Introduction: The Three Pillars Of Retirement

Long term investment is the most accessible path to wealth. Wealth enables retirement. This is the principle behind retirement planning in modern day Israel.

Newsflash: you are all investing already, provided you have a job. You’re investing through your pension fund, and Keren Hishtalmut if you have one.

Not only that, but this is probably a larger sum than you’d be investing from post-tax savings. Adding together employer and employee contributions, you’re probably investing 21% of your gross salary, or 31% if you have a Keren Hishtalmut; and an even higher percentage of your net salary. That means 2500 shekels / month for a salary of 8k, or 6200 shekels / month for a salary of 20k. That’s a huge amount of money, in both cases probably much more than you’d be investing from your take-home pay. Even with a conservative estimation, the pension on the 8k salary should compound to around 2.3 million shekels after 35 years of contributions.

You’re probably thinking: that’s no use to me, I can’t access that money until I’m old, and who knows if it’ll even exist by then. This is a consequence of our savannah-adapted brains being incapable of planning for the long term. The youthful brain struggles to believe something will still exist in 30 years because it finds it difficult to fathom 30 years. That’s why you get articles like this here

Let’s think about the goal of your investment strategy. We’re talking long term here. You can divide the remainder of your life into two parts:

1) Before aged 60-70, you can’t withdraw from your pension funds or claim a state pension, and must support yourself either from work income, inheritance or savings.

2) After aged 60-70, you will most likely live off passive pension income.

You’ll probably live a good 25 years after first being able to access your pension (aged 60). Even for the youngest of people bothering to read this (I assume), that’s only a bit less than the number of years until you reach 60. Therefore, like learning to run a marathon or a musical instrument, it’s worth beginning to cultivate your pensions correctly right now.

The three pillars of retirement

As mentioned in the introduction, the exercise of planning long-term savings is non-instinctive, but let’s take a shot at it anyway. Income after official retirement age will come from three pillars:

Pillar 1 – the state pension

Paid by Bituah Leumi, this is today somewhere between 1200-2500 shekels / month per person, depending on their marital status and a few other boring factors. This grows with inflation.

Pillar 2 – your private pension

Paid by your chosen pension manager. Your monthly income is calculated by:

total amount you’ve saved ÷ the “retirement coefficient” (Mekadem Prisha);

where Mekadem Prisha is a number somewhere between 200-240. Thus if you’ve saved 2 million shekels in pension, you’ll get 8-10k shekels per month, which also grows over time. The retirement coefficient is calculated so that they have enough money to pay everyone taking into account life expectancy. I’ll discuss this number more in the future.

Pillar 3 – non-pension savings

Private investments, Keren Hishtalmut etc.

You can’t do very much about the first pillar, nor does it provide enough money as it currently stands to fund any reasonable retirement. So you’ll have to focus on boosting the second and third pillars. 

This guide will go through each pillar of long term savings and consider practical steps to (a) get started and (b) optimise the pillar.

Continue to Debunking The Myths Surrounding Pension