3/12/2016The National Insurance and Treasury's savings plan for every childPart 1 – My Opinion on the Plan Anyone not interested in this section is welcome to skip ahead. Part B contains recommendations for choosing child savings plans.Slowly but surely, the country is deciding that we, its citizens, are not competent to make decisions in various areas and that it needs to decide for us. So first of all, many of us are probably not competent to make decisions, including simple ones. Try to imagine for a moment what percentage of drivers would use seatbelts if it weren't mandatory by law. To get an idea, I remember a conversation I once had with the VP of Marketing of one of the car importers. He told me that they brought a new model with a promotion where you could get free magnesium wheels or computerized traction control. Not even one customer chose the traction control. This life-saving safety feature is now a requirement in every new vehicle.So let's assume that in life-or-death decisions that don't cost the state money (enforcing seatbelt laws can be funded by those who drive without them despite the law and pay fines), it makes sense for the state to decide for us. Now, the state is expanding its reach and deciding that we must save for our children. The state is doing this in a clever way that is supposed to make us think that we weren't forced to save, but rather that we received a gift from the generosity of National Insurance, which is saving for us. This is, of course, nonsense. If citizens were told, "From today, you must deposit 50 shekels a month for each child into savings," there would be an outcry. Who are you to decide that we must save, and even dictate where we are allowed to save? So National Insurance, as an arm of the government, did something clever: first, they collect these funds, and then, seemingly separate from the collection, they deposit them into children's savings accounts.This savings plan has an additional cunning element. Child benefits are a politically charged issue that has historically caused great anger among the secular middle class, characterized by high National Insurance payments and few children, towards the Haredi public, characterized by low National Insurance payments and many children.In the past, Netanyahu, as Finance Minister, significantly reduced child benefits. Now, instead of increasing the benefits back, they made a savings plan for every child, which in practice is equivalent to increasing the benefits.A large portion of parents with children pay a mortgage. Efficient Mortgage Books I described parents who want to save money for their children's wedding over 20 years. I won't repeat all the calculations, but in general, the saving alternative alongside the mortgage yielded about 100,000 shekels less than if they had deposited 500 shekels more per month into the mortgage, shortened its term, and then deposited the full mortgage payment for the children over just two years. according to Central Bureau of Statistics There are about three million children in Israel. A deposit of 50 shekels per month for each child would cost 50 * 3,000,000 * 12 = 1.8 billion shekels annually, before management expenses for the entire system. If the state thinks its citizens are so economically ignorant that it needs to take responsibility for their children's savings, it would do well to take those 1.8 billion shekels and improve the ability of its children and adults to better understand the economic world so they don't need "gifts.".If the state is already giving a gift to children, it would make sense to direct its use towards needs that fulfilling them is in the state's interest. For example, funding the acquisition of a profession. It seems strange to me that when the state gives a similar sum as a token of thanks to its warriors (a demobilized soldier deposit for a combat soldier who completed three years is NIS 28,414 as of 2016), it allows them to use it for only six defined purposes, for example: studies, vocational training, housing, and starting a business, while the sum it gives to everyone, regardless of their contribution, it does not limit in terms of purpose.After I said everything I think about the Finance Minister's gift distribution to citizens, which is currently a failure according to the benchmark he himself set – "If apartment prices don't drop, I won't run again" – it's time for action.Part B – What is required of us parentsNow comes the part where we can take responsibility and decide where to direct the money. As parents, we have the option to make four decisions regarding this savings:a. Should I save in a bank or in a provident fundIf we choose a provident fund, we must choose an investment track.C. If we chose a provident fund, we must choose a fund.D. Should we increase by 1.99? Or more accurately, by 50 shekels?Provident fund or bankUnquestionably, a provident fund:The interest rate at the bank is approaching zero.It is possible to change investment tracks in a provident fund.Yes, you can change your provident fund