He who plans for 40 years will live with dignity at 70 – on pensions

Pension (as well as mortgage) is a daunting word that, when heard, the initial tendency is

"Change the subject or talk about something else. We tell ourselves stories like "we'll cross that bridge when we come to it," "go with the flow," "we'll survive," etc. That won't work. A much more fitting saying is "one who prepared on Friday evening will eat on Saturday.' In this case, Friday evening spans decades, and Saturday is also long. Regardless of your age, you should increase your knowledge and actions regarding retirement.

This article was written by The pic who serves as a senior mortgage consultant at Mishkanta Efektiva and as a consultant for financial management and growth towards retirement and in general. 

Every age is suitable for preparing for retirement (assuming you haven't retired yet, of course). Not only is it suitable, but you absolutely must prepare financially for the retirement period. How much will you receive from all your income sources combined? Is it enough for you to live with dignity? And maybe even travel the world a bit, buy gifts for grandchildren, help children... And what if you get sick – you'll need to buy medication too. And God forbid, long-term care.

It is important to plan in advance the monthly amount you can expect in retirement. The sooner you check it, the better you can prepare and take action so you won't be in financial distress after you retire.

In this article, I will briefly review the three sources of income for retirement. They are also called the three tiers (of economic protection):

1. Social Security
2. Pension fund retirement – pension fund and/or manager's insurance
3. Passive income that you have created for yourselves

On the allowance you will receive fromSocial Security You are not in control. Some believe Social Security will collapse by the time most of you reach retirement age. Indeed, Social Security is facing enormous deficits, but personally, I find it hard to believe the state would let it collapse and not pay out benefits. It should be remembered that in any case, it's not a high pension, and it's very likely it won't be enough for a reasonable living.

Regarding Passive income – These can include, for example, rent from an investment property you own, or a savings plan that pays out an annuity, etc. Liquid savings you have can be converted into an annuity, if necessary. There is also a reverse mortgage mechanism for your primary residence. These solutions can serve as a supplementary sum to the main pension bracket for most of you.

The main category for most of the population is provision number 2 – pension savings.

Pension savings

So what is your retirement savings made up of?

1. Pension fund
2. Executive Insurance
3. Provident fund

If we are employees, a significant amount (benefits and severance) is deducted from us each month for one or more of these products.

Let's briefly expand on each of them:

Pension fund

The pension fund has binding bylaws, which may change over time. Funds are accumulated in the fund and generate returns, with a portion of the amount earning a return guaranteed by the state (currently, the guaranteed return stands at 4.85% on approximately 30% of contributions, which is a lot!)—this is a unique advantage found only in the comprehensive pension fund. This advantage is particularly evident in a low-interest-rate environment such as the one that has prevailed over the past ten years.

At retirement age (currently 67 for men and 62 for women), "The coefficient"You take the sum you've accumulated and divide it by the coefficient – and that's the amount of the monthly allowance you'll receive for the rest of your life. For example, if you've accumulated one million shekels, and the coefficient is 200, you'll receive 5,000 shekels each month (1 million divided by 200). The coefficient is determined by the projected number of months you'll live after retiring. For example, if someone retires at age 67 with a coefficient of 200, it means the pension fund estimates it will need to pay them for 200/12, approximately 17 years, according to the average life expectancy on the day of retirement.

The pension fund has mutual guarantees among its members. This means that if the fund paid out "too much" money to its members, it may take money back from them in order to remain balanced. This is called Actuarial balance. Sometimes the pension fund pays out less than it estimated, and then it returns money to its insured members as part of that actuarial balancing. The Ministry of Finance has been working vigorously in recent years to significantly reduce the need for an actuarial balancing mechanism (e.g., by changing the percentage of bonds with guaranteed returns, reducing insurance costs, etc.), so it is very possible that in the coming years this figure will no longer be relevant at all.

The pension fund also has insurance. In addition to paying a pension after retirement, the pension fund also includes Survivor insurance (The surviving spouse and children under 21 will receive a monthly pension in case of your death before retirement age) And disability insurance (which is effectively disability insurance).

The pension fund has seven tracks, which differ from each other in the amount of payment to survivors and the amount of disability insurance. It is very important to choose the track that suits you at every stage of life. For example, if you do not have a spouse and you do not have children under the age of 21 (in other words, you have no survivors), then there is no need to pay for survivor insurance. Cancel it immediately! Don't forget to go back and cancel this insurance every two years if you still don't have survivors. Why every two years? Just because. Because after two years the cancellation is automatically canceled and you will start paying for survivor insurance again. The logic is that it is better for many people to pay insurance for free than for one child whose father dies and it turns out he is uninsured and will therefore grow up without survivor benefits. However, you really don't need to be the ones paying for insurance on a car you haven't even bought.

It is important to check the management fees your fund charges and the returns it achieves over time. The website Pension-Net This is exactly where you can see the return each fund has achieved and its average management fees.

