Personal finances change fundamentally when we retire – our fixed income typically falls by 20 to 30 per cent at the end of our working life. People who plan their retirement in good time and make sensible provisions will enjoy their golden years to the full. This is especially true for pensioners who own their own home.

The topic of retirement and old-age pensions is on the minds of many people today. Do the “three pillars” still deliver what was once promised? If you want to be sure of maintaining your standard of living in your golden years, you should start planning your retirement in good time. It’s never too soon – but sometimes it’s too late! Most pension experts advise getting to grips with personal retirement planning by the age of 50.

Make plans

Retirement planning includes answering certain questions, such as: what are your longer-term plans for the future? How do you envisage your living arrangements after retirement? Are you thinking about early retirement? Do you want to end your working life gradually with a reduced workload?

Your budget is all-important here. As far as your income after retirement is concerned, your pension fund certificate and an OASI pension projection can provide useful indicators; you can find out more about this from your pension fund or the relevant OASI compensation fund. When planning your retirement, in addition to the 1st and 2nd pillars, any payments into the 3rd pillar must also be taken into account (private provision, pillar 3a at a bank, life insurance, etc.). Since the pension system and the regulations of the pension funds change from time to time, you should review your assumptions every two to three years.

Future outgoings should be categorised as various fixed expenses. For homeowners, this includes mortgage interest, ancillary costs, energy, regular building maintenance and also contingencies (repairs, renovations). On top of this, of course, there are all the living costs, especially health insurance contributions, taxes, insurance, leisure time and holidays. The fact is that the actual income you will receive from your OASI pension and the pension funds is often somewhat lower than previously expected. At the same time, some expenses will often increase – after retirement you may have more time to pursue your hobbies and various leisure activities; you may also wish to travel more often to your dream destinations, etc.

Top up your pension

People who start their retirement planning by the age of 50 will have more time to “get their house in order”. Repaying any previous pension-fund withdrawals may be advisable – for example, if you have withdrawn money from your pension to finance a home purchase, you should make up the difference by the time you retire (i.e. buy back into the full benefits of the pension scheme as far as possible). This will ensure that you will receive the full retirement pension provided by the pension fund without any deductions.

Also consider whether you want to set yourself certain amortisation targets in view of your retirement plans. After all, whatever you can save today thanks to low interest rates may give you leeway to reduce your mortgage debt when the opportunity arises. In general, the minimum requirement is to pay off a second mortgage by the age of 65. For example, if you become a homeowner for the first time at the age of 58 and take out bank financing, you will need to pay off the mortgage relatively quickly. After retirement, you must aim for an equity ratio of around 34 per cent.

Key points: equity and income

It is essential that you also think about the usual industry standards in the mortgage sector. Accordingly, the ongoing fixed costs of your own home (including interest and ancillary costs) should not exceed one third of your gross income – whether this is pension income or earned income is of course irrelevant. Therefore, if you have managed to obtain a mortgage on a relatively expensive property, you should carefully analyse its financial viability after you retire and seek advice from your bank. For this purpose, the affordability of the loan must be calculated with an imputed interest rate that is significantly higher than the current interest rate – depending on the bank, an imputed interest rate of 4.5 or 5 per cent is typically used.

These affordability checks for pensioners are often criticised as being too strict. Ultimately, however, the industry standards merely serve to prevent households from becoming over-indebted and to dampen volatility in the real estate sector. The fact that some pensioners may hold considerable additional assets does not change this. Depending on the bank, only some of your securities, savings or other credit balances may be included in the equation – or discounted entirely. Some banks are prepared to include certain investment income or, if need be, asset erosion, provided that these funds are deposited in the custody account of the client concerned. In some cases, this may make it possible to demonstrate the necessary financial sustainability after all. Experience shows that this becomes easier if the property is no longer too heavily encumbered with mortgages.

Plan your retirement to suit your personal situation

When planning for retirement it’s important to be aware that your everybody’s personal needs and financial situations are different. Some people may want to thoroughly reconsider their housing situation and may also be considering moving home. For others, private home ownership is the ultimate goal and, in some cases, also a cost-effective form of housing. For example, if you have already invested a lot in your home and reduced your level of debt, you may be able to say with certainty: “For me, owning my own home is the ideal retirement provision that offers me security.”

The options with regard to liquidity and savings will also vary significantly from person to person. While some people are able to set aside a healthy nest egg or acquire inheritances before retirement, others hold almost all their assets in the form of property and have relatively few liquid assets. It is therefore also fundamentally important to include liquidity and the amortisation schedule in your retirement planning. Furthermore, if the financial sustainability of your mortgage will be rather limited after the age of 65, you will probably not be able to remortgage after you retire. Consequently, homeowners are well advised to take care of any renovations and structural adjustments to their property while still working.

Conclusion: planning for retirement

Also remember that, in the wake of the regulations and standards in force today, the banks will regularly review the mortgage arrangements (condition and value of the property, income, etc.). It is therefore essential to observe the aforementioned affordability rules and the required share of equity at all times. In a nutshell, when preparing to retire, careful planning and building up savings over the longer term are the be-all and end-all.