowed with a 3a like it is with a vested benefits account. This is why my tax rate is slightly higher in this scenario.
  • I used this finpension website to estimate my tax liability
• I plan on having 0% tax liability for my US brokerage account capital gains
  • US taxes on capital gains are not levied (0%) under a certain threshold of income
  • To minimize my tax liability I will strategically use capital gains harvesting

Table 3

VTSAX after 0% tax	Finpension after 5.81% tax
CHF 301’862	CHF 222’924

Analysis

· Brokerage account
o If I invest only in VTSAX I will earn CHF 301’862.
· 3a pillar account
o If I invest in a finpension pillar 3a I will earn CHF 222'924 (after tax) from that account plus CHF 57'519 that I invest from the tax savings so a total of CHF 280'443
o The performance of the 3a pillar account option under these conditions loses versus the brokerage account by CHF 21’418 (or 7.1% lower than the brokerage account)

Conclusion

In this scenario is there is no monetary advantage of investing in a 3a pillar account versus a US brokerage account. In fact it loses by 7.1%.
Even in the “best case” scenario that I ran in Version 2 which assumed that both the Finpension 3a and Vanguard earn annual returns of 8% the 3a only beat the brokerage by 10.2%.
Neither Version 2 nor Version 3 of the simulation make a convincing case that investing in a 3a pillar account is worth the disadvantage of locking the money until you are 60 years old.

 

[CPMB]

I'll rerun the simulations with your suggested percentages later and post the results on the thread.

After looking at the table you posted I can see why you think VTSAX should be assumed to have higher returns than finpension. The performance of VTSAX during the last three years of 11.31% far surpasses finpension's 3.14%.

Assuming VTSAX returns 8% is consistent with long term US stock market returns.

Do you know of any data sources that would support the assumption of finpension's return of 6%? Such as long-term data for the entire Swiss equities market? With this data it might be possible to roughly estimate finpension's Equity 100 expected returns based on the current assets allocation in the fund.

I've fund a SMI ETF (good representation of Swiss equity market) with an inception date comparable to VTSAX, namely 1999. The annualized performance since inception is 5%.

https://www.ishares.com/ch/individual/en/products/261154/ishares-smi-ch-fund

 

[Mises]

Financial Analysis Version 3 with Modified Finpension Returns

3a pillar versus (US) brokerage account

(Please refer to my initial post to see more details about my personal case study.)

CPMB made a compelling case that it should be assumed that a Finpension 3a account will earn at maximum 6%. I’ve updated my simulation to reflect that.

Table 1 assumptions:
· Annual contribution to 3a pension or Vanguard brokerage account of CHF 7’258
· Investment returns of 8% annually in Vanguard
· Vanguard’s VTSAX expense ratio (ER) is 0.04%
· New: Investment returns of 6% annually in Finpension
· finpension’s expense ratio (ER) is 0.39%
· Investment period of 20 years
Table 1

Base Interest Rate	VTSAX ER 0.04%	Finpension ER 0.39%
8.00%	CHF 301’862	CHF 290’960
6.00%		CHF 236’675

Table 2 assumptions:
· Estimated tax savings of investing 7,258 annually in 3a pension is 1,383 CHF annually
o I used this finpension website to calculate my estimated tax savings
· I ran the estimated earnings of investing the 1,383 CHF saved annually on my Swiss taxes into Vanguard’s VTSAX

Table 2

Base Interest Rate	VTSAX ER 0.04%
8.00%	CHF 57’519

Table 3: Adjusted for Taxes

• Estimated taxes on my third pillar are 5.81%
  • My previous simulations incorrectly assumed that I could split my 3a pillar account. After further research apparently I learned that is not allowed with a 3a like it is with a vested benefits account. This is why my tax rate is slightly higher in this scenario.
  • I used this finpension website to estimate my tax liability
• I plan on having 0% tax liability for my US brokerage account capital gains
  • US taxes on capital gains are not levied (0%) under a certain threshold of income
  • To minimize my tax liability I will strategically use capital gains harvesting

