By Douglas Goldstein, CFP®

Do you think all your financial woes will disappear when you retire because you have a pension? If so, you need to pay better attention to your annual pension reports. This is because your anticipated pension is only a fraction of your current income. If you are having a hard time making ends meet on your current salary, imagine how much more difficult it may be on a fixed salary that may be significantly smaller than today’s paycheck.

Don’t assume that bituach leumi will make it all better. While it is nice to get a guaranteed pension from the government, the amount rarely spells the difference between starvation and chicken for dinner. Bituach leumi payments should be considered as a supplement to your pension, not as the backbone of your retirement income. While the government payout increases the longer you’ve been in the workforce, typically the incremental differences don’t make a vast difference in cash flow.

Another reason why you can’t necessarily count on your pension to provide all of your retirement needs is that your anticipated pension assumes you’ll stay at your current job from now until retirement. That’s a long time, and who can predict your boss’ mood or the economy’s health. If you lose your job and you have an extended job search, your payments to your pension fund will stop, and your future pension payments will be lowered, due to less money coming into the fund. Also consider what would happen if your health forces you to retire earlier than expected and disability payments aren’t forthcoming? This, too, might affect your pension’s size at retirement.

While planning is important, one of the basic assumptions of a long-term plan is that it must be flexible enough to allow for the unexpected. A good plan takes into account the possibility that things won’t follow your expectations. Having an emergency fund that has three to six months’ worth of living expenses is prudent because it limits the negative impact emergency bills have on your budget and financial plan as a whole. A quality financial plan helps you meet your goals and deal with any bumps along the way with a steady hand and full wallet.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

By Douglas Goldstein, CFP®

Get it now. And by that I don’t mean buying more stuff. I’m referring to accumulating wealth. The reason why you should do this now, and not procrastinate, is because assets accumulated when you’re young will help when you’re older. Compound interest may be the magic formula for letting your investments work for themselves. And if your savings are working for you, you may not need to work as hard or for as long.

Even more important than accumulating assets
While accumulating assets is important, perhaps it is even more important to accumulate sound financial habits – don’t spend beyond your means. You may figure the small luxury of new bath towels is something you deserve (and relatively inexpensive compared to pampering at the spa), but beyond the initial purchase price, there’s the cost of upkeep. Fluffier towels take up more space in the washing machine, which means more loads to wash, more water, more detergent, etc. It’s not only the trivial cost of daily chores that you should pay attention to, but your overall approach to spending and saving: do you make purchases because you feel you deserve something or because you need it?

Money is meant to be spent. However, there is a difference between careful spending and thoughtless spending. Before you make a purchase consider your budget and make sure it fits in with your overall financial plan. If your budget has a line for discretionary spending, you could buy the newest gadget without worrying about breaking the bank. Conversely, some people have “save, save, save” engrained on them from a young age. While this is prudent advice, depending on your situation, it may be appropriate to spend. A retiree with a sizeable savings and adequate health care insurance may be able to spend more than they’re used to. Creating a financial plan can help you determine if you should be in the saving stage or the spending stage of your life.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

By Douglas Goldstein, CFP®

The way risk is presented often affects the way it’s perceived. When preparing financial plans, I look at the client’s chances of success (i.e., dying with an estate worth X amount). If the chances of success are low, I look at factors that the client can control to increase his chances (i.e., increasing savings, decreasing spending, retiring later, etc.). If the plan shows high chances of success, I look at the factors that could be changed in order to improve the person’s current lifestyle without harming anticipated future success.

What is a “high” or “low” chance of success? Unfortunately, there is no magic number. People’s judgments about risk are subjective. One 50-year-old might be satisfied with hearing that he has an 80% chance of success, while another might not sleep well at night until his odds of success have increased.

Which is riskier?
If I tell someone that he has an 80% chance of meeting his retirement goals, it may sound pretty encouraging. In fact, clients are frequently happy to continue with that status quo. However, in “real” terms, 80% translates to one in five people in similar situations where the clients outlive their money. I certainly wouldn’t want to be that one!

