You should be putting together a projected retirement plan, regardless of your age, but especially if you’re getting close to or already in retirement. It’s important to understand what you can expect from both your income and your projected future expenses in order to be assured that you’ll be able to retire comfortably, regardless of what stage in life you are making Aliyah.
Many financial planners suggest you may need 80–100% of your annual working income to maintain your current lifestyle after retirement. Government social security payments and pension plans account for only 20–40% of most people’s total retirement income.
Average life expectancy keeps growing, while the number of years the average worker is fully employed continues to shrink, as people start working later in life and desire to retire at an earlier age.
So how can you effectively fund retirement in Israel? Let’s get some basics clear before we consider the whys and hows of retirement planning. Savings will likely not suffice for your retirement because inflation erodes purchasing power. Even a relatively low inflation rate of 3% will halve your purchasing power over twenty-four years. (And the current inflation rate in Israel is hovering around 0%.) That means, in nominal terms, that you’ll need to earn double the amount you earn today to avoid a loss in buying power. If you’re in your forties and living on NIS 12,000 of income a month, you’ll need NIS 24,000 available to you each month of retirement in order to support yourself at your current standard of living.
Because savings are not enough, your investment strategy will play a crucial role in generating extra income. On the one hand, too conservative a strategy won’t necessarily give you enough to outpace inflation and provide the standard of living you desire. On the other hand, too aggressive a strategy might expose you to too much risk. Long-term investing thus becomes a critical element of your retirement plan. Investing regularly over a long period of time will help you see the benefits derived from compounding.
For example, someone who starts saving NIS 500 a month when he is thirty and earns a 6% return on the savings will have NIS 712,355 saved by the time he is sixty-five. Someone else who saves the same amount but only starts when he is forty-five will have NIS 346,497 saved by the time he is sixty-five. By starting fifteen years earlier, the amount saved has doubled!
Investing just NIS 200 a month for thirty years at 8% will give you an extra NIS 300,000 in retirement. While this may not be enough to retire on, it is a nice sum nonetheless to supplement your other income streams. By investing long-term and compounding, you’ll be able to build your capital in an unhurried and reliable way. Your investment choices are largely dependent on how long you have until your retirement — and that same time period will also be a major factor in deciding the risk element involved.
There is no “one answer fits all” to retirement planning. It is a process of calculating odds, while considering the many variables and unknowns, and then acting on those calculations, without being paralyzed by the lack of certainty.
The many variables that need to be considered include the following projected information: desired standard of living in retirement, retirement date, health care costs, longevity, rates of return on investments, inflation, tax rates, private pension estimates, and government pension benefits.
The key to your successful retirement plan is a slow but steady approach to savings and investments. Begin with small steps, and the goals will become more achievable. The hardest part of your retirement strategy is taking the plunge. While there is much to do, here are four steps to get you started:
Set up automatic savings. Savings programs that you don’t need to initiate and think too much about help you avoid the temptation of spending the money on other things. In Israel, most workers have long-term pension plans and keren hishtalmut policies. If you consistently contribute to these funds (and don’t withdraw money from them), they’ll provide you with a base for your retirement plan. That being said, most often these savings are insufficient to support your current standard of living, and you’ll need to open additional savings plans or count on other assets to supplement them.
Align your investment risk with your time horizon of investing. If you’re young, you can take more risks because you don’t need immediate access to the money and thus have more time for poorly performing investments to recover. If you’re closer to retirement, reduce your risk — this isn’t the time to take unnecessary chances with your retirement savings. If something goes wrong, you could end up with much less than you expected and no time to repair the damage. Investments in Israeli retirement savings plans can often be changed to match your current risk level as you approach retirement. Be proactive and don’t wait for your insurance agent to contact you.
Look very carefully at your current standard of living and see if there are expenses you can cut in order to increase your savings.
As you age and your living-space needs change, consider downsizing your current home. It will reduce your monthly expenses, and you’ll free up more of your resources for investment and savings. When moving to Israel, consider your housing needs carefully to ensure that you don’t buy a home larger than you can afford.
Compiling a retirement plan can be a complicated exercise. Narrowing it down to the basics makes it more manageable, especially if you’re considering Aliyah close to, or during, retirement. Let’s take a look at a simplified retirement self-assessment example before you begin building your own plan.
Note that the example below is very simple. It doesn’t account for investment gains or inflation, and doesn’t take into consideration added expenses in retirement due to health deterioration or medical and family emergencies. But it’s a good start.
In order to build your plan, start with the following five simple steps:
Estimate projected Israeli income during retirement.
