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Pensions: What Does and Doesn’t Matter

The Biggest Mistake Most People Make in Choosing a Pension and The Best Opportunity to Save Hundreds of Thousands of Shekels
A long time ago, when Daniel Kahneman, future nobel laureate in economics, was teaching a group of Israeli Air Force officers about effective training and positive reinforcement, he was challenged by one officer.  “On many occasions, I have praised flight cadets for their clean execution of some aerobatic maneuver.  The next time they try the same maneuver, they usually do worse.  On the other hand, I have often screamed into a cadet’s earphone for bad execution, and in general he does better on the next try.  So please don’t tell me that reward works and punishment does not, because the opposite is the case.”
A powerful challenge, no doubt, and one I think we can all sympathize with in some of our personal and business relationships.
But the truth behind this challenge is explained by Kahneman using statistical principle called regression toward the mean.  In various situations where luck is present, you are always more likely to go toward your average.  If a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement—and, paradoxically, if it is extreme on its second measurement, it will tend to have been closer to the average on its first.
Take these pilots for example.  Let’s say that one a scale of 1 to 5, a pilot named Yosef flies a 3 on average.  Yosef flew a 2, for which his commander screamed at him.  Since Yosef on average flies a 3, the next time he is more likely to do better, irrespective of the yelling.  Similarly, if Yosef flew a 4 and was given a hearty shkeyach from his commander, the odds are still that he will do worse next time, since he flies a 3 on average and 3 is worse than 4.  Positive reinforcement is proven to work in the long run, but in the short run, specifically in a situation where luck is a major factor, regression toward the mean is king.
I bring up this to demonstrate what is in my opinion is the biggest mistake people make when choosing a pension, or making any investment for that matter.  People I have met tend to focus on the past performance of a fund or company to choose the right investment.  But if there is one thing that past performance has shown, it is that it is a never good indicator of future returns.  Also, due to regression toward the mean, people who choose the better performing funds are almost always disappointed within a year or so since, as regression analysis proves, the next year is more likely to be more toward the average return, which for anyone starting from a point above average, is worse.
Now that the year has ended, you will likely be bombarded by company after company showing off their past performance, as if it means anything.  Their salesmen and agents will admit that past performance doesn’t guarantee future returns, but they’ll end the sentence while pulling out a nice graph showing how well they did over the past five years. They’ll jokingly admit that their stock pickers are no better than chimps with darts, but still find a way to make them look prophetic.  You need to ignore these people and follow the science.
What does matter in choosing a pension is (1) getting a significant discount for the rest of your life and (2) that the company has the proper range of options available for investments for the rest of your life.  When you are young, or at least in good health, pension funds are more likely to offer discounts and if you succeed in getting a discount for life.  But when you get older, and especially if your health deteriorates, most pension companies won’t want you since your being in the fund will cause damage to the actuarial balance all pension funds must maintain.  And even if they do accept you, the chance of you getting a huge discount on fees is very slim since, as far as they’re concerned, you’re no longer a long term investment for them.  Remember, in your 50s and 60s you have the most money in your pension you’re ever going to have and having a significant discount on fees during this time will likely save you hundreds of thousands of shekels, on accumulation fees.  It’s up to you to take advantage of your youth,  health, and work connections to make sure you save this money before it’s too late.
Focusing on options is also important since you will need to solidify your investments as you reach retirement and unless the company that has given you a discount has the proper investment options, you could be left with the terrible choice of either settling on having too much risk or else moving your money to a new fund, potentially forgoing any discount and losing tens of thousands of shekels in fees.
Concentrating on investment options and fees doesn’t mean you should ignore פנסיה נט completely; you should have an idea how your fund is doing compared to the market and how it is performing and invested.  It means that you should take such information with a grain of salt and be less concerned with statistically insignificant issues such as how well the fund performed over a single year and more concerned with issues that will save you hundreds of thousands of shekels such as the investment options available by the company and the fees you’re paying.
Jonathan Degani is a licensed pension consultant by the Ministry of Finance.  If you’re looking for help choosing or reviewing a pension, please feel free to call 052-790-6824.
The anecdote at the beginning of the article above is taken from Daniel Kahneman’s book, Thinking, Fast and Slow.  The definition for regression toward the mean is taken from wikipedia.

2014 Israeli Tax Calculator

I recently updated my tax calculator.  The latest version includes the new tax brackets and credits according to 2014.

You can download the latest calculator here or go to the following site:

https://www.box.com/s/460zksl3t4335018j5hp

The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly.  If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי).  If you need to get money back through an alignment see this post for more details.

Note:  While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not.  There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)

Use the guide as follows:

If you are paying less in taxes than what is calculated on the sheet:  Find out what kind of benefits you are receiving and how to continue receiving them.