People may not be enthusiastic about receiving 5% returns when inflation is 3%. But the same investor may be happy to get a 7% return when inflation is 5%. While both are receiving the same 2% real return, the second scenario seems like a better deal because the numbers are higher.

Don’t let numbers lie
Don’t be lured into a false sense of complacency because a statistical simulation gives you X% chance of success in your financial plan. Think about the number that you feel you need to achieve in terms odds of success. Before you accept a percentage of chance of success, ask yourself if this grade is really appropriate. Remember – even if the market fluctuates, you play a large part in determining your financial success.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc. Member FINRA(formally NASD), SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book, Building Wealth in Israel: A Guide to International Investments and Financial Planning, (with a guest chapter on taxation by Leon Harris, International Tax Partner, Ernst & Young) is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942. Building Wealth in Israel, ISBN 193268784X 308 pages

By Douglas Goldstein, CFP®

Making ends meet means having a positive cash flow, plus having extra to put away for future needs. In other words, you need enough cash to pay your bills, and add to your savings programs without slipping into overdraft at the bank. Many people think they are living within their means because they are able to pay off their bills at the end of the month. However, if all you can do is minimally satisfy your obligations – and don’t have anything left over for savings – then you are living dangerously.

It is easy to gradually begin living beyond your means, even if your spending habits do not significantly change. This happens because inflation turns moderate spending patterns into lavish lifestyles. In addition, unexpected circumstances (such as family sickness, loss of a job, etc.) or even planned events (like weddings, buying a new car, or taking a long-awaited trip) can upset the most carefully worked-out strategy. And, as if these challenges were not enough, some families have one or more members who indulge in spending sprees that make it impossible for the family to stay in the black.

By understanding exactly how much you can afford to spend each month, you can keep a collar on overspending. When you prepare a budget, your income sources and expenses are set forth in front of you and you can check whether you can afford to purchase a given item. In addition, by studying your figures, you can make well-educated estimates as to how much capital you will need in the future, which expenses you can minimize or eliminate, or when sufficient funds will have accumulated so that you can make future purchases.

Forgotten expenses
An often forgotten line item in a budget is the cost of borrowing money. For example, if you borrow NIS 5000 on your credit card and the finance charges are 15% per year, you’ll owe NIS 750 above the principal loan each year.

Where does your money go?
By keeping tabs on your money as it comes in and goes out, you will have a well-organized budget that you can rely on to help track your financial situation. Creating a budget can help catch a small spending problem before it becomes a big problem. This, in turn, may keep your bank balance intact and keep you out of overdraft.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

By Douglas Goldstein®

While spontaneous decisions might be fine in deciding how to spend your weekend, forethought and planning are crucial to achieving investment success. When deciding whether to purchase an investment, consider the following points:

Investment Goal: Income, Growth, or Capital Preservation?

Why do you want to invest? Are you retired and need income on a regular basis? Is the assurance of having a steady stream of income more important to you than potential double-digit returns? Do you need growth? If you are saving for a new house, retirement, or some other goal, you want your money to grow. Yet, often the returns desired in growth investments require assuming a certain amount of risk. Or, are you looking for capital preservation? Do you want to be sure your investments retain their value in the future? If you live in a high-inflation environment or are retired, this would be a central point to consider before purchasing an investment.

Since many people have goals that fall into more than one of the above categories, it is important to prioritize which is more important and purchase investment products accordingly.

Liquidity

If you’ll need your money sooner than anticipated, will you be able to get it? Are there any financial penalties for taking money out of a mutual fund or bond fund early? Cashing in CDs before they’re due might also carry hidden costs. Liquidity in and of itself isn’t a requirement for successful investment (often it’s fine to “lock” your money away for a given time period); however, you must consider liquidity as a factor before investing in any product.

Remember that not every investment in your portfolio needs to be easily converted to cash, but a certain amount of your portfolio should maintain liquidity. The amount of liquidity necessary depends on how far you are from reaching your fiscal goals, and whether your portfolio is an “investment” portfolio (saving for some time in the future) or a “nest egg” portfolio (providing for all of your current living expenses).