Table 3

VTSAX after 0% tax	Finpension after 5.81% tax
CHF 301’862	CHF 222’924

Analysis

· Brokerage account
o If I invest only in VTSAX I will earn CHF 301’862.
· 3a pillar account
o If I invest in a finpension pillar 3a I will earn CHF 222'924 (after tax) from that account plus CHF 57'519 that I invest from the tax savings so a total of CHF 280'443
o The performance of the 3a pillar account option under these conditions loses versus the brokerage account by CHF 21’418 (or 7.1% lower than the brokerage account)

Conclusion

In this scenario is there is no monetary advantage of investing in a 3a pillar account versus a US brokerage account. In fact it loses by 7.1%.
Even in the “best case” scenario that I ran in Version 2 which assumed that both the Finpension 3a and Vanguard earn annual returns of 8% the 3a only beat the brokerage by 10.2%.
Neither Version 2 nor Version 3 of the simulation make a convincing case that investing in a 3a pillar account is worth the disadvantage of locking the money until you are 60 years old.

Did you take into account that you have to pay income taxes for the dividends? And for the account in the 3rd pillar you don't, so they get fully reinvested without that bite.

On the other side, the Finpension has a higher TER, and in case of US securities probably a 15% L1TW on their dividends before it reaches the fund (which is 0% in the case of VTSAX through your broker).

So I guess they end kind of equal in that aspect.

I actually see the 3rd pillar as a nice tool for investing in the Swiss market, because many of the ETF and funds from the 3rd pillar account have 0% TER (you only pay the 0,39% to Finpension), so for a total TER of only 0,39% you can invest with 0% L1TW, 0% income tax (or L2TW), in a not very correlated economy with the US.

Of course if you compare that with investing in the swiss market from your brokerage account then I guess the 3rd pillar will win by an interesting distance, and even more if you specially want to invest on small and mid caps to get a more decorrelated exposure.

I didn't run so exact numbers as you did, but I also reached the same conclusion: I will not use the 3rd pillar as a tool for investing in the US stock market, where you already have low TERs and low dividends (that means less income tax leakage).

 

[Rebecca]

@Mises thanks for your reply, you raise an interesting point that I should consider taxes on dividends in a brokerage account versus the advantage of zero tax liability on dividends in the 3rd pillar.

I will not be liable to pay taxes to the US for dividends on VTSAX. It is a bit complicated why I can avoid the taxes but in a nutshell it has to do with my US citizen status, sources of income and the deductions system in the IRS tax code.

However, it appears that if I maintain my Swiss residency I probably will be liable to the Swiss government for dividends on VTSAX as they will be considered ordinary income.

For this table many of the same assumptions from my previous calculations apply. I assume a SEC yield (annualized dividend return) of 1.18% because that was the number available on Vanguard's VTSAX website. Of course dividend returns can vary but I can't predict the future so I just applied 1.18% to the full 20 year investment period. I assumed a 19.7% marginal tax rate for my Swiss tax liability.



Conclusion:
Although the 6'186.29 CHF tax liability on dividend income does reduce the advantage of investing in VTSAX this amount is actually rather minimal over a a 20 year period and still not is not sufficient to outweigh the CHF 21’418 VTSAX advantage I calculated in Version 3 of my financial analysis.

 

[Michael]

Table 1 assumptions:
· Annual contribution to 3a pension or Vanguard brokerage account of CHF 7’258
· Investment returns of 8% annually in Vanguard
· Vanguard’s VTSAX expense ratio (ER) is 0.04%
· New: Investment returns of 6% annually in Finpension
· finpension’s expense ratio (ER) is 0.39%
· Investment period of 20 years
Table 1

Base Interest Rate	VTSAX ER 0.04%	Finpension ER 0.39%
8.00%	CHF 301’862	CHF 290’960
6.00%		CHF 236’675

Interesting analysis, but I think there is no good reason to think why US will outcompete CH (currency adjusted) in the long run.
It might. But it might also not. I hear this sentiment often from US citizens but just cannot relate.

