Making your golden years golden

“I’ll be retiring in a few years and am thinking that it’s time for me to change all my pension and savings accounts to 0% risk (ie completely out of stocks and all risky investments) so that I will be properly prepared for my retirement. You agree, right?”

My reply took the questioner by surprise as the simple answer is that it is usually not that simple. Your risk profile as you approach retirement must be determined by many elements of your retirement plan.  Using simple rules, like the one that states “retirees generally should lower their risk profile as they approach retirement” are more often than not slogans that hurt your long-term planning goals.  Let’s dive a little deeper into the issue to better understand the issues and help you make a better and more educated decision about your investments. 

When low risk can actually be high risk

Your assets are possibly composed of various elements including pension funds. Certain pension funds in Israel (like kranot pensia) must be turned into an annuity (or monthly revenue stream) at a specific date at retirement. )In Israel retirement age for men is currently 67 while for women it is 62.) As you approach the time you will convert your pension into an annuity, most people will need to reduce the risk component of their investment fund to avoid unnecessary market risk, if they will not have the time to see their investments recover. For example, at the end of 2008 pensions lost 20% of their value in Israel, seriously affecting those who needed to or were planning on realizing their pensions at the beginning of 2009.

However, those who didn’t need those savings immediately could wait until the market recovered from the end of year lows.  But in order to be able to have this patience they needed to have alternative sources of income while delaying taking their pension.  If your pension funds are not your only source of income, there is no reason to become ultra-conservative and avoid all market risk in the years approaching retirement. Especially if your other investments (whether financial or in hard assets like real estate) won’t be needed immediately on retirement but rather five to ten years later.  Reducing the risk level of all those investments when you don’t expect to use the principal (nor possibly the gains) for many years could deprive you of substantive growth in the assets that you might need to live on in retirement.  In those cases, it’s a fallacy to think that choosing a low risk element is always the correct choice. 

Your investments as part of the big picture

The only way to successfully structure your retirement, regardless of how imminent it is, is to look at your big picture. Firstly, you need to update (or create if it doesn’t yet exist) your projected spending or lifestyle budget in retirement.  Your needs may be changing as you approach retirement. You may think you are still spending the same amount you always did but it’s likely that the components are quite different.   Health payments, travel expenses, helping parents and children might all feature prominently in your budget. Life expectancy is rising, so once your budget is updated you will get a better idea of when your investments will be needed over what will hopefully be decades of good health.

Make sure that the risk element of your investments corresponds to time horizon of when you expect to dip into those investments.   Look at your various savings funds and see which you should leave to accumulate more wealth, considering the risk level of the investment and the tax exposure.  For example, delay cashing in tax-deferred or tax-free investments like kranot hishtalmut funds.   Proper planning before withdrawing various funds can save you thousands if not tens of thousands of shekels and ensure that your money is available when you need it.

What to do if you can’t afford to retire

Unfortunately, not everyone has enough savings to last for possible decades after retirement. In fact, lack of sufficient funds is one of the main reasons why people continue to work after the official retirement age. In Israel the basic old age pension is simply not enough to live off. In 1995 the pension structure in Israel changed. Those people fortunate enough to be the recipient of a defined benefit pension (which were halted when the pension laws were changed) are receiving or will likely have a generous pension. As you approach retirement, if you do not have that type of pension, your first step is to find out exactly what and how many pension plans you have in your name. Use the Israeli government Hebrew website itur.mof.gov.il to help locate funds that you may have forgotten about. It is possible that pension contribution plans were set up in your name via different companies you worked for. That money is yours and is there for you to find, so it is worth checking.

If you are unclear regarding the best way to maximize your pension savings, you are not alone. Depending on the plans 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 liquid.
• Whether to take the 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.

If you are now approaching retirement and it is too late to set save enough money to be comfortable without working, consider the following options:

• Adjust your standard of living to a more reasonable level that you can afford. It’s never too late to make changes that will help you become more financially secure.
• Assess your various insurances. The Israeli government Hebrew website harb.cma.gov.il shows all the insurance policies that are in your name. Your insurance needs are often very different as you approach retirement with life insurance and disability insurance becoming less important. Make the appropriate changes and you might find yourself saving significant funds as you stop paying for insurance that is no longer needed. 
• If you are able to continue working, even part-time, not only will you continue to earn a welcome salary but you will also accrue more benefits and a larger pension when you eventually decide to retire.
• If you own your home, you might also consider selling your property and downsizing, thereby freeing up a potentially significant amount of capital, that if properly managed can generate an important source of income in retirement.

The benefits of old age

Make sure that you are familiar with all the various benefits that retirees are entitled to. In Israel the Hebrew website shlaykes.co.il is an excellent resource to help discover the many options available to retirees and ways to save money – from free glasses and hearing aids to heavily discounted entertainment.

Scams and salesmen

Unfortunately, older people are often the victims of financial scams, as they are viewed as soft targets. Make sure you never divulge financial information to anyone who cannot prove their identity. If in doubt, err on the side of caution – ask to take their contact details so you can do your research in your own time. Israel is now introducing ‘pin numbers’ which will need to be entered when paying by credit card. This is to safeguard your credit card in the event it is lost or stolen, so it is crucial that you never give that pin number to anyone. (You can also personalize your pin number to a more easily-remembered option. Check with your credit card company how to do that.)

Salesmen are very persuasive – their income depends on it. They bombard us with words, information, and still more words until we are convinced that what they are selling is crucial to our wellbeing. But it very rarely is. Never agree to whatever it is they are selling until you have time to think about it. Despite them telling you that the price they are offering is only good for the next 30 seconds, the chances are they’ll give you that same special offer if you ask them to call back in a week. Regrettably, many people fall for these scams and salesmen’s offerings which can result in losses of large sums of money.

In conclusion and contrast, when dealing with a possible scam and pushy salesman it pays to be over-cautious … unlike the route that should be taken with investments that will only be needed over the entire period of your retirement, where continued risk exposure is often still incredibly valuable.