Estimate government pensions from your home country.
Add the two estimates together.
Create a projected retirement budget.
Evaluate your retirement insurance needs versus your current insurance.
Estimate your projected income from Israeli sources during your retirement. Israeli source income should be detailed, and include Bituach Leumi (Israeli national insurance), private pension funds such as bituach menahalim and keren pensiah policies that you expect to start saving, state pensions, savings and investment accounts, and real estate. In Israel, national insurance payments from Bituach Leumi will represent a relatively small percentage of your required retirement income.
About a decade ago when the Israeli government began the current obligatory pension system, it was seen as a very positive step and a huge relief to many who felt that now they automatically had an effective retirement plan in place, and could cross retirement planning off their ‘to do’ list. But whereas it is an essential and necessary part of retirement planning, everyone needs to know exactly how much money they can expect when retirement comes around, and thus know how complete their plan really is.
According to the existing legislation all employers and employees need to contribute on a monthly basis to an employee’s pension fund. The standard contributions are 6% from both the employer and employee, and an additional 8 1/3% from the employer towards severance which also forms part of the employee’s retirement plan. With a contribution of almost 20% of annual income, these savings should provide a strong introductory retirement package.
However there are several points to take note of.
The fees. Make sure that you study the new reports that show you exactly how much you are paying in both a load fee on all contributions and an ongoing management fee on the accumulated balances in the account. The reports clearly show not only what you pay but also the average for the kupa/plan you are in. When necessary contact your agent to ensure your fees are not exorbitant.
The insurance costs that are built into the policy. Life Insurance, disability, accident and other insurances that are built in one’s policy can significantly reduce one’s personal savings rate, especially as we age and the insurance becomes more expensive.
Future payouts are highly dependent on long term rates of return. Because a standard pension fund invests rather conservatively on the whole, including large exposures to bonds, the current depressed (repressed) interest rates have made it more difficult to produce significant returns. As there is currently no plan to raise interest rates locally it will probably take several years to see a return to more normal rates. This implies continued difficulties in performance that might last much longer than we all hope.
Lower overall rates of return will reduce most people’s pension payment. While some older workers might still be lucky enough to have qualified and/or be grandfathered under the pensia taksivit system, where pension rates are not dependent on the rates of return, most are very dependent on long term rates of return in their pensions. If current returns are insufficient to generate a significant pension, you should consider changing the risk exposure of your policy to give yourself a better opportunity of making higher returns (remaining aware of course that higher potential returns bring along higher risk).
Other negative factors include the fact that many people access their severance payments when they switch jobs thus reducing their future pensions. When faced with emergency situations, you might also be tempted to access your retirement funds when allowed. Be careful! Future expenses need to be funded by current savings or else you risk not having enough money to retire comfortably when you want to, at the standard of living that you are accustomed to.
So what can you do? Be proactive so you can salvage and improve your situation to meet your needs.
Change your mindset. Get your head around the fact that as it stands your retirement plan will offer you less than you need, and start to save more – especially for intermediate savings goals like weddings, education, helping your kids buy an apartment, etc.
Consider increasing your exposure to stocks instead of just relying on the standard default distribution that most investors fall into. These klali funds are a very conservative distribution of assets with between 70-80% of all assets invested in bonds and other conservative assets. This distribution sounds very reasonable as you approach retirement but might be much less so when you are building up your savings in your 40s and 50s.
Speak to a professional and see if you can safely reduce or eliminate the insurance in your policies to help you ensure that your savings rates remain high.
Consider other investment vehicles where you can diversify your assets and hopefully increase your overall portfolio returns, although this will not be easy for the small investor who is just starting to save money. Those smaller investors might need to continue relying on ETFs and other market based products to see some growth in their portfolios. If you are unable to do so yourself, find a professional who will be able to guide you with a plan that best suits your requirements.
As with most financial issues there is no easy option. In order to ensure that you are properly prepared for retirement recognize that the government obligatory pension system offers a very good start. But a start is what it is and it is up to you to take it further.
These facts mandate that retirees in Israel need to save significant sums of money to supplement government pensions for a growing number of years in retirement.
The state pension paid out by Bituach Leumi combines a universal pension with means-tested income support (for those with severely limited income sources). Since January 2008, contributions to pension funds are mandatory. Retirement for men in Israel is defined at sixty-seven, while women’s retirement age is currently set at sixty-two, but might change if the amendments to the current bill are approved.