If you are paying more in taxes than what is calculated on the sheet:  Odds are you need to do a tax alignment.  Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.

As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me.

Are there any financial tools you would like to see?  Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com

Israeli Investing 101

I’ll be blunt.  When it comes to investing, most people have no idea what the hell they’re doing.  But it doesn’t have to be that way.  Israel’s financial system has a fantastic system in place in order to help people invest safely and wisely.  And the best part is that quality, objective financial advice is usually free.

Before you need to invest, you need to know why you are investing.  Investing in order to save for a down payment on a mortgage is not the same as investing in order to preserve the value of money, nor is it the same as investing for retirement. Each of theses goals has a specific rationale behind it that impacts the risk one is willing to take, the amount of investment and the oversight required.

Once you know why you are investing and how much you are looking to invest, the next step is to find someone to help guide your investments.  In Israel, the person to look for is a yoetz hashkaot, a certified investment advisor.  This is not the same as a meshavek hashkaot­, someone licensed to sell investments.  Only a yoetz hashkaot is entirely objective, a term with significant legal ramifications.  Buying investments from a meshavek hashkaot is like buying a second hand car and relying on the car salesman for a fair assessment.  I am not saying that the meshavek hashkaot is lying, but his goal is to sell you the best financial option that he has to offer, not necessarily the best financial option from among all the options available.

Finding a yoetz hashkaot is easier than you think; just go to your bank and ask for one.  Speaking with your yoetz hashkaot at the bank and receiving his advice an analysis is free, although the bank does take a commission of 0.4% – 0.7% on buying and maintaining some investments.  Some banks do not offer investment counseling unless you have a lot of money.  If you have a bank like this, I suggest speaking with the manager or telling your banker to #&@% off; many banks offer free advice, regardless of how much money is being invested.  I bank at Mercantile, and I received free investment counseling even though I began with only NIS 7,000 (I am not sure if the policy of offering and limiting investment counseling depends on the bank or the specific branch.)

Alternatively, you can look for a private yoetz hashkaot who will take a different commission (or maybe just a fee for his advice and analysis) and will do the buying and selling of investments for you or show you how to do it yourself.  If your Hebrew isn’t that great and your bank doesn’t have someone who can speak English, it may be worthwhile to find a yoetz hashkaot who speaks English.  Also, if you’re not comfortable with your bank’s yoetz, you should find a private one.  Just make sure that the person you find is a yoetz hashkaot, not a meshavek hashkaot.

Once you know why you’re investing and you have a yoetz hashkaot, you’re almost ready to go.  The yoetz will begin by explaining his liability to you and then give you some simulations to test how you feel about risk.  In most cases, your yoetz will take a few minutes to talk you out of investing in the currency market and begin to direct you to mutual funds (as a Dave Ramsey fan, I appreciate this).  Depending on your adversity to risk, the yoetz will find a few funds that match your preference.  Finally, you’ll compare funds by discussing the risk, the sharpe, and fees.

A good yoetz hashkaot is not just someone who can give you good advice, but is also someone who holds your hand and explains everything to you clearly so that you can make a decision.   Let me say that again – so that you can make a decision, not him.  Don’t invest anything if your not 100% comfortable with the decision.

What has your experience been investing in Israel?  Is there a bank or yoetz hashkaot that you recommend?

Freelancing in Israel: Oved Atzmai vs Billing Company

Congrats, you’re considering starting your own full time business.  Or maybe you’re just looking for a little money on the side.  Sooner or later, someone is going to want a cheshbonit mas (tax receipt) and its time to stop working under the table; it’s time to register as a freelancer.

In Israel, you register as a freelancer or Over Atzmai (hereinafter OA) as either an osek patur or osek murshe.  An osek patur earns less than NIS 76,884 and does not charge VAT for his services.  If an OA makes more than NIS 76,884, he or she registers as an osek murshe.  An osek murshe does charge VAT, but can reclaim VAT on business expenses.  You can change from an osek patur to an osek murshe mid-year (when you come close to the 76,884 line you have to change your status) and once you are an osek murshe, you cannot be an osek patur again for at least two years.  Finally, some professions such as accountants, lawyers and doctors may only register as an osek murshe.  Regardless of what you choose, the process is the same: register at the tax authority, then mas hachnasah, and then bituach leumi   Once you are registered, you have to file regular reports, prepay VAT every so often (for an osek murshe) and file an annual report.

Sounds difficult.  Is there an easier way?