If you use past performance for the decision on where you should put your money, you'll get to the conclusion that 100% BTC would be the one of the best solution going forward.

Having said that, if you have personal beliefs or deeper insight that US will indeed outcompete (CHF adjusted), you can just make a custom strategy and overweigh US in Finpension. No need to use the out-of-the-box "Global" option from them in this case.

PS:
Keep in mind that if you look at very recent developments, YTD VTSAX is -7% (in CHF) and CHSPI (only CH companies) is +4%. Probably won't stay like this until the end of the year, but at least at the moment nothing hints towards a better deal being fully in VTSAX vs something more diversified (and including CH bias if you plan to stay here for longer).

 

[Mises]

@Mises thanks for your reply, you raise an interesting point that I should consider taxes on dividends in a brokerage account versus the advantage of zero tax liability on dividends in the 3rd pillar.

I will not be liable to pay taxes to the US for dividends on VTSAX. It is a bit complicated why I can avoid the taxes but in a nutshell it has to do with my US citizen status, sources of income and the deductions system in the IRS tax code.

However, it appears that if I maintain my Swiss residency I probably will be liable to the Swiss government for dividends on VTSAX as they will be considered ordinary income.

For this table many of the same assumptions from my previous calculations apply. I assume a SEC yield (annualized dividend return) of 1.18% because that was the number available on Vanguard's VTSAX website. Of course dividend returns can vary but I can't predict the future so I just applied 1.18% to the full 20 year investment period. I assumed a 19.7% marginal tax rate for my Swiss tax liability.

View attachment 197

Conclusion:
Although the 6'186.29 CHF tax liability on dividend income does reduce the advantage of investing in VTSAX this amount is actually rather minimal over a a 20 year period and still not is not sufficient to outweigh the CHF 21’418 VTSAX advantage I calculated in Version 3 of my financial analysis.

Just to be precise, you have to rest the taxes paid to the interest rate to account for the compounding effect (the initial 8% rate includes dividends reinvested, and now you'll reinvest less amount of dividends), the new rate ratio becomes something like 7.96%-((1.18%-0.04%)*0.197) = 7.735%. Note: I rested the TER from the dividends because in the practice funds take the TER from the distributions (even though in accounting terms is taken from the NAV), that reduces the income of the income tax you'll pay.

Anyway I don't think the difference will be huge.
By the way you are calculating the return of different assets in your version 3, I would prefer to compare apples with apples and oranges with oranges in order to know which tool is better for peeling them. You assume an 8% return on VTSAX vs a 6% on Finpension because you compare US Total Market vs a kind of World mixed stocks with a 40% weight on Swiss stocks.

What about when we compare VTSAX vs a Finpension USA market fund? Let's say 8% vs 8% returns.

Here we would have to assume a loss of a 15% withholding tax on the dividends that Finpension (UBS actually) receives from USA before it even reaches de fund (VTSAX receives 0% withholding tax because it's domiciled in the US). But, also, you will have to pay Swiss income tax on dividends from VTSAX, so in the end they are roughly similar in that aspect.

So we end with VTSAX 0.04% TER and "Finpension USA" with 0.39% TER.
Both with a similar dividends tax drag.
And that's basically your version 2 analysis

BUT we have to add a huge advantage of 3rd pillar: NO WEALTH TAX. That bonus will depend on your marginal tax rate on wealth Calc
Mine for instance is sitting currently at 0.54%, and that is a huge bonus for the 3rd pillar on the long term if we compound.

But where the 3d pillar shines, in my opinion again, is for assets where you have:
1. High TER in your non-3rdpillar option (because Finpension doesn't rise it's TER for that).
2. High dividends (because 3rd pillar reduces to 0% the dividend income taxes on your end).
3. Equal or lower L1TW than your non-3rdpillar option (because the 3rd pillar doesn't spare you from withholding taxes on the fund level).

