Thanks to the yeoman work of Nefesh B'Nefesh and the Jewish Agency, thousands of new olim arrived this past summer. It's important for these new olim, as well as veteran immigrants, to keep their IRAs (Individual Retirement Accounts) up to date. One of the most common issues I see when I meet with prospective clients is that they haven't looked at their IRAs in years.
Last week, on two separate occasions, I asked prospective clients whether they had received any retirement plans while working in the US. They both said they had IRAs, but because they were relatively small in nature, they rarely, if ever, looked at their statements. When I asked them the size of their IRAs, one answered $34,000 and the other said $71,000. I then asked each of them how much money they had invested in these accounts when they came to Israel, and the answer from both was that they had roughly the same amount then as they do now.
If you have an account in which the whole purpose is long-term savings and you don't even look at the account, you are doing yourself a disservice. In fact, you are defeating the whole purpose of these types of accounts. While you may think that $34,000 is a small amount of money, in 20 years, that "small" sum can, and statistically should, turn into a much larger sum. By never checking the statements and holding the same investments for decades without rebalancing or reallocating your investment portfolio, you could potentially lose tens of thousands of dollars.
Just like your other investments, it is important to keep your retirement accounts updated, together with your current financial situation. If you are younger, you can afford to be much more aggressive with your investments. But as you approach retirement age, it is important that you become more conservative with your investment style, as you will be living off these investments and you can't afford to take as much risk.
In times when stock-market returns are much higher, many investors can find themselves with portfolios more heavily tilted toward stocks than when they started out. Conversely, if bond returns outpace stocks returns by enough of a margin, your portfolio could become more bond-heavy, or conservative. The point is that by just sitting and doing nothing, your portfolio can change into something that you don't want it to be.
To maximize the tax benefits, it is important to know which investments should go into a tax-free account versus a taxable account. According to an article in Morningstar: "A number of factors will affect your 'asset allocation' decisions - which assets to hold in your taxable accounts versus tax-sheltered ones like IRAs. Because capital-gains rates are relatively low now, you may want to hold appreciating assets, such as stocks, in taxable accounts. Income-generating assets, such as many bonds, may be better held inside your IRA. This rule of thumb won't always hold true, however. If you are young and have a long time until retirement, you'll want growth investments, such as stocks, to fuel appreciating assets inside your IRA."
Transferring retirement accounts
Just because you live in Israel doesn't mean your retirement savings should go unattended. Because retirement accounts are generally either tax-free or tax-deferred savings plans, they are a fantastic way to save for the long term. But they must be cared for. Many people living in Israel don't realize that their retirement accounts are transferable. Just because the account is held at one firm doesn't mean it can't be transferred to another firm.
Keep an eye on your IRA to maximize the benefits your long-term tax-free or tax-deferred account provides. To do otherwise could prove to be quite costly.
Aaron Katsman, a licensed financial adviser in the United States and Israel, helps people who open investment accounts in the US.