“When I retire …” When you hear those words, you immediately conjure up an image of your dream retirement in Israel. It might be your new life in an apartment by the beach, traveling to places you have always longed to see, moving to a luxury retirement village, or relocating to be able to spend your work-free day enjoying children and grandchildren.
But no dream ever features the unpalatable reality of not being able to afford your plans. Whether you are making Aliyah during retirement, just before retirement, or even early on in your working career, a properly constructed retirement plan is crucial. After working for decades you want to be able to enjoy your freedom, but if you have insufficient funds, the future you have been dreaming of will, unfortunately, remain just a dream. Your retirement plan provides you with critical information about what you can expect in retirement and gives you the opportunity to be proactive – before it’s too late.
How much do you need to retire?
- Many financial planners suggest you may need 80-100% of your annual working income in order 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 is growing, while the number of working years is dropping as people start working later and retire earlier.
So, with all that in mind, how can you ensure that you’ll be able to fund your retirement in Israel?
The chances are that your savings alone won’t be enough because inflation erodes the purchasing power of your money. This means that your investment strategy will have to 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.
The key to your successful retirement plan is a slow but steady approach to savings and investments. Don’t be overwhelmed by the magnitude of the figure you will ultimately need. Begin with small steps, and the goals will become more achievable. Obviously, the more time you have until your retirement, the more effective your plan will be. But no matter what stage you are at in life, be proactive. Being slightly better prepared for your golden years is definitely preferable to being unprepared.
How to build a retirement plan
In order to build your plan, start with the following five simple steps:
- Estimate your projected Israeli income during retirement
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.
- Estimate government pensions from your home country
Include all projected government pension income from your home country (such as US social security, Canadian or British pension plan) and private pensions. Because your pensions from abroad are in a foreign currency, estimating the value of your pension in shekels 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 sometimes surpassing 10% in a single year. For long-term planning purposes, I recommend taking a conservative estimate, for example, the average rate over the last year or two. If you are 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.
- Add the two estimates together
The sum of your projected incomes represents your total income estimate.
- Create a projected retirement budget
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 in a myriad of ways that could drain your resources. And even retirees 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.
- Evaluate your retirement insurance needs versus your current insurance
Evaluate your retirement insurance needs versus the current insurance you own. Many types of insurance might be relevant when you are younger (like life and disability insurance) but can be reduced as you approach retirement, especially in a new country.
If you own an existing long-term care 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 pay-outs. 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 pre-existing conditions.
It’s never too early or too late to start planning for retirement. Consult a professional if you can’t construct your plan yourself. Start planning now to adequately fund your retirement. And that’s how you can make your dream retirement in Israel a reality.