during the years.Investment trackPension funds offer the option to choose between four investment tracks:According to Jewish lawB. According to Islamic lawC. High riskd. Low riskI will not address the first two tracks as I do not understand them. The last two tracks (high risk / low risk) are misleadingly named. Just as one can say high risk, one can also say high chance of profit.My recommendation regarding high-risk, high-return versus low-risk, low-return investments is to opt for the high-risk option with the higher probability of profit for the first two-thirds of the investment period. Assuming a child has 18 years of contributions, it is definitely advisable to choose the high probability of return with a high risk of loss for the first 12 years, and to reduce the level of risk and return for the last six years. Behind this choice of investment tracks—also known as the Chilean model—lies the logic that even if there is a loss of 30% in the early years, there will be enough time to recoup it.Personally, I would choose the high-risk tracks with a high probability of returns for the entire duration of this savings plan. But as I said, this is a personal decision. For example: In 2008, many study funds lost 50% (!) of their value. Is a loss of 50% from your savings something you could sleep through if it happened? While it’s true that this is a low-probability scenario, anyone who absolutely cannot absorb this kind of loss would be better off choosing a lower-risk track.From my perspective, I hope that, as often happens in our region, the next government will choose to cancel this saving and simply reduce the national insurance collection from all families in Israel.Choosing a Pension Fund Savings PlanChoose the one with the highest historical return and follow to ensure its future performance. For a list of participating mutual funds and their returns, Click here – https://hly.gov.il/ProvidentFunds.htmlIt can be seen that Altshuler Shaham achieved the maximum return in the last five years, and I will choose them.Should I increase savingsHere we are already required to invest our own money to increase savings for a child. The discussion on the feasibility of this step is beyond the scope of this article. In fact, if you think that savings should be made for a child, you should not have waited for Social Security and you are already depositing. The fact that we are now being offered to "increase" instead of simply save is meaningless. Do you think you want to save for a child? Why transfer these funds to a government program with its limitations instead of simply opening some savings plan for the child and depositing 50-5000 shekels per month? On the other hand, there are no management fees in the government program. Each parent will do their own calculations.My recommendation is not to increase savings.For choosing a provident fund / bank and the option to increase savings Click here – http://bit.ly/IsraelKidsSave A few more questionsUntil when do I have to decide which investment track?Until March 1, 2017. If you do not decide by then, the funds will be allocated according to the default mechanism:For a child under 15 years old – a provident fund. For a child over 15 years old – a bank.Are there management fees?The management fees for the funds are paid by the state, and therefore, concerning the decision of which entity will manage the funds, we are indifferent to management fees, and only return and risk are important. It should be noted in parenthetically that the entities that will manage these funds will certainly charge management fees. The Treasury has not published what the management fees are that it, or more accurately, the taxpayer, will pay for this program as a whole.Can I transfer between provident funds?You can switch between pension funds and between investment tracks within a fund. Those who choose a bank cannot switch banks or switch to a pension fund, but within some of the bank’s investment tracks, it is possible to switch to other tracks.Is it possible to withdraw the funds before the child turns 18?Only in the event that the child is in a serious medical condition, as confirmed by a National Insurance physician.Should the money be left after the child turns 18? 21?In fact, there is no obligation to withdraw the money. You can leave it as savings in the provident fund. This is a reasonable investment option. At an annual return of 6%, the money will double every 12 years, so 50,000 shekels at age 21 can turn into 100,000 shekels at age 33 and 200,000 shekels at age 45.The actual selection and reporting processDone as per this link http://bit.ly/IsraelKidsSave . ID card is required Of the mother For the selection.Step 1 – IdentificationStep 2 – Contact DetailsAt this stage, you can choose whether to update all children with a uniform investment policy or different funds, different risk levels, etc. for each child. I chose the same fund for all of them, so the next step is unnecessary for me.Step 4 – The choiceStep 5 – SummaryStep 6 – Confirm OperationGood luck.
