Your retirement savings – decimated or adjusted downwards?
by Baruch Labinsky
Elon Musk’s recent huge starship’s first flight test ended in an explosion approximately four minutes after takeoff. While the media mainly focused on the explosion and portrayed the test as a failure, the private company has framed the test flight as a major success which will pave the way towards even greater achievements. The disparity between the two perspectives – explosion vs unqualified success – got me thinking about media hype and how it influences our behavior.
No one will deny that 2022 was a difficult one for the markets, with stocks and bonds unfortunately down significantly last year. A diversified portfolio is meant to hedge risk and protect investors as bonds and stocks are not highly correlated. When one is significantly down (usually stocks) the other asset class (usually bonds) mitigates the loss and protects the capital. But not last year. This means that a standard 60/40 portfolio (60% shares 40% bonds), which is often the allocation for traditional balanced portfolios, took a hit from both sides. Most international markets suffered last year, including the major USA indexes and the Israeli markets, where most of our retirement savings are invested through our Kranot Pensia, Bituach Menahalim, Kupot Gemel and Keren Hishtalmut policies.
These losses have had a direct effect on the retirement savings of many people who were retiring or are due to retire shortly. In particular, retirees who are converting savings into pensions and/or living off investments that have decreased in value, face challenging times. Inflation, which has reared its ugly head, is also eroding the buying power of many seniors and dampening our retirement flexibility by devaluing our money and ability to buy goods and services. But while market and economic conditions have and will continue to impact on our finances, sometimes how we frame issues can change our entire mindset.
Has your situation changed dramatically or do you need to understand what opportunities exist to take effective steps for your future? Here are three immediate steps to consider which can improve your situation and help you plan for the future.
It goes without saying that in general, investors should avoid withdrawing large amounts of money when their portfolio is down. In an ideal world we all want to time and structure our transactions to our benefit from a tax and investment perspective. However, life isn’t always ideal, and if you need your retirement savings in the near future, you don’t necessarily have the luxury of waiting for the markets to recover.
But before you think of withdrawing even part of your savings, consider going back to work or continuing to work longer or part-time, so that you can delay dipping into savings and give them time to recover. This will be beneficial on other fronts as well. You will continue to receive a salary and pension benefits, keep active and mentally and physically stimulated, which can keep you healthier and stronger in retirement.
If you are already in retirement, re-evaluate your withdrawal rate from investments as part of your overall plan. If you were using 4% as your magic number, evaluate whether that percentage is too high based on your portfolio’s performance and future projection. During volatile times, consider reducing your withdrawal percentage to preserve wealth and give you greater future flexibility.
Putting your funds to work
If continuing to work is not an option, you need to create a retirement spending plan which looks at your current and projected income and available assets that are going to support you in retirement. The good news is that because interest rates have gone up significantly over the last year, if you have savings, you can expect a much higher rate of return on conservative bonds and even bank savings accounts. While Israeli banks were paying almost 0% interest in recent years, they are currently offering between 3-4% in many circumstances. Determine the amount you need to live on, put a budget in place and then shop around the banks and see the interest rates they are offering on deposits for the money that you don’t need in the short term. The increase in bond yields and the banks’ savings rates is significant and will give you the ability to invest, with a decent rate of return, with very little risk.
If you can afford to lock in for a longer period of time, you should be able to get a higher interest rate. Corporate bond portfolios can expect to yield between 4-6% over the next few years, as returns for more conservative accounts are expected to be higher and surpass actuarial estimates thus generating much needed additional income. The uncertainty in the markets means there is still a lot of variability, but retirees who want to reduce risk levels can still maintain good returns, which should keep pace with inflation and protect your purchasing power.
Rising inflation has eroded everyone’s spending power, especially those with fixed incomes but check which pensions are indexed so that can help give you some peace of mind. In Israel, higher inflation also means lower taxation as capital gains are reduced by inflationary gains.
The lower shekel rate offers an opportunity for people with foreign currency assets. I always tell clients to keep a percentage of their savings in the currency of the country where they are living to ensure they are not exposed to a large currency devaluation in the foreign currency. However, many people feel more comfortable leaving their savings in their home country, even if they are predominantly spending shekels. I don’t know if anyone can accurately foresee the direction that the shekel exchange rate will take, but if you have foreign currency that has appreciated significantly over the last year, consider converting part of it to shekels, thus benefitting from the higher rates, and then locking in the shekels at a higher interest rate.
No matter how near or far from retirement you are, make sure that you block out the hype and frame your mindset so that you can proactively structure your retirement savings and plan for the future. No-one wants to go into retirement with less funds than they had anticipated, but the above points give a direction to help maximize your savings for a financially sound retirement. If you can’t do it yourself, consult a professional. Behatzlacha!
Baruch Labinsky is the founder of Labinsky Financial, specialists in budgeting, retirement planning, investment management and pre- and post-Aliyah financial planning. Licensed by the Israel Securities Authority as a portfolio manager, Baruch specializes in working with olim who are looking to grow their wealth successfully, and is the author of the olim’s ‘bible’ “A Financial Guide to Aliyah and Life in Israel”. Contact us on 02 9910029 or email email@example.com.
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