The Five Pillars of Financial Independence

Employees are used to having a fairly substantial portion of their pay deducted in order to cover their future (hypothetical) retirement, as well as to insure them against the risks inherent in their professional activity. In Switzerland, we have the three-pillar system, the first (AVS) being compulsory and strictly solidarity-based, the second (LPP) being almost always obligatory and supposed to be individual (which is anything but true), and the last one being optional, individual and fiscally quite interesting. In other countries, the pension systems work a little differently, but they all have one thing in common: that of drowning the risks, at the same time as the individual responsibility (of employees AND bosses), among all workers.

The aim of these systems is to ensure that not only employees, but also employers and the State (since they are paid by the two previous ones), are insured against THE major risk of Rat Race : absence from work (due to illness, accident, retirement, unemployment, etc.).

Financial independence does not have this problem, quite the contrary. Income is mostly passive, so work or not, it does not change the situation. Those who claim to become financially free, paradoxically, even have an interest in limiting their contributions to state occupational pensions as much as possible.

Financial independence also has its own system. several pillars. They obviously have nothing to do with those put forward by the government. Sometimes, they even oppose them. Above all, there are more...

1st pillar of the freedman

L'real estate, this is the basis of the system. The annuitant (or future annuitant) must be able to count on a regular income (or at least an absence of expenses), coming from a reliable and solid source. Real estate is perfect on this point: you own your main residence (therefore avoiding rent) and/or you rent your former main residence (receiving rent). This almost guaranteed monthly windfall is like the first Swiss pillar (AVS). It is not huge, but it is solid and it is regular. It is the first source of money with which you will partly ensure your previous lifestyle. As far as I am concerned, it is what allows me to feed my current account and finance a good part of my basic expenses.

This first pillar of the freedman is directly opposed to the second pillar Swiss occupational pension plan: you will withdraw your funds from your LPP account (paid with a claim of 1% per year and blocked until your retirement) to finance your main residence (then possibly re-let it later - with a much higher return).

2nd pillar of the freedman

A small independent sideline is good for the body and mind. It allows you to maintain social ties, preserve the image of an active person (albeit modestly!) and ensure some more or less regular income (which allows you to diversify your risks). Thanks to this additional income, it is also possible to achieve financial independence more quickly. As far as I am concerned, this source of money allows me to replenish my current account when it falls below a certain threshold that I have set for myself (emergency fund), since real estate does not allow me to cover all the expenses.

This second pillar of the freedman normally puts us in the "independent" box with the AVS in Switzerland. We therefore contribute to it, but it remains modest compared to an employee or a person without gainful activity with a significant fortune. It also makes it possible to limit the risk of being considered a professional securities trader.

3rd pillar of the freedman

The two previous sources of income cannot in principle cover all the needs of an annuitant. This is where dividends come into play. As long as the portfolio is sufficiently well diversified and invested in quality and valuable companies, dividends fall regularly. Better still, they tend to increase each year.

Personally, I always draw primarily on the first two pillars, because dividends have something sacred for me: they are the first stones I laid on the path to financial independence. So when I can, I reinvest them.

The 4th pillar of the freedman

The freedman, in addition to dividends, can also draw a small part of his capital, using a risk-free withdrawal rate.

I try to avoid it as much as possible (and so far I have succeeded), but this levy is planned (it is even part of the strategy, as I explain in my book). It's a bit of a spare wheel for me.

The 5th Pillar of the Freedman

At some point, you will have to be able to start drawing on the money you paid into the state pension system. Obviously, you will have to wait several years, so that you reach official retirement age (or at least close enough). This fifth pillar should be limited to everything you were unable to recover earlier.

In Switzerland, this is the AVS (which you can receive at the earliest at 63 years old), a possible remainder of LPP (from 58 years old) and a third pillar, used for tax reasons and/or for the depreciation of real estate (at the earliest five years before retirement age).

This fifth pillar (which still represents the retirement of an average person), is the equivalent for an early freedman of the bonuses paid to bankers. It is not necessary to live, but it allows one to enhance one's life with several extras.

Conclusion

On the one hand, you have five pillars, with financial freedom possible from the age of forty. On the other, you have the three pillars of state pension provision which allows you a retirement, often modest, from the age of sixty.

What do you choose?