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Pushing off planning for retirement could really cost you!

This will be a 2-part series.

In the US as well as in other countries like the UK, saving for retirement is mainly on the individual. The individual must decide to contribute to a 401K plan, to match what his/her employer is offering and to decide to invest through tax advantaged accounts like an IRA or Health Savings Account (HAS).

Forbes, reported these numbers and they are very troubling. Again, these do not tell the entire picture, since they do not include other savings accounts such as IRAs or personal brokerage accounts, however it is clear that individuals are not properly planning for retirement.

There is a well-known retirement “rule of thumb” – the 4% rule. The 4% rule is a guideline which indicates how much an individual should withdraw from his/her savings in a given year. The rule states that one can withdraw 4% adjusted for inflation per year. So, if you have $100,000 in savings, you can withdraw $4,000 a year maintain your original principal. Taking the example in the chart above, if you have $280,000 in your 401K, you can withdraw $11,200 a year (4%). This does not take into account taxes and other variables.

Not to dwell on the effectiveness or validity of this approach, for most people, $11,200 a year in addition to their monthly social security payment will not be enough to maintain one’s quality of life in retirement.

In 2007, Israel began the process of instituting obligatory pension (פנסיה חובה) whereby the employer is obligated to deposit funds (based on a percentage of gross salary) on behalf of its employees into a pension fund. Over the years, this law has been extended to include the self-employed and has also been upgraded to require higher percentages to be contributed by both the employer and employee. This means that for most working Israeli’s they have some savings put away in retirement accounts. Therefore, you would think that perhaps we are in a better situation, right?

The fact is that the state of the average Israeli’s accumulated retirement savings is not so rosy. In a recent article published by Globes, Moshe Ernst, CEO of Clal Pension states that the pension savings that an average Israeli enters retirement with is around 400,000 ILS. This number is driven by the fact that pension accounts were only opened 25 years ago and therefore people have not had enough “time” to contribute and grow these funds. However, the truth is, that for most people even having 1,000,000 ILS in pension savings is not enough, as you will see.

Monthly pension payments are derived from the amount accumulated (צבירה) in the fund and the plug number called a mekadem (מקדם המרה לקצבה). On a simple level, this plug number is based on actuarial data and life expectancy numbers as well as on what percentage of the payment the individual decides to allocate to his\her partner after he passes away in the retirement period. This number gets updated based on changing statistics. The lower the plug number, the higher the monthly pension payment will be in retirement.

There is more nuance here, but I would like to focus on this point. Take for example, an average Israeli with 400,000 ILS in pension savings. Assume we use a mekadem of 200 (which very well me be much higher) this translates to a gross (before tax) monthly payment (קצבה) of 2,000 ILS per month (400,000/200 = 2,000). Bituach Leumi payments for an individual is 1,596 ILS in 2022.

I think we can agree that it would be hard for someone to live on 3,000 to 4,000 shekels a month in retirement. Again, this example is for an individual and not a couple, but the amount will be proportionally similar for a couple.

Here is the crux of this post – In a country like Israel, which is proactive and has enacted laws to obligate individuals to contribute and save towards retirement, the average Israeli will not have enough saved and be able to maintain his\her quality of life in retirement, based solely on his\her pension accounts!

So here are a few questions to ponder –

  1. What are my retirement goals? What should my target monthly income be?
  2. How do I position myself for financial success in retirement, if my accumulated savings are not enough?
  3. How do I plan for emergencies and unexpected costs that may arise?
  4. What’s my strategy and how do I get started?

 

Reach out to Green Peak Advisors to discuss your personal retirement plan and to create a personalized strategy to achieve your life and financial goals!

Stay tuned for Part II to this post!

Sources:

(1) Forbes

(2) Globes