That bassically means Swiss Market equities or high dividend equities like DM Asia ex-JP, etc.
Which assets would be the WORST for holding at a 3rd pillar account? Things like GOLD, BTC, etc.. You get 0% advantage from the spared income tax and you have to pay some capital taxes on gains

If, by any reason, you were going to invest in any of those kind of ETFs, then the 3rd pillar offers you an even bigger advantage.

Thats my case btw, and I'm making a table that takes those costs into account in order to give us a realistic estimation. For example:



This draft table wasn't intended to calculate 3rd Pillar advantages but CAGR leakage depending on the country or ETF in order to adjust weights in my portfolio. So, important: It is neither accounting for the tax deductions you get when you make deposits to the 3rd pillar (1383 CHF p.a. in your case), nor for the tax you have to pay when you withdraw the third pillar.
I used your marginal income tax rate of 19.7% and, since I don't know yours, my 0,54% marginal wealth tax rate (wich will continue raising).

So, how can you make use of a table like this one? Well, look at the TC (Total Cost) per year, and instead of comparing an 8% rate VTSAX vs 8% Finpension, you should apply a correction according to the real difference in TC you have one from another. For example, if the VTI (similar to VTSAX) has an extra TC of 0.8% and the Finpension USA has an extra 0,61%, then apply them in your new calcs, being VTSAX 7,2% and Finpension being 7,39%.

So, there is actually a small advantage even for US assets without even taking into account the 3rd pillar deductions! Now you can calculate them with more exactitude.

With your numbers the advantage of the 3rd pillar I guess it will be around a +15% of capital after 20 years, roughly above +45k CHF. Similar to your first version, because the capital tax you didn't count made it for the wealth tax you didn't remove.

But as you can se in the table, the best assets to add to a 3rd pillar account are things like Swiss stocks (a 0.8% cheaper vs the already cheap CHSPI), specially if you want to get more exposure to small and mid caps (higher TER in the broker). And of course also huge stuff like DM Asia ex-JP, where you have an amazing difference of +1% in the CAGR.. before even accounting for deductions.. That will be around a +24% final capital in "only" 20 years, or above +65k with you numbers. Of course I don't think you will put the whole 7256 CHF yearly deposit in that asset but the % advantage remains the same.

Hope it helped! Let me know if I made any mistake.

 

[Rebecca]

@Mises

Thanks for pointing out that there is a wealth tax owed. I assumed in the new column a marginal Swiss wealth tax rate of 0.33% although that is actually high, realistically it will be 0.23% based on my projected net worth for several years. I also reduced the future value by the taxes paid on dividends.




Now the total tax liability with the wealth tax is 6'173.73 CHF + 8'764.22 CHF = 14’937.94 CHF
Again this is rather low spread out over 20 years and still is not is not sufficient to outweigh the CHF 21’418 VTSAX advantage I calculated in Version 3 of my financial analysis.

If you want to invest in the Swiss stock market I suggest carefully considering all of your options. In my opinion the third pillar is a part of the Swiss middle class trap. If you'll turn 60 within the next 5 years then it is probably fine to use but otherwise there is a huge disadvantage to lock your money in an inaccessible account for 5, 10, or even 20 years.

I view the third pillar account as a symptom of a paternalistic government that tells its citizens this is a great tool to save on taxes when actually it is just a great way to support Swiss companies without reliable advantages to the investor. It also supports Swiss banks with ridiculously high management fees. The only thing it consistently does is make sure the average person won't be able to spend this money until they are 60.

Why I think the third pillar is a borderline scam:

• The money is locked away until you are 60 with very limited ways to access the money. Not coincidentally one of the few early withdrawal exceptions is using the money to prop up the overpriced Swiss real estate market. To be frank all this does is encourage middle class people to take mortgages that are designed to never be paid off so that they and their heirs can be debt slaves who spend a lifetime enriching already rich banks.
• The tax savings are highly variable with significant differences between cantons and municipalities. You can save nothing (0%) or a lot (41%). Please see this kaleidoscope map of tax savings. Sure if you're lucky enough to live in a place that actually offers decent tax savings then it is probably worth it. But can you really guarantee that you will live in in the same place your whole life? Do you even want to?
• After waiting for potentially decades finally you turn 60. Now it is time to pay taxes on your third pillar withdrawals. But how much? Well yet again we have another kaleidoscope map of tax rates. The rates vary from 0.5% - 13.7%.
• The variable tax savings and tax liabilities of the third pillar make it very difficult to reliably calculate the benefits unless you somehow know you will not leave your municipality.

