by Baruch Labinsky
As we approach Pesach and our thoughts turn to our liberation from slavery in Egypt I thought it timely to share some tips to help you set yourself up for a financially liberating retirement.
Save disposable income
If there is one positive aspect to the current pandemic, it is that it has shown us we can survive while spending much less. We were forced into this reality as entire sectors of commerce including leisure and entertainment, hospitality and travel were all shut down. But the interesting fact is that according to the Central Bureau of Statistics’ National Accounts, one third of disposable income went into savings programs and the stock market in 2020. Their figures show that households’ net savings rose to a record 31.2% of disposable income. Generally, in an economic crisis the private savings rates fall as people lose their jobs and try to maintain their spending levels in order to keep their usual standard of living, despite the loss of income. But in our surreal corona reality the reverse was true. Many people (especially those continuing to work or already retired) ramped up their savings rates squirreling away money in the financial market or savings plans.
At this time of writing, the Israeli government is allowing the re-opening of much of the closed industries. With the hope and prayer that we return to and remain with a fully-open economy, I think many people have proven to themselves that all that ‘necessary’ expenditure is actually not as vital as they thought. Whereas I’m not suggesting that everyone continue their corona lifestyle post-corona, I do think that it is financially sensible to look at your current spending as a baseline of what the barebones basics really consist of and then adjust upwards depending on your current and future income and cashflow. Generally speaking, people have not been allocating enough towards their retirement savings to provide themselves with the resources to retire in comfort. Take this opportunity to evaluate what your retirement plan looks like so that you can assess what you need to save now to fund your future retirement. We are currently living a reality which makes it easier to continue a scaled back standard of living which can really make a major long-term impact on your finances.
Set up automatic savings programs
If you decide to spend less of your disposable income as we recover from corona lockdown, set yourself up for success by initiating automatic savings and investment programs. These programs will help you avoid the temptation to spend the money as you won’t see it in your current account. Begin the process now before you can revert to your pre-corona lifestyle, and you’ll find it will make a major difference in helping you grow your savings.
Review your investment mix
With interest rates very low at the bank, investors have been forced to consider higher risk investments if they need to generate income. Any move along the risk/reward spectrum to higher risk/returning investments must be carefully considered. Those close to retirement should not put themselves in a position where they are investing money but cannot tolerate possible losses. 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 options, consult with a professional and then make an informed decision. Just don’t jump at an offer promising high rates of return with little or no risk. There is no such thing. Higher returns come with higher risk.
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. Alternatives for direct ownership of real estate include private real estate offerings (many of which are only for accredited investors) or for smaller investors, publicly traded REITs (Real Estate Investment Trusts). 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.
Assess your insurance and pension plans
As we age our insurance requirements change, with life insurance and disability insurance becoming less important. Review your various insurances as you may even be unaware of exactly what you have. The Israeli government Hebrew website harb.cma.gov.il shows all the insurance policies that are in your name. Make the appropriate changes and you might find yourself saving significant funds as you stop paying for duplicate policies or insurance that is no longer needed.
If you are unclear regarding the best way to maximize your pension savings, you are not alone. Depending on the policies and your financial situation you will need to consider, among other elements:
- When to start taking your pension – the longer you wait the higher the benefit amount in most cases.
- Whether to take out your entire pension as a monthly payment or to take out a part as a lump sum – for example to have emergency funds available.
- Whether to take a pension based on your life expectancy or based on the lifetime of either you or your spouse (with reduced benefits in that case).
It is worth consulting with a licensed pension advisor regarding your specific situation.
Delay your retirement
Continuing to work in your current job might not be the best option for those itching to quit, but extending your revenue stream (whether part-time or full-time) beyond your projected retirement age can have a tremendous impact on your retirement plan. Not only does it delay you from eating away at your savings, but it also gives your investments time to grow.
Extend or diversify your revenue stream in retirement
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 empty hours that retirees sometimes face.
We all need 20/20 vision in order to see clearly. 2020 was the year that turned many of our assumptions and pre-conceived notions on their head. If we use the harsh lessons we learned this past year to give us clarity of sight and insight, we will be able to set ourselves up more comfortably for a financially liberated retirement.
Behatzlacha raba and chag kasher vesameach!