The maximum management fees a pension fund can charge you are 0.61% of your contributions (i.e., of every monthly payment you or your employer makes to the fund) and 0.51% of your accumulated balance (i.e., of the amount you’ve accumulated in the fund). But that doesn’t have to be the management fees you actually pay. For example, in the Halman-Aldubi default fund, you pay 1.491% on contributions and 0.051% of the accumulated balance. These are reasonable management fees that you can definitely achieve.

Executive Insurance

In manager's insurance, the insured has a personal and binding contract (which cannot be changed) with the insurance company. There is no actuarial balance, but there is also no guaranteed return. There used to be a guaranteed coefficient as well (in old policies from before 2013).

Manager's insurance is generally more expensive than a pension fund., and it is very profitable for the insurance company and the insurance agent. Therefore, the main marketing efforts of insurance companies and your agent will be directed towards management insurance. This is, of course, often contrary to your interests.

The maximum management fees that executive insurance plans can charge you are 4.1% of your contributions and 1.051% of your accumulated balance. That’s much more than you’d pay with pension funds. And what do these management fees mean? It means you’ll receive a lower monthly pension. How much less? It could amount to hundreds or even thousands of shekels a month!

Managerial insurance may include both a life insurance component and a disability insurance component. Of course, the insurance components are not free – you pay for them, and much more than for a pension fund.

Basically, disability insurance for executive insurance has an advantage over the equivalent insurance in a pension fund because it is professional and not general (meaning, if you cannot work in your profession but can work in something else, you will receive an annuity from the executive insurance but not from the pension fund).

Here too, as I explained about the pension fund, the coefficient is determined towards your retirement (unless you have a guaranteed coefficient in old policies, in which case you're lucky).

Provident fund

There is no insurance component, no actuarial balance, and no guaranteed return. You simply deposit and accumulate returns.

This product can be used for pension contributions above the contribution limit (the contribution limit for a comprehensive pension fund with a guaranteed return is 20.51% of twice the average national wage, which was 4,061 NIS in 2018. In other words, a monthly salary of approximately 20,000 NIS). If you earn more than 20,000 NIS per month (gross, of course)—check where the payments exceeding the cap are being allocated. To a supplementary pension fund? To executive insurance? To a provident fund? This article is too brief to recommend what to do, but many believe there may be an advantage in contributing amounts above the ceiling to a provident fund. Of course, this recommendation varies from person to person based on their individual circumstances.

It is very important to track returns and management fees, and as mentioned, compare them to similar products using the website Camel-net. If it's not the best, then just move on.

Recommendation for closing: Do yourselves a personal favor – never withdraw your severance pay (even if it's tax-exempt, unless you're starving for bread!). You can't even imagine how much it could hurt you in retirement and the taxes you'll pay on it in the future.

So far, this is a brief overview of your retirement savings. It's important to emphasize that this is a general explanation only and does not cover all types of policies and funds available, but it does give you a pretty good idea of them.

How to save 1,000 NIS per month on phone calls

The importance we give to each of these topics is usually the reverse of their impact on our lives. For example, with a pension fund, management fees will take from our monthly allowance. Over a thousand shekels every month.

Let's say, for example, someone has accumulated one million shekels in their pension fund and they are paying the maximum management fees on the accumulation.
At 0.51% of the total savings. That amounts to 1 million * 0.51% = 5,000 shekels per year, or 417 shekels per month.
In addition, that person continues to deposit 2,500 every month and will pay a maximum fee of 6% * 2,500 = 150 shekels
And together, 567 shekels per month (and the amount keeps going up).

These 500 shekels that went to management fees instead of accruing to your pension will reduce your allowance by thousands of shekels per month.
For each month from age 67 until your death and the death of your spouse (up to 120).
The problem is, of course, particularly acute among low-income workers, who find it much harder to negotiate management fees or even to understand what they are.

The outgoing Supervisor of Insurance and Capital Markets, Ms. Dorit Salinger, created a mechanism that eliminates the need to negotiate management fees.
With the pension funds. Instead, the state created a tender among the pension funds. The two companies that offered the lowest management fees.

Won the tender And every employee is entitled to join them and benefit conditions that were previously reserved for the Electric Company, Israel Aerospace Industries, or other strong entities that could negotiate with pension funds on behalf of their employees.

What is the lowest management fee you can get?

• At Halman Aldubi and Altshuler Shaham, you will pay 0.11% of the accumulated balance and 1.491% of deposits. (After the tender closed, Halman Aldubi announced that it would cut the fees on the accumulated balance in half to 0.051%).
• Meitav Dash – 0.05% from the accumulation and 2.49% from the deposit
• Peaks – 0.0905% from the accumulation and 1.68% from the deposit.
This is an addition to the income of approximately 1000 shekels for a pensioner who had an average income. Of course, the higher the income, the greater the increase in the pension.

I highly recommend looking into one of the funds listed above.

You can quibble about returns and so on, but the sad fact is that even after Best Dov began charging reduced management fees to those who joined their default fund, many people remained with them in the regular fund with the high management fees, even though it's the same investment manager with the same return.