Your Investments: Take charge of your retirement

Tens of thousands of Israelis may see their pensions cut as the veteran pension funds have once again fallen into large deficits, 'The Marker' says.

By AARON KATSMAN
“Tens of thousands of Israelis may see their pensions cut as the veteran pension funds have once again fallen into large deficits. The pension funds are now facing an actuarial deficit of more than 5 percent and will have no choice but to cut their benefits to members. Retirees collecting pensions will immediately see their monthly checks cut.” (Monday’s The Marker)
So you have worked hard all your life, studiously put money into your Israeli pension on a monthly basis, and what do you have to show for it? Well if you have a pension with the National Workers Union or other similar “old” pensions, you are in for a big cut in benefits. According to The Marker, “At the end of the third quarter of 2010, the deficit hit NIS 1.12 billion, 15.4% of its commitments. This translates into a 15% cut in pensions for members.”
I mentioned this report to some friends and they were all in disbelief. The most common response I heard was, “How is it possible to keep saving for a pension and find out that your benefits are about to be cut?” It’s actually quite simple if you think about it. Without even speaking about mismanagement, in today’s climate of record-low interest rates, it’s virtually impossible for these funds to make enough money to meet the obligations that they have to pay out. As a result, they get deeper and deeper into debt. Aside from another government infusion of funds to help them regain solvency, the only way they can make up the shortfall is to cut the amount that they pay out in benefits.
The government loves me
Investors need to stop thinking that the government is the answer and will see to it that you are provided for. As we see time and time again, the government is pretty inept at efficiently dealing with most problems. Why do people think that when it comes to retirement, suddenly the government will get it right? Keep in mind that Israeli government pensions were created with the purpose of preventing elderly retirees from being thrown out in the streets. While there were never any promises that these pensions would make you rich, there was the assumption that the payments would pay for the living expenses of the elderly.
After decades of mismanagement and skyrocketing deficits, there is a real possibility that the government will not be able to meet their long-term obligations. If they can’t meet their own long-term obligations, how are they going to be able to bail out private pension plans? Where is all the money going to come from? The whole global, government-run pension system is on the cusp of insolvency.
Take a look at the UK pension deficits or Social Security in the United States. In certain respects they are like one big Ponzi scheme. Workers pay in now so that retirees can take out their share. Sounds great for today’s retirees, but what happens in 20-30 years when, due to recent low birth rates and baby boomers retiring en masse, not enough money comes in to pay for those claiming benefits?
What to do?
I don’t mean to scare you, I just want to encourage you to take control of your own retirement. In order to figure out how much money you will need for retirement you need to understand your current expenses. Sit with a pen and paper and start figuring out how much money you spend each month, as well as annual, onetime expenses. Once you have a handle on how much money you need to live off of each month, you can get a good estimate of how much money you’ll need to retire.
The general rule in financial-planning circles is that you need 80% of your current income to meet your expenses at retirement. For example, if you are now spending $50,000 a year, you will need to generate income of about $40,000 during retirement to fund your lifestyle.
Be selfish
As financial planners like to say, “Pay yourself first.” This means that when you set up your budget, include savings as part of your expenses. Try and save 10% of each paycheck and have it go directly into an investment account. There are some basic retirement calculators online that help you get an idea of how much money you need to save monthly and at what investment return you’ll require to meet your retirement goals.
If you haven’t started to plan for retirement yet, or you think that you are shortchanging you savings, speak to your adviser and put in place a plan that will help you retire, comfortably, without having to rely on the government.
aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and the United States and helps people who open investment accounts in the US.