There is another elective track that you did not mention in your excellent article: Savers who prefer moderate riskI would appreciate your opinion on this option.Thank you BoazReply
In my opinion, low risk is a poor alternative for a young child. High risk is a good alternative and medium risk is moderate.Reply
You forgot to mention that when withdrawing the funds, there is a tax on the profit. Which is? Simply bizarre. 15%: Tax on income from a bank deposit vs. 25%: Tax on income from a provident fund deposit. Why should I deposit my private money if, in the end, a quarter of it will be taken by the income tax?? This is just outrageous.Reply
Thank you for your question, Ruth I think everyone's goal should be to pay as much tax as possible. Would you forgo a raise at work because you would pay more taxes afterward? If I offered you 4 apartments for free right now, would you refuse them because of the rent tax?Stock market investments have much larger profits than interest on a deposit, even after payment. These profit margins are expected to be higher. To remind you, I did not recommend investing your personal money there, but if you are considering it, then the tax is not A good reason to avoid it. Income tax is always on the profit only, not on the money you deposited.Reply
I read the article with great attention and interest. Thank you very much. Question about whether to increase savings? This essentially gives us an opportunity to expand savings without management fees – something that is unparalleled in today's market (correct me if I'm wrong). Isn't it worth taking advantage of the opportunity and putting the money into an investment channel like this?Reply
Thank you for the call. You wrote about the absence of management fees as "something unparalleled.". In my opinion, the competition isn't about the amount of management fees you pay, but about the amount of money you'll receive. Compared to what you deposited. Most people, for example, do not deposit the maximum possible amount into a study fund for tax credit. Such a deposit, although it requires management fees, will ultimately be a much bigger gift: Exempt from capital gains tax. — Is a recognized expense and therefore reduces income tax payment upon deposit. Much more flexible in the pull.Good luck.Reply
So, assuming there wasn't a program council for this plan, what avenue would you recommend for opening a savings plan for a newborn?Reply
I do not recommend saving for "a child" at all. In my opinion, it's strange that the decision to save or not save depends on having a child. Parents' role is not to save for children. Parents' role is to (supposedly) accumulate wealth. The maximum they can and then divide it among their children as they wish. When you paint money and call it savings, for example, you are manipulating yourself. emotionally, which often causes you to make serious financial mistakes, such as saving at the time There are overdrafts and loans.Reply
Hello. And thank you for the beautiful article. Does the list of provident funds chosen by the National Insurance Institute indicate anything about these funds? Can this list be seen as some kind of recommendation or even the state taking responsibility that the fund will not go bankrupt or anything similar? Thank you!Reply
Thank you very much for the insightful article. I appreciate you including your personal moves as well. It provides a clear bottom line regarding your opinion. Question: The sum of 50,000 NIS that the child will have at age 21, I could not understand how you arrived at this sum. Is it theoretical and unrelated to the "Savings for Every Child" program?Reply
Hello Orit and thank you. 50,000 is just an example. However, a parent who invests 100 shekels at an annual return of 61% will end up with approximately 51,000 shekels After 21 years. Calculation in Excel: Interest rate 6% Approximate calculation (I ignored effective interest for simplification): =FV(B26/12,21*12,100) = 51,000 ~Reply
Hello Pomegranate Thank you for your words Where is the option for the Sicilian Defense available? Or are you just recommending to switch to low risk after 12 years?Reply
Pomegranate Your words enlighten us all. Well done and much success with the book "Effective Mortgage" – it helped me a lot.Reply
Hello Rimmon and thank you for the investment. Everything you give will come back to you tenfold. Well done. My son is 9 and a half years old. Are your recommendations still valid for this age? Meaning, a higher-risk provident fund? And if so, after how many years should it be transferred to low risk?Reply
Hello Tamara, and thank you very much for your warm wishes. My recommendations are valid for your son. For the sake of argument, he currently has no accumulated money at all, and therefore even if there is a stock market crash He will not be harmed. In your son's case, the total accumulation will also not be very high (approximately 7,000 shekels), and therefore Even in an extreme case of losing half of the accumulation, it's not dramatic in terms of financial loss. I suggest maintaining a high risk throughout the savings period. Good luck.Reply
Pomegranate, thank you very much for the enriching article! I would like to ask a question regarding our specific case. My children are two and a half years old and half a year old. In about two years, we will travel abroad for a postdoctoral position for about 5 years. It is currently unclear if we will want to return to Israel and, if so, when. What are your recommendations in this case? Will the deposits continue even when we are not in the country (will we continue to pay national insurance)? Thank you!Reply