For those working in Israel prior to retirement and eligible for Bituach Leumi, the basic pension is approximately NIS 1,558 for one individual per month, with a couple receiving NIS 2,342, as of January 2020. A seniority increment of 2% for each year worked in Israel above ten years (up to a maximum of an additional 50% of the pension) is added to the pension. If you receive a pension from another country, your pension in Israel will be reduced until the age of seventy.
Check the Bituach Leumi website for more specific details relating to your specific situation, as the system is complex. If each spouse independently qualifies for a pension (because both contributed to Bituach Leumi during their years in the workforce), each will receive an individual pension. These amounts aren’t nearly enough to support yourself in retirement, even at the most basic level. Because of this stark reality, it’s important to ensure that you have other sources of income to supplement the official pension.
If you are an Israeli resident but not eligible for old age insurance payments because you immigrated to Israel after the age of sixty to sixty-two (the exact age depends on when you were born), you may be eligible for a special benefit or income supplement (especially if you have no other assets or income) from Bituach Leumi. If so, you receive a minimum income in the amounts laid out below.
Summary : Estimate the income in NIS that you can expect from each of these income sources. If you’re unsure of the amount you’ll earn, make an attempt to estimate it as best as you can. Many retirement policies include projected pension estimates, and, as you get closer to retirement, these estimates should be more accurate. For simplicity’s sake, if you have investment accounts, take the projected lump sum and divide it by twenty, and it will give you a good estimate. For example, an investment account of NIS 200,000 at retirement will generate approximately NIS 10,000 of income annually during your retirement.
Include all projected government pension income from your home country (such as US social security or Canadian pension plan) and private pensions. Because your pensions from abroad are in a foreign currency, estimating the value of your pension in NIS can be a difficult task — especially if you are many years away from retirement. But even if you’re close to (or already in) retirement, estimating future exchange rates can be very difficult, with annual fluctuations often between 10 and 20%. For long-term planning purposes, take a conservative estimate, for example the average rate over the last year or two. So if the US dollar has averaged about NIS 3.4 over the past year, use that figure to estimate your pension income in NIS. Americans living in Israel and receiving social security payments are uniquely exempt from taxes on these payments both in Israel and in the United States. Americans abroad continue to qualify for these payments even after they’ve made Aliyah. If you’re making Aliyah from Canada, the United Kingdom, or Australia, consult an accountant prior to your arrival in Israel to ensure that you can maintain your pensions abroad.
For Americans who are eligible for social security payments, there is a provision (the Windfall Elimination Provision or WEP) that reduces the social security payment, if you contributed to a foreign pension. This means Americans living in Israel and contributing to a keren pensia or a bituach menahalim policy, would have their social security payment reduced by future pension payouts. Until recently the social security administration was also using Bituach Leumi pension payments to reduce social security payments but that is no longer the case due to a recent court decision. The social security website has online calculators that can be used to estimate future payments and the effects of the WEP.
For an individual – 1,558 NIS
For a couple – 2,342 NIS
For an individual + 1 child – 2,051 NIS
For an individual + 2 children – 2,544 NIS
For a couple + 1 child – 2,835 NIS
For a couple + 2 children – 3,328 NIS
For an individual – 1,646 NIS
For a couple – 2,430 NIS
For an individual + 1 child – 4632,139 NIS
For an individual + 2 children – 2,632 NIS
For a couple + 1 child – 2,923 NIS
For a couple + 2 children – 3,416 NIS
Once you have listed your pension income, add all your investment accounts, including registered retirement accounts, real estate assets that will generate income, and any other assets that you can expect to use in retirement.
Then estimate projected familial support payments, income from trusts or inheritances, and any other income sources that you can expect from abroad. If the income is in a foreign currency, convert it into NIS according to the method described above.
Add all the projected incomes to produce your total income estimate.
Take your current budget and create a projected retirement budget. You’ll probably want to maintain your current standard of living. While some expenses go down at this time of life, others go up: you’ll have more leisure time, which will lead to increased expenses.
You may also want to help your children and grandchildren financially that could drain your resources. And even those who are considered healthy may have health issues that arise and need to be financed. For these reasons, you need to think seriously about the different expenses you can reasonably expect in your golden years.
Gone are the days when Grandpa spent twenty years rocking in his chair on the porch. Retirees are younger, healthier, and more active than they used to be. Because people are living longer, their health care costs and overall maintenance expenses can be higher than the sums they spent during their working years. Don’t just assume that things will work out for the best — plan now to avoid serious problems later.
Everyone would prefer their retirement to be a worry-free relaxed stage of life, rather than the constant pressure and tension regarding the imbalance between their financial needs and wishes, and the actual reality.
