Going with the premise that it’s certainly never too early, and hopefully never too late to prepare for those golden retirement years, take a moment to think about the following facts:
– 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 less than half 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.
Once you have absorbed these startling statistics, the question you need to ask yourself is how can you effectively fund your retirement in a relaxed and secure manner?
Get started – set up automatic savings programs
Savings programs (including contributions to kranot pensia and bituach menahalim policies) that you don’t need to initiate and think too much about, help you avoid the temptation of spending the money on other things. These contributions are mandated by law in Israel but if you are self-employed you’ll need to set them up yourself. If you contribute consistently to these policies (and don’t withdraw money from them including the severance or pitzium component when you leave a job), they’ll provide you with a good starting base for your retirement. 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. Do the math and get a projection of your estimated future pensions to determine how much you might need to supplement.
Align your investment risk with your investing time horizon
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. Savings plans can often be changed to match your current risk level as you approach retirement. But be careful not to invest too conservatively as you need your assets to keep pace with inflation.
Choose an investment strategy
Because savings are often 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. The golden mean needs to be found for your specific situation. 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.
Fees and commissions
Once your financial plan reflects your current expenses, look and see which in which areas you can reduce fees and commissions – a very effective way to save money without actually changing your lifestyle. Service providers want your business. Shop around and you will be surprised at the different options available to you that offer a reduced fee.
Prioritizing your lifestyle
No-one ever wants to cut back on anything they deem important/necessary/fun. Use your financial plan to prioritize those things that are crucial to you. And then you can contemplate reducing the expenses of those that are less important. Prioritizing your lifestyle will free up funds that can go towards longer-term expenditure such as helping your kids to buy a home, or help fund their education or your retirement. Look very carefully at your current standard of living and see if there are expenses you can cut in order to increase your savings.
Where to invest
Obviously how and where to invest your hard-earned wealth is a key to your continued financial good health. Regardless of anyone’s pronouncements, no-one is a prophet, and every element of investment carries a degree of risk. The golden rule for success for most investors is diversification. Your investment portfolio must be diversified so you can cover yourself in fluctuating markets. If you want to invest some of your funds in high risk assets, ensure that you have enough time to recover the amount before the time you need it, should the markets crash. In an age when many investments are positively correlated, it’s important to remember to diversify into different asset classes beyond your standard financial portfolio of bonds and stocks.
Unfortunately there are no guaranteed quick-fix routes to accumulating wealth. However, a solid, steady approach to your financial expenditure, and a diversified and balanced portfolio for your savings, will give you the maximum benefit for your golden years. Good luck!