Retirement planning is a financial “super-strategy” preparing you for retirement age, allowing you to optimally utilize all your financial assets: pension savings, provident and study funds, various funds, investment money, et cetera. For the self-employed, retirement planning is even more critical, since they are not protected by employment contracts providing for contribution of money to the various funds.
Many self-employed people are not protected by employment contracts with an employer, their “contract” being in most cases with themselves. Nowadays the law requires the self-employed to contribute money into a pension saving scheme, but many people effectively still do not contribute such amounts.
Another problem which might occur in the pension savings is that of “low wage withdrawal” or “wage withdrawal avoidance”. That situation involves the giving of preference to withdrawing a dividend from the company, with the tax paid for such dividend being lower and therefore being perceived as expedient. This results in the contribution to pension being derived from a low wage not reflecting the true, much higher income; which leads to loss seeing as no exemptions or tax reliefs are due for deposits into the pension and into study funds.
Financial journalism has is recent years been greatly preoccupied with the “pension bomb” – the fact that a considerable part of the Israeli public is set to face poverty in the future because people don’t set aside enough money for their pension.
Contrary to popular opinion, the “pension bomb” is not just a lower-decile or middle-class problem. People’s failure to plan their retirement leads to cases of self-employed, high-income professionals such as accountants, attorneys, dentists, private clinicians, et cetera, reach retirement age without having a clear retirement plan, resulting in their financial welfare taking a sharp downturn.
People often prefer short-term financial investments or real estate investments, paying less attention and ascribing lesser importance to their pension savings. In many cases they do have pension savings, but ones that lead to a sharp downturn in their living standard since they do not reflect the actual income and the living standard they had before reaching retirement age.
Studies in financial psychology have shown that most people have trouble envisioning or planning the future, instead focusing mostly on the “here and now”. At the height of one’s career, one’s energy is directed at current investments and short-term savings, with retirement seeming a long way off – but this kind of financial behavior can lead one to dire straits in the future.
Life is fraught with unexpected scenarios, such as a business no longer being as lucrative as it used to be, people encountering difficulty in going on working as they did before or dealing with restrictive health conditions. Accordingly, you have to make sure that your financial future is prepared for your retirement at all times.
To gain an understanding of your own personal snapshot, you have to consider two personal aspects: your preferred risk level, family, health, variables affecting your lifestyle, et cetera. We will also review the financial snapshot: how much money you have in all your savings and where it is.
Then we will begin to understand how to narrow the gap between your “target pension” – the pension you sought to have – and the pension actually expected according to the savings you accrued up to today.
The following are only some of the points we will review on our journey to plan your retirement:
Understanding the gap between expectation and reality
Deciding what your desired post-retirement income is. People usually want to maintain an income similar to their current income after they retire.
Understanding the extent of the gap between your desired post-retirement income and the income actually expected according to the savings you accrued up to today.
By weighting the income expected post-retirement from all your sources of income, including apartment rental, spouse’s income, expected pension, savings, expected inheritances, et cetera. Such amount must be deducted by the expenses expected to be made post- or up to your retirement, such as helping your children finance their tuition or helping them purchase an apartment. The result is then compared to the desired income you defined earlier. This will provide a good snapshot of your expectations vs. reality.
Once we have understood the gap between expectation and reality, we can start looking at our options for narrowing that gap. First of all, we recommend that you check the structure of your pension deposits and make sure that all the tax benefits granted when you make the deposit are utilized.
If your pension deposit is low, or if not all wage components have been deposited, there is no utilization of all the tax benefits you are due for making pension deposits. This means a loss of hundreds of shekels or more per month. Self-employed people who contribute to their pension are entitled both to a tax deduction and to a tax credit up to a certain percentage. If you are interested, you can find more information in Sections 45 and 47 of the Income Tax Ordinance.
Management fees, the savings deposit percentage, insurance costs, guaranteeing a pension coefficient, returns, investment tracks, et cetera, all have to precisely meet your needs and personal situation.
For salaried employees who are controlling shareholders of a company, it is recommended to check the proper wage to withdraw so as to obtain the maximum tax benefit. Salaried employees who are controlling shareholders tend to withdraw the bulk of their income as a dividend, so as to pay less tax – because the tax on a dividend is lower than the tax on wage. But people often forget to weight in their loss of tax benefits on their pension and study fund deposits. We will calculate the optimal wage to be withdrawn so as to maximize the tax savings, while also considering the long term, thereby increasing your expected post-retirement income.
Organizing your short- and intermediate-term savings and directing them at investment products featuring the maximum tax benefits and options for receiving your pension. Designating your short- and intermediate-term savings as savings intended for your retirement rather than for current consumption. For example: study funds and private savings.
We will check and inquire whether Amendment 190 applies to you too. Amendment 190 of the Income Tax Ordinance allows you to receive, upon your retirement, a pension out of the company’s funds, on certain terms, so that the company can write it off as a deductible expense and for the owner it constitutes additional income.
We will review your current insurances and see where insurances can be added, upgraded or cancelled if redundant. This way we will reduce your risk of suffering a significant loss of income in the future, such as, for instance, one resulting from a health incident. For example, in loss of work capacity insurance, which is part of pension insurance, it’s important that you insure your full income rather than just the insured wage and that you receive certification of such course of action from your insurance company. If you fail to do so, your insurance company will probably not recognize your full income in the event of a need to realize your insurance, instead recognizing only the income from your wage.
According to the picture obtained, we will create a strong and well-reasoned retirement plan reactive to your reality, taking into account your dreams and guaranteeing you profit and welfare.