But depending on your financial situation, you may well need to be proactive to realize your retirement dream. Your financial reality is created by a combination of external factors over which you have no control, and your personal financial lifestyle which you can control. In Israel, one of the external factors is the current, very low interest rate. It used to be that someone had a portfolio or investments and received a conservative 4%-5% return. If a couple was able to save a million shekels for example, earning 40-50,000 nis a year, and supplement that income with a relatively small pension and Bituach Leumi payments (and possibly social security from the old country), they had the ability to retire fairly comfortably.
The problem is that incredibly low interest rates have punished savers who have investments and had counted on savings schemes with no or low risk.
Much as people might resent the low interest rate situation as they feel they are being ‘punished’ unfairly with what should have been a headache-free situation, this is the reality. Your choice is to ignore it and suffer even more, or try and find ways to deal proactively and make the best of a less than ideal situation. Once you acknowledge the situation you will be in a better state of mind to deal with it. Let’s tackle the issue with some very practical advice.
You need a sustainable standard of living in retirement that matches your income. Lowering your standard of living both before retiring and if necessary after retiring, can help you achieve a balanced long term budget. Expense cutting can be done on a small and large scale. Small scale includes reducing your food shopping bills, ensuring your communications costs are minimized, and keeping travel and entertainment at a reasonable level. Large scale cuts might include downsizing your home and using part of the proceeds to improve your income generating capital. Prioritize what is important to you. If you want to stay in the same area, you could sell your home and move to a smaller place. If you feel the space is still important to you, you may need to consider moving to a different location. The actual price of housing is cheaper outside the center of the country (eg the periphery) and related costs are often cheaper too.
With investments offering very low returns, investors have been forced to consider higher risk investments. Any move along the risk/reward spectrum to higher risk/returning investments must be carefully considered. Anyone who is close to retirement should not put himself in any position where he might jeopardize his life savings. Those who are further from retirement, and can afford the time it may take for investments to recover if the market falls, should consider the option, consult with a professional and then make an informed decision as and if necessary. But don’t jump at a headline promising 15% or 16% with little or no risk. There is no such thing. Higher returns come with higher risk and anyone who presents a high return investment as being low risk should be avoided like the plague.
Although some people like owning an actual property, as we age it becomes harder to be an effective landlord with all the accompanying issues and time-consuming tasks. An alternative for those, and also for those who prefer being one step removed from real estate is a REIT (Real Estate Investment Trust). There are many high quality REITs in the US and a few in Israel that pay good dividends and are an option that should be examined.
Part time jobs can be an excellent source of income. Consider whether your chosen profession fits the bill. Part time jobs after retirement can serve the dual purpose of bringing in income and occupying the sometimes empty structure that retirees find themselves in.
Continuing to work in your current job might not be the best option for those itching to quit or determined to come on Aliyah, but extending your revenue stream (whether part time or full time) beyond your projected retirement age can have a tremendous impact your retirement plan. Not only does it delay you from eating away at your savings, but it also gives your investments time to grow.
Savings programs that you don’t need to initiate and think too much about help you avoid the temptation to spend the money on other things. So start the process now while you are still working and you’ll find it can make a major difference in helping you grow your savings.
Hard and annoying as it is, the reality is that your retirement in Israel might not look as comfy as you had imagined. While retirees would love to see interest rates rise, this wishful thinking won’t change the reality.
Sit down, work out your retirement financial plan, and work on finding solutions to stretch your savings so that you too can fund an enjoyable and relaxed retirement.
If your projected income is greater than your projected expenses, you have a running start for your retirement. Still, monitor things closely after you move to Israel and get closer to retirement. If your expenses are greater than your projected income, look seriously at both sides of the income/expenses equation to see what adjustments can be made. See below for a sample budget for retirement for a middle-class couple living in Israel. Use it as a starting point for building your own budget.
When retiring in Israel or considering bringing your elderly parent(s) to Israel, look carefully at your options. While assisted living facilities are widely available and usually highly desirable, they are generally much more expensive than assisted living solutions in a private dwelling. Many facilities require a large down payment and ongoing monthly fees.
Living at home with either part-time or full-time live-in help can be significantly cheaper, especially if one isn’t living alone. Couples living with full-time live-in care can expect to spend NIS 15,000–20,000 a month. The cost of assisted living facilities and retirement and nursing homes vary tremendously, depending on the standard of care and services, but you can expect to pay over NIS 20,000 a month per person for full-time care. See below for a sample budget for a single retiree living with a full-time caregiver.
