Over the past century, returns on equity investments have averaged 9%. This average conceals extremely strong market swings. In the last 20 years, the average return on equities was 55%; in the worst year, however, losses averaged nearly 35%. A client's individual risk profile is therefore essential. Clients must be willing and financially capable of riding out major fluctuations in asset values. Bonds issued by triple-A debtors are far less subject to fluctuation than equities. And even bonds offer good returns. Historically, bonds have generated average yields of 4 percent.
As the following example shows, securities are an essential investment for tied 3a pension assets: assuming you save CHF 6,566 per year from age 20 to age 65 and invest that amount in a securities portfolio with an equity content of 25%, and assuming you have an overall return of 5% per year on your portfolio, by the time you retire your paid-in savings will equal CHF 295,470, the return on your savings will equal CHF 805,551 and your total retirement savings capital will amount to CHF 1,101,021. (If you are self-employed, you may set aside maximum CHF 32,832 or 20% of your earnings in 2010 (AHV/AVS income) without the compulsory BVG/LPP portion). AHV/AVS payments and pension fund benefits are additional.
By comparison: in the last 25 years, the Pictet BVG/LPP Index with an equity content of 25% had an average annual performance of 5.67%.
Account and security solution performance compared over 45 years
Alternatively, if you pay CHF 6,566 per year onto a savings account with an average annual return of 2%, by the time you retire your savings contributions will also equal CHF 295,470 with a return of only CHF 186,018, and your total retirement savings capital will amount to just CHF 481,488. The difference is CHF 619,533 or CHF 15,488 per year!
And if you were to pay your tax savings of CHF 2,000 per year, calculated on the maximum annual 3a retirement savings contribution allowance, into an equities fund with an annual return of 9%, you could save an additional CHF 1,150,000.
An average savings contribution of CHF 700 per month over 45 years would allow you to retire with retirement savings of approx CHF 2.3 m (pension funds excluded).
Moreover, if you increment your 3a securities portfolio by regular monthly payments, price fluctuations will be balanced out since the securities will have been purchased at the average annual price. This smoothes performance. Certain providers even allow investors to transfer the securities into their private portfolio when they go into retirement; this avoids the risk of being forced to sell at a bad time.