How large is your pension gap, and what can you do about it?

Almost everyone wants to know whether the money will last in retirement. The pension gap puts a number on that. This text shows how to estimate it roughly and what you can do next.

What is the pension gap?Abschnitt verlinken

The pension gap is the amount you fall short of your target pension each year in retirement. It is the difference between the target pension and what the state pension and the pension fund pay together. If the sum of the two pensions is smaller than the target pension, you have a gap.

An example: with a last salary of CHF 100,000 and a target pension of 60 percent, you need CHF 60,000 per year. If the state pension and the pension fund together pay CHF 48,000, you are short CHF 12,000 per year or CHF 1,000 per month.

How much pension is enough?Abschnitt verlinken

A common benchmark is around 60 percent of your last gross salary. The Swiss constitution requires that the state pension and the pension fund together allow you to continue your accustomed way of life, and that is widely read as roughly 60 percent.

60 percent is not a figure fixed by law. Whoever owns a paid-off home in old age with low fixed costs often gets by with less. Whoever pays rent or has high health insurance premiums tends to need more. So set the target pension based on your expected spending, not on a rule of thumb alone.

Why is the second pillar often the biggest lever?Abschnitt verlinken

The state pension is capped at the top. From around CHF 90,000 of annual salary the pension no longer rises. Everything above that has to come from the pension fund and the third pillar.

On top of this there is the coordination deduction of CHF 26,460: only the salary above it is insured in the pension fund. At low salaries and with part-time work a large share of income stays uninsured. That is exactly where the gap forms, and exactly where a pension fund buy-in or a better fund has the strongest effect.

How accurate is such an estimate?Abschnitt verlinken

A quick estimate often calculates the pension fund with only the legal minimum. Many funds pay more than the mandatory part, so your real gap is usually smaller than the estimated value.

The estimate is an order of magnitude, not a promise. For the binding figure, your compensation fund's pension projection and your pension fund certificate are what count. Inflation, tax on the pension and your salary growth are not included in a rough calculation.

How much capital covers the gap?Abschnitt verlinken

As a rough orientation, divide the yearly gap by 4 percent. At a gap of CHF 12,000 per year that is around CHF 300,000 of extra capital you need to cover the gap from your assets indefinitely.

This is a rule of thumb, not an investment guarantee. But it helps you judge whether your gap is reachable with saving and pillar 3a, or whether you need to adjust your retirement age or your target pension.

How to proceedAbschnitt verlinken

• Estimate the gap with your current salary, your age and your planned retirement age.
• Get out your pension fund certificate and enter the projected pension shown there, instead of calculating with the minimum.
• Consider a pension fund buy-in only once the gap justifies it. A buy-in lowers your taxes but ties up the money until retirement.
• Use up pillar 3a before you save freely. The contribution is deductible from your taxable income.
• Model early retirement separately. Each year earlier lowers the pension and lengthens the payout period.
• Repeat the calculation every few years or after a big change in salary, workload or family.