 

[Rebecca]

Interesting analysis, but I think there is no good reason to think why US will outcompete CH (currency adjusted) in the long run.
It might. But it might also not. I hear this sentiment often from US citizens but just cannot relate.

If you use past performance for the decision on where you should put your money, you'll get to the conclusion that 100% BTC would be the one of the best solution going forward.

Having said that, if you have personal beliefs or deeper insight that US will indeed outcompete (CHF adjusted), you can just make a custom strategy and overweigh US in Finpension. No need to use the out-of-the-box "Global" option from them in this case.

PS:
Keep in mind that if you look at very recent developments, YTD VTSAX is -7% (in CHF) and CHSPI (only CH companies) is +4%. Probably won't stay like this until the end of the year, but at least at the moment nothing hints towards a better deal being fully in VTSAX vs something more diversified (and including CH bias if you plan to stay here for longer).

View attachment 198View attachment 199

Hi Michael.

I'm not sure if VTSAX will outcompete CHSPI over the next several decades. Maybe it will, maybe it won't. CHSPI is inherently disadvantaged due to higher expense ratios (0.10% vs VSTAX's 0.04%) so it will need to outperform enough to make it worth the higher expenses.

A lot can happen in the next 50 years. This is why I review my investing strategy periodically and if the US stock market stops outcompeting the rest of the world then I will switch to investing in a index fund like VT (Vanguard Total World Stock ETF) that consists of both US and international stocks.

I don't have deeper insight nor would I dare to predict the future. I can share my personal belief that the United States is capitalism on steroids: capitalism touches most aspects of US life. Another important aspect of the economy is that the US government spends vast sums of money to support the economy. After I moved to Switzerland I noticed significant differences compared to the US in terms of bank fees, competition, market size, consumer product ranges, financial systems, immigration polices, technology adoption and innovation, labor market opportunities for women (especially mothers) and customer service. Capitalism and the willingness of the US government to pour billions of dollars into the economy are why I think the US has outperformed Europe economically during the last decade.

I also see possible risks for the Swiss economy that cause me to to be hesitant in investing into something like CHSPI:

• A real estate bubble just waiting to pop
• Women can be fired for being pregnant...
• …low birth rates
• Overreliance on foreign labor
• High wages
• Uncompetitive working conditions (other countries are catching up in the labor market)
• The risk that the EU will no longer offer "special exception" trade agreements to Switzerland
• Reputational damage (Credit Suisse) caused by insane banking practices
• Lack of sufficient talent in key sectors (IT, healthcare, etc.)
• High emigration rates of Swiss people and foreign nationals
• Immigration policy coupled with direct democracy is probably the greatest risk of all. Unless Swiss people start having more kids really fast the economy will continue to be overly reliant on foreign labor. Business leaders understand this but I'm not sure a majority of voters realize that curtailing immigration could devastate the Swiss economy.

I already have an involuntary CH home bias through my obligatory second pillar pension account that I have zero control over. Unfortunately my employer's pension is partly invested in Swiss real estate. As I thought the whole point of these accounts was to grow not lose principal I'm rather pessimistic about it and just hope that somehow after the high management fees my second pillar manages to beat inflation.

Regarding the recent outperformance of CHSPI over VTSAX:
If I was a short-term trader then I would be concerned.
I am a long-term investor therefore I look forward to stock market downturns because they are excellent opportunities to buy stocks at a discount. I also use stock market downturns to reduce my tax liability with tax loss harvesting.