Hello Tanya. Glad I could help. As long as you continue to receive child benefit, the deposits will continue. I don't know enough about the National Insurance laws to know when child benefit stops. . Good luck.Reply
Pomegranate, Thank you for your time and the way you present things. I enjoy every post of yours and the book. Thank youReply
Thank you very much for the excellent and relevant article, Rimon! How many questions: – Capital gains tax – it applies to the mandatory deposit (50 NIS from National Insurance) and also to the additional optional deposit, correct? – Bank interest rates – As of now, several banks are offering a fixed interest rate of 4%, which is by no means negligible (!) and offers a decent risk-reward ratio. What do you think? Decision date - In the letter we received, the date is 6/1/2017, not 3/1.Reply
How many answers –Correct.** Banks (actually, only Bank Hapoalim; at other banks, the interest rate is lower) – offer 4% only to a child born today. Or, in their words, only to those who deposit for 18 consecutive years. The non-index-linked 4% is subject to index erosion. Let’s assume an index of 1.5% will erode the 4%. If the index is higher in some of those 18 years, the erosion will be significant. Still, it’s not a bad alternative.In fact, the decision date is January first. Regarding the last decision date, I saw different dates in various sources. I assume you can decide as you wrote in your letter in June, but please note - at all times until you make a decision, the money will not be invested and will not yield returns. Therefore, I wrote that it would actually be advisable to decide already.Reply
Excellent! Regarding the banks' 4% interest rate – In case of an increase in the index (=> decrease in bond value), it is unclear how the provident funds will react, so their profitability could also be affected. As a retail customer, you won't get an interest rate anywhere near 4% at a bank, which makes it a relatively attractive alternative. Bottom line, is it reasonable to assume or hope that a "high-risk" investment plan will yield a nominal return of more than 41% per year over 18 years?Thank you, Michael (:Reply
And another question about increasing savings – If I want to save an additional 50 shekels per month for a child (or in general), wouldn't it be better to choose this program that has no management fees, compared to a private program? I didn't understand what limitations the government program has that make you hesitant in this case.Reply
If you want to save 50 shekels for a child, why haven't you done it by now? This is just an example of the power and influence of communication/marketing systems, etc.I assume you didn't do it (if you didn't) because you actually didn't have a balance Free cash. Of course, everything is a guess, I don't have any of your data. So, today too, fund savings. From money you don't have (if you have a mortgage, overdraft, or any other loan, then you don't have money). . The space here is limited, but in my book I describe how much a child will lose if he is saved 500 shekels. Instead of increasing the mortgage payment by NIS 500. Spoiler - NIS 100,000 - 70,000.The second point is that savings should serve as a buffer for unforeseen events. Savings that even if you lose your home, in case of an economic emergency This or that, you won't be able to use it; it's a bad investment in my opinion. Is the ability Use emergency savings and the ability to control how savings are invested. Is it worth the savings in management fees? I assume you'll be able to make a decision. My opinion is stated above.Reply
Pomegranate – Thank you very much for the detailed answer! I understood that the return in this plan needs to be checked against the mortgage interest rate and that liquidity is lost. You are also right about the psychological effect of the "sale" that is given to us and that it needs to be neutralized when making a decision. So, a self-funded addition to the program can be worthwhile for someone who intends to save money in the long run anyway. The interest he pays on his mortgage is lower than the return in the program (whether it's at the bank or in a provident fund), and he can afford to forego liquidity on a limited amount (the 11,000 shekels deposited here won't save anyone, right?). Thanks again for the clarification! You helped me get some ideas for making a decision!Reply
The claim about the deposit is a bit empty because, first of all, there's also a discharge grant that you receive in cash immediately. And the deposit also becomes cash after 5 years and can be redeemed for any purpose.So here it is, the 18-year-old grant that the state gives to every child – combined with encouragement for the child's parent to increase it by 1.99 Along with trying to encourage the child to understand the value of saving – with bonuses if the deposit isn't opened immediately. And also an arithmetic exercise – because they give the grant in installments instead of all at once, and also the money goes to the stock exchange and the banks Banks and provident funds that receive forced cash flow additions are given a benefit.Reply
Roi, thank you very much for the reading and the response. I couldn't understand your response. Did you refer to the discharge grant? There is no mention of it. In my opinion, in the article.Reply
Hello, first of all, thank you for the article. I wanted to know why you recommend not adding a deposit to a child savings plan., Because, as you wrote, no management fees are paid for it, right? Is it because in your opinion there's no point in saving specifically for the child?Reply