Your budget should reflect your unique circumstances as you plan for your future. Use the second column to start building your own projected budget.
|Monthly Expenses||Retirees (2) ₪|
|Phone / Cell Phone / Internet (not including devices)||525-875|
|Utilities (water, electric, va’ad bayit, gas)||525-1,050|
|Municipal Taxes - Arnona (includes 70-90% reduction)||250-800|
|Health Insurance (supplemental coverage)||0-875|
|Additional Insurance (life, home, dental, optical)||700-1,050|
|Transportation||1,750-2,275 (includes fuel and maintenance of car)|
|Total||9,125₪ – 18,050₪ ($2,607 – $5,157)|
Local retirement consultants are available in Israel to help identify solutions for the elderly during the various stages of retirement. Additional funding from Bituach Leumi is available for seniors who continue to live at home with assistance. Ensure you’ve undergone an assessment with them, as you might qualify for financial benefits and extra hours of care, especially if you can prove your financial need.
Evaluate your retirement insurance needs versus the current insurance you own. Many types of insurance might be relevant when you are younger but will need to be adjusted as you approach retirement, especially in a new country.
It’s important to evaluate your disability, life insurance policies, and long-term care insurance to see how they impact your retirement plan. Do you anticipate needing to supplement your income during retirement in order to live at home as long as you can, or do you have enough savings to support yourself and hire additional caregivers if necessary? Private medical insurance policies are often used to supplement the standard medical care in retirement, but they can be expensive.
If you own an existing policy in your home country, verify that your insurer will continue to pay out if you live in Israel and investigate future tax liabilities, as taxes might be withheld on future insurance payouts. If you don’t own a policy, consider whether you can afford an Israeli policy and whether it will be wise to purchase a policy that usually excludes preexisting conditions.
Aside from standard retirement planning as described above, there are two related areas that are critical to consider, given Israel’s unique legal and financial systems: a health care directive (or proxy) and a final will or other estate planning tool.
Israel’s health care system is divided between the care provided by the health funds (kupot) and the care provided by the hospitals’ emergency services. Doctors working in the health funds have access to all official medical records and information on members of the health fund. Currently hospitals have no access to medical information that you accumulated over the years by the kupot. In the event of hospitalization, you’ll be starting from scratch. This lack of information can create unfortunate situations where doctors are unable to properly treat a patient or do not have the ability to correctly make important life-and-death decisions for a patient.
If you have a medical condition that emergency care providers need to be aware of, make sure you wear a medical bracelet sharing all the relevant information. Creating a health directive or health power of attorney (health POA) to transmit your needs and requests will ensure that medical care decisions are executed according to your wishes. The Israeli Ministry of Health website (www.health.gov.il) has documents available (including an English document entitled “Advanced Directive as to Future Medical Care of a Dying Patient”) that enable a person to stipulate how he wants his life to end should he become critically ill.
It is advisable to have a will that complies with Israeli law, even if you already have a will in your home country. Israeli inheritance laws apply to individuals who are Israeli residents at their time of death or those who die owning assets in Israel. A will means that you can earmark your assets for your family and friends in the specific manner that you desire and not leave it to the court to decide how to distribute your assets. Dying without a legally valid will (“intestate”) might be the easy way out for the deceased, but it can create terrible family squabbles for years to come. A will also provides you with the opportunity to decide in what legal court system you want it adjudicated. There can be significant differences between how the will is executed via the different court systems, so your choice of legal system is crucial. For instance, in Israel there are parallel secular and religious court systems that are mandated to execute wills, and your will should indicate which system is preferred.
Wills (and planning for disaster) can help you structure your personal affairs and finances in advance of a financial, legal, or health disaster, thus lessening their negative impact and ensuring care for family members who are unable to make their own decisions. They can also prepare for the possibility that you will be temporarily or permanently disabled for a significant period of time. Wills can make recommendations as to custody issues for children and can provide mechanisms for custodianship of assets, for example via the creation of trusts. Check with a legal counsel and/or a financial planner with experience in setting up medical directives, wills, and contingency plans to ensure that your wishes are respected and won’t be contested.
For more sophisticated estate planning involving trusts and other financial structures, seek guidance from professionals who are familiar with international tax and structuring issues.
It’s never too early or too late — start planning now to adequately fund your retirement.
List and total all your sources of projected income — both from Israel and abroad — to obtain your total income estimate.
Take your current budget and create a projected retirement budget.
Evaluate your retirement insurance needs and adjust your coverage to ensure it reflects your short- and long-term needs, which change as you age.
Set up a health care directive to ensure that your wishes are upheld in the event of a debilitating medical condition.
Consider drawing up a will that complies with Israeli law to simplify proceedings in Israel.
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