Eight years ago, when the Israeli government began the current obligatory pension system, it was seen as 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. So far it’s all sounding quite good – with a contribution of almost 20% of annual income, these savings should provide a strong introductory retirement package.
However, obviously there is quite a large “however” here or I wouldn’t be writing this article!
- Firstly, there are all those pesky little 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.
- Secondly, there are all the insurance costs that are built into the policy. The article I wrote last month discussed this in more detail. (See my blog online http://labinsky.com/how-much-are-you-really-paying-for-your-life-insurance-2) 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.
- Thirdly, 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 depressed (repressed) interest rates have made it more difficult to produce significant returns. Just wait for your end of year reports (that will come in March or April) to see how bad 2015 was. And while the results from one year cannot be extrapolated to decades, there is currently no plan to raise interest rates locally so 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 taksivut 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? Whereas all the above points make your retirement plan sound quite bleak, by being proactive 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.