Long Term Financial Planning

Baruch Labinsky- Financial Planner, Israel Resource Network
This is the first in a 3-part series on Financial Planning in Israel.

-          retirement

-          insurance

how it fits into financial plan

Financial planning: a lifetime of planning.

1) When you start off: just trying to make ends meet

2) Start accumulating assets- put them to work for you. Start long term retirement plan

3) retirement- you have income flow. Now determine how to spend it or how much I can spend to make ends meet

4) Passing assets to next generation- trusts, wills, estate planning

It's a process- not just one time discussion and that's it. The more you plan- less you'll think about it on day to day basis

"But it stresses me out!" – Exactly the opposite. If you have no plan and it's all ad hoc, financial issues will come up constantly. A plan in place, a budget in place reduces the stress and thinking about it. Do the homework- and you'll be better off

RETIREMENT PLANNING

Putting together a plan

1)       Define goal- what do you want to accomplish. Have an idea of what you want in retirement- even before you put a number on it.

-          know the environment- will you be in BS, Yerushalayim etc

-          what are you doing- working, learning, resting, travel, support children, non-profit work

-          what will your standard of living be

2)       Now you can put numbers to it

-          sources of income: pension plans (government based, bituach minahalim, keren pensia, kupat gemel), social security (if you can work 40 quarters or work from here and file in US), bituach leumi, other savings (financial assets, real estate)

How much do we need for retirement? If you're spending 15,000 shekels now, people generally assume you'll spend less in retirement. Statistically, retired people spend similar to pre-retirement. They have more free time- recreational money spent to keep busy (travel, shopping, activities). They support the children, grandchildren. Medical costs- takes up major bucks and replaces all the stuff you were paying for before retirement.

Therefore you need to have at least 75% of your average adult income for retirement

Now start estimating what each thing will bring in, in what currency it's coming- because of exchange rates, you want the money to be shekels based. Inflation also affects amounts you'll have available- you pay taxes on what you earn. Therefore to keep buying power of money you have to make- after taxes- enough that it reaches the rate of inflation and higher.

The rule of 72's: divide into 72 any number and that determines the outcome- so if you're getting 10% return, then in 7.2 years the money will double.

Flip side: if rate of inflation is 3%, then every 24 years your money becomes worth half of what it is in today's money.

You must evaluate your retirement plan as you go along

What else to consider- different types of insurance

-          life, especially critical when you have young kids. As you get older you should be saving more money, and because the premium is rising you should be reducing the life insurance policy. If you have more assets, in theory you don't need as much insurance. Once kids grow up, same applies. How much life insurance should you have? That's a very personal decision.

3 different attitudes to insurance

a) I want my spouse to be covered for life, kids to be supported till they're out of house etc. Insurance should cover all eventualities

b) I want a minimum amount so my spouse can get thru transition period. Eventually they'll land on feet- so enough for maybe a few years

c) in between- enough to support kids are out of house, till spouse is X age etc. 

-          disability- disability is very critical element. It's much more common that person will become disabled and be unable to work for many years than catastrophic event and person dies

-          health- in Israel everyone by law is covered for the basics. It's the extras that cost- you have to evaluate what type of policy you want. Some policies are available thru kuppot which give extra level but it doesn't give 100% flexibility as to what doctor or hospital you can choose. The rest can be covered thru private insurance broker

-          bituach siudi- long-term care. Generally thru kuppot ranges 3-5 years, will cover 5-8000 shekels for home care or in a home. Not 100% clear that these policies pay: If you have the extra money, you can put it in savings and you will have enough towards retirement ("self-insuring"). Because you probably won't need it for many years to come, no reason to buy this policy at a young age- save money and you'll have it when you need it

In Israel, life insurance policy ends at retirement age. So once you hit that age, that's it- policy is over. There's nothing to pass on to inheritors. Therefore, in Israel, there is less use of insurance in estate planning.

Disaster Plan

Other people might call it a Will. But odds are greater you'll be disabled rather than suddenly die. So…you have to plan for the kids, spouse etc.

Recommended to have a will- however it only comes into effect when you die.

So disaster plan deals with other eventualities- both parents killed. Who takes care of young kids? Who deals with leftover finances?

So in your lifetime you can put in place plan- how you would want others to take care of you, who takes care of kids etc.

If you write will here in Israel, you have to decide which court will adjudicate: secular or Rabbinic