Going up a flight of stairs on my way to buy some milk one morning I passed a couple of kids leaving the store. As I walked past them, the younger child clutched her big bag of chips, scared that I was going to take it from her. And it got me thinking how we all have a tendency to hold on to things – both literally and metaphorically.
As we mature, and the bag of chips becomes less meaningful – hopefully! – it is replaced by other items. Equally our thoughts and priorities change, but some of our pre-conceived notions remain with us and form the way we deal with situations.
A prime example of this is our attitude to retirement. People in their twenties and thirties are for the most part convinced that retirement is so far in the future, it is irrelevant to their current lives and thus should be ignored. The irony is that were they to start saving for retirement while they were younger, giving them decades for their money to grow (i.e. the 8th wonder of the world – compound interest) their financial health upon retirement would be greatly improved.
In Israel there’s also a ‘yiheye beseder’ (it’ll be okay) attitude. We think it will sort itself out when the time comes … we’ll have our government pension … and hopefully some other savings. If your retirement savings plans and pensions are only projected to provide a small part of your needed retirement income, you need to think carefully about your assumptions and possibly make some major changes.
Everyone knows the story about the man trapped on the roof of his house as the flood waters rise towards him. His reply to the boatman, the firefighters and the helicopter pilot who come to rescue him is that he’ll be okay because G-d will save him. After he drowns and is in the next world he asks G-d why He didn’t save Him when he trusted in Him so deeply. G-d tells him that He sent the rescue team, but the man didn’t see them for what they really were. Similarly, we tend to see what we want to see as opposed to what the true picture is.
So here are some basic messages that everyone needs to absorb.
- Most people’s forced savings plans (keren pensia, bituach menahalim, kupot gemel) are not enough to fund their retirement.
- People need approximately 80-100% of their current income to maintain their standard of living during retirement. It’s a fallacy that people need less money when retired – the expenses merely change (healthcare, kids, grandkids, travel).
- You can’t necessarily rely just on an inheritance (unless it is incredibly large) as people are living longer and using up more of their assets in retirement, leaving less for the next generation.
Ignore these messengers at your own peril. So where does that leave you if you want to start preparing for your retirement reality? Start with the following:
- Your financial plan. If you don’t have a financial plan at all you must make one. How it should be done is a subject for a whole different article, but it must include an evaluation of your current income vs expenditure in the short run, and your long-term savings and investments.
- Once you can clearly see what you are spending your money on, see whether you are also allocating a large enough portion of your current income to cover future expenses like weddings and retirement. If not, then consider lowering your standard of living. Reducing your expenses is never simple but it is far easier to adapt when you are younger.
- You are never too young to set up a retirement plan. If you are in your twenties and thirties this paragraph is for you. If you are in your forties, fifties, sixties and have children in their twenties and thirties encourage them to start thinking about long term financial health. The expression ‘life is a marathon not a sprint’ can be applied not only to your lifelong goals and dreams but also to your finances. Starting your savings early gives you a major advantage and enables you to utilize compound interest where interest/gains are earned on previous years gains leading to very substantial growth in the long term.
- If you are in your forties, fifties and sixties and don’t have a realistic retirement plan in place, do it now. Better late than never is definitely the maxim to live by in this situation. Recognize that you may well have to be frugal and cut back on your current lifestyle to fund your future. This may be difficult to accept but is nevertheless true. And by cutting back you will become used to a lower standard of living which you can continue in your retirement years.
- If you aren’t sufficiently aware of the financial markets and options available to you, speak to a professional. Decide what your acceptable level of risk is and make sure that you have a diverse and balanced portfolio. A DIY portfolio is definitely an option with the resources available today but ensure you are truly knowledgeable about the dynamics of multi-national financial issues before making all decisions independently.
With the knowledge that no one knows what the future will bring, but hoping that everyone will have many healthy years to enjoy their retirement, we must all recognize that the money has to come from somewhere. Regardless of your stage in life start saving now. Confront your reality and act accordingly. Money does not need to equal happiness, but some basic planning can avoid predictably stressful financial situations. An ounce of prevention is worth much more than a pound …