The typical image of retirement used to be of Grandma sitting on her rocking chair knitting, supporting herself with the sizeable pension checks Grandpa received in the mail. However, this picture no longer represents today’s retirees.
While life expectancy has steadily grown longer, people often continue to retire at the same age that they did decades ago. This means that many people are going to be retired longer than they were working.
Couple this with the fact that pensions, once considered an invaluable perk of a job, have changed in nature. Pensions today tend to be smaller than those of yesteryear, and government pensions (social security, national insurance, bituach leumi, etc.) may not be as solid as they once were. Even though the Israeli government mandated the implementation of a pension law, depending on your income scale and employment status, it is reasonable to assume that you will need personal savings in addition to any work- and government-related pensions to support yourself during retirement.
While the question of “how much do you really need for retirement” is open-ended, due to the vastly different needs of retirees, there are still some general guidelines.
Some financial advisors say that you should have a portfolio that is 25 times larger than what you expect to spend during the first year of your retirement. Others say that you should plan on spending 80% of your pre-retirement budget every year of retirement, and not count on your investments doing better than 4%. But these are just rules of thumb, and you should do a more in-depth analysis of your own spending to determine what your needs will be.
Factors such as nursing care insurance, plans to travel, and longevity genes can all influence the ideal size of your portfolio. As health degenerates, living expenses may increase. And, healthy retirees may also find living expenses increasing as their desire to “live it up while they can” strains the pocketbook. Whatever the nature of one’s expenses, don’t forget the unpredictable nature of the market. While a retiree’s assets should not be heavily invested in stocks (due to the potential of real loss), a certain percentage of these assets should be invested in growth vehicles in order to stem the debilitating bite of inflation. A professional financial advisor can help you build an investment portfolio that best meets your retirement income needs.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published January 26, 2015.