I know, the reason you became a freelancer was so you wouldn’t have to leave the couch and put on pants; going to so many government offices seems out of the question.  Fear not, there is an alternative; you can register with a billing company.  A billing company is a company that hires you as a worker.  You work as a freelancer, the company does your billing and the company takes a small cut of your revenue and pays you as a worker.  Since you are working under the guise of another company, you pay both the employer and employee side of all taxes and investments.  Billing company freelancers (hereinafter BF) do not issue personal receipts, but send the money to the billing company and then ask their billing company to issue a receipt.   All that the billing companies ask for in return is a small percentage of your revenue.

So which is right for your?

This is a very complicated question that gets to the heart of a very important matter – tax planning, or more honestly, tax avoidance.  With tax rates as high as they are in Israel, saving money on your taxes can mean a world (or at least a paycheck) of difference.

1) Tax deductible expenses:  Expenses are deductible for both OAs and BFs.  The only difference is that OAs can also deduct some living expenses (a portion of arnona, electricity, water and va’ad bayit).  In addition, OAs who are registered as an osek murshe and BFs can also receive back VAT on most expenses (for some such as a car and cell phone, you only get back 2/3 VAT.  Car rental expenses receive no VAT at all).  Click here for a full list of deductible expenses for an OA including VAT reimbursement rates.

2) Charging VAT:  Despite popular belief, VAT is more of a tax on the seller than on the buyer.  Like all taxes, it leaves a tax incidence, but in a world of many suppliers, VAT is really less of a 16% sales tax on the consumer and more of a ~14% tax on the supplier.  An OA is allowed to not pay this tax as long as he is an osek patur.  One he is an osek murshe, then he is in the same boat as the BF, who always charges VAT.

3) Bituach Leumi.  OAs pay 9.82% on all salary below 60% of the average wage (meaning on the first 5,000 of revenue) and 16.23% on all revenue after that.  BFs pay 3.95 on the first portion of revenue and 17.9% afterwards.  This means that until ~ NIS 14,200 revenue BF’s pay less, but after 14,200 revenue, OAs pay less.  All in all, the difference is not that significant until an OA starts making a lot of money.  Another difference is that OAs pay a minimal amount of Bituach Leumi   (NIS 212) every month, whether they receive income or not.  BFs only pay bituach leumi during months they receive income.

4) Pension:  Both BFs and OAs can put aside money for pensions.  BFs can put aside up to 7.5% from the employee side (which means after tax money, but 35% of the deposit is a tax credit, 7.5% from the employer side (tax and bituach leumi exempt money), and up to 8.33% for pitzuyim (also, tax and bituach leumi exempt money).  Note that the percentages from the employer side turn out to always be a bit less than listed above because these are percentages of your declared salary after you remove the deductible and refundable expenses, including the hishtalmut and pension (there is some complicated math in this).  OAs can also put aside money for a pension, 5% from the employee side and 11% from the employer side (both have the same tax deductible policies mentioned for a BF).

5) Hishtalmut:  One of the best ways to get some money past the tax man is by paying to a keren hsihtalmut.  Typically, a keren hishtalmut, allows a worker to pay in 2.5% of his or her income, which the employer matches with 7.5%.  Since BFs are paying both the employer and employee side, this means that they get to pass the 7.5% through tax free and bituach leumi free (Note: like pensions, percentages are a bit less than 2.5% and 7.5% because these are percentages of your declared salary after you remove the deductible and refundable expenses, including the hishtalmut and pension).  Similarly, an OA may deposit 2.5% from the employee side, but only 4.5% from the employer side. 

6) Social Security:  This is where the OA’s have it rough.  If you’re an American and registered as an OA. you’ll have to pay 15.3% of your revenue (before taxes, but after deductibles and bituach leumi) to the US government for social security.  This is sometimes a good thing, because if you’re close to having 40 quarters, being an OA can push you over the edge, but it also means you’re going to be paying a lot of extra taxes.  (For those interested, I plan to have a post discussing the social security issue at length in the near future).  Again, this tax does not apply to BFs at all.

7) Billing company fees and accounting fees.  Billing companies charge a certain percentage of your initial revenue as a fee for its services (the fess is paid on revenue after removing VAT, but before removing expenses.)  This fee covers not only billing, but all Israeli accounting expenses you’ll need throughout the year including deductions, refunds and tax planning (fees range from 4% – 7% with a maximum fee per month).  Similarly, an OA requires the services of an accountant.  I know there are many OAs out there who choose to do it alone, this is often a huge mistake.  The major perk in being an atzmai is the ability to utilize tax exemptions and if a worker is not using an accountant he or she risks either not taking advantages of all the tax advantages at his or her disposal or, conversely, committing fraud.  The cost of an accountant is usually between NIS 1000 and 3,000 a year for preparing an annual report.  Obviously this price varies depending on the extent of the time and service you need from your accountant.

Some final thoughts:

There are a variety of billing companies that can offer