I suggest checking out these articles:

• https://www.mrmoneymustache.com/2022/05/20/2022-stock-market-crash/
• https://www.madfientist.com/tax-loss-harvesting/

 

[Michael]

Hi Michael.

I'm not sure if VTSAX will outcompete CHSPI over the next several decades. Maybe it will, maybe it won't. CHSPI is inherently disadvantaged due to higher expense ratios (0.10% vs VSTAX's 0.04%) so it will need to outperform enough to make it worth the higher expenses.

A lot can happen in the next 50 years. This is why I review my investing strategy periodically and if the US stock market stops outcompeting the rest of the world then I will switch to investing in a index fund like VT (Vanguard Total World Stock ETF) that consists of both US and international stocks.

I don't have deeper insight nor would I dare to predict the future. I can share my personal belief that the United States is capitalism on steroids: capitalism touches most aspects of US life. Another important aspect of the economy is that the US government spends vast sums of money to support the economy. After I moved to Switzerland I noticed significant differences compared to the US in terms of bank fees, competition, market size, consumer product ranges, financial systems, immigration polices, technology adoption and innovation, labor market opportunities for women (especially mothers) and customer service. Capitalism and the willingness of the US government to pour billions of dollars into the economy are why I think the US has outperformed Europe economically during the last decade.

I also see possible risks for the Swiss economy that cause me to to be hesitant in investing into something like CHSPI:

• A real estate bubble just waiting to pop
• Women can be fired for being pregnant...
• …low birth rates
• Overreliance on foreign labor
• High wages
• Uncompetitive working conditions (other countries are catching up in the labor market)
• The risk that the EU will no longer offer "special exception" trade agreements to Switzerland
• Reputational damage (Credit Suisse) caused by insane banking practices
• Lack of sufficient talent in key sectors (IT, healthcare, etc.)
• High emigration rates of Swiss people and foreign nationals
• Immigration policy coupled with direct democracy is probably the greatest risk of all. Unless Swiss people start having more kids really fast the economy will continue to be overly reliant on foreign labor. Business leaders understand this but I'm not sure a majority of voters realize that curtailing immigration could devastate the Swiss economy.

I already have an involuntary CH home bias through my obligatory second pillar pension account that I have zero control over. Unfortunately my employer's pension is partly invested in Swiss real estate. As I thought the whole point of these accounts was to grow not lose principal I'm rather pessimistic about it and just hope that somehow after the high management fees my second pillar manages to beat inflation.

Regarding the recent outperformance of CHSPI over VTSAX:
If I was a short-term trader then I would be concerned.
I am a long-term investor therefore I look forward to stock market downturns because they are excellent opportunities to buy stocks at a discount. I also use stock market downturns to reduce my tax liability with tax loss harvesting.

I suggest checking out these articles:

• https://www.mrmoneymustache.com/2022/05/20/2022-stock-market-crash/
• https://www.madfientist.com/tax-loss-harvesting/

Again, and as @Mises wrote, you shouldnt mix up investment region with 3a being beneficial or not. You can just weight US to 100% in Finpension and then use the same percentage.

You write you are not sure VTSAX will outcompete CHSPI (was just an example, meant as anything outside US), but then give me like 12 reasons why you think it will; that pretty much sounds like you made your decision. That's fine, I won't argue with this even though I have another opinion on many of these points. But the topic is about 3a or not.

If you really wanna challenge your conclusion, you should also post your analysis on some other Swiss finance forums (e.g. MustachianPost), you might find some people that will spend more time in digging through the large amount of details you presented.

Just a last comment: Any benefit of 3a vs not 3a is inherently coupled to a well functioning economy in the future. With 3a you get an immediate benefit, which can, depending on the strategy you choose, be beneficial (if it has dividends) or maybe less beneficial.

 

[Rebecca]

Hi @Michael

It is possible to invest a Finpension 3a in 100% US equities? From Finpension's website it only seems possible to pick from different fixed pension plans. The "finpension Global 100 (Pension)" plan only has 37% of its allocation in North American equities.