Before purchasing a specific investment, look at the larger picture. Stay focused on your final goal, and make sure every particular investment furthers that goal.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

By Douglas Goldstein, CFP®

A bear market, meaning a down market, is named for how a bear fights, slashing his paws down. While that might be a dramatic image, many investors who find their portfolio ripped to shreds can identify with the devastating feeling the image conjures.

However, as counterintuitive as it may be, a bear market may be the best type of market for a young investor. This is because for those folks striving to grow their savings, it’s better to have a bear market at the beginning of their accumulation stage rather than at the end. If an investor buys stocks during a down market, then, hopefully when the market rebounds, his portfolio will increase proportionately.

No one has prophecy
I’m frequently asked if I think the market will rebound to its previous high. Instead of answering the question, I ask a different question, “How are the market’s movements affecting your financial plan?” While it may be emotionally difficult to recover from the last year’s market’s slide, if your financial plan was sound and is still appropriate, things should eventually work themselves out. The question is: how and when will the “eventually” take place?

If you are closer to retirement, there is much less room to maneuver. Since there is less time to recover a loss, and less tolerance for increased risk in your remaining funds, the question becomes how to protect your principal best. You need to protect your principal both from losses and against inflation. Perhaps postponing retirement or increasing savings can help your bottom line. Other times, reallocating your assets into income-producing streams might do the trick.

If you are further away from retirement, there are more options. Without embracing too much risk, there may be suitable investments that can boost your nest egg in time to meet your goals. Since time is on your side, you may be able to invest in high risk/high potential instruments in order to meet your target. If your investments are too conservative, they might not earn enough to retain their real value against inflation.

In both scenarios, asset allocation is the key. Make sure your portfolio’s actual allocation reflects the allocation set in your financial plan. Chances are, the market’s moves moved your portfolio allocation. Though it may be difficult to align the reality with the ideal, doing so is perhaps the single best move you can make for your fiscal future.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments

By Douglas Goldstein, CFP®

Sometimes the right decisions are clear cut, but difficult to implement. For example, I recently met with an owner of a company who decided that he wanted to give his employees a perk and provide them with a keren hishtalmut plan. This means that every month, the employer would contribute 7.5% of the worker’s salary into a tax-free account, while the employee would contribute 2.5%. The monies could be redeemed in six years, or continue to grow tax-free. While most employees welcomed this valuable perk, others resisted receiving the package because they were reluctant to take the small drop in net income. While I can sympathize with those who feel as if they need every shekel now, this decision is short-sighted. I coached this business owner on how he could impart the importance of participating in the plan to his employees.

Tax-free savings plans are one of the best investment decisions someone can make. This is for several reasons:

The tax-free benefits
By investing pre-tax shekels, the real value of your investment increases proportionately to your tax bracket. In order to invest a similar sum of after-tax income, you would need to earn more money.

Automatic deductions make savings easier
By the time your salary is deposited in your bank account, your most important creditor, your future, has already been paid. If it’s difficult to make ends meet while you’re employed with a set salary, imagine how much more difficult it will be when you’re a retiree with a limited income (usually pensions are between 35-70% of one’s salary.)

Maximizing your investments
The employer contributions to tax-free savings plans are greater than the worker’s contribution. There is no better way to get “more bang for your buck.”

As a financial adviser, I meet with hundreds of people and review their budgets. It’s extremely rare to see a budget that is so lean that there is no room to cut a little. Financial success boils down to making choices. The seemingly mundane choices of where to live, what to eat, or how to dress, have far-reaching repercussions.

Good saving habits
Even if participation in these plans means your net income drops a little, it is a good habit to live slightly below your means. This leaves some maneuvering room in time of crisis. If a large dental bill or car repair causes you to go into overdraft, it is a sign that you may be living beyond your means. In addition to your tax-free savings plans, strive to put aside a set sum each month for emergencies. This way, if you have a one-off large bill, you’ll be able to meet the expense without going into debt.

If you are having trouble making ends meet now, or anticipate difficulties while retired, consider meeting with a budget adviser and/or financial planner for practical tips on how you can make it. Don’t be penny wise and pound foolish; when it comes to tax-free savings plans, a penny saved can really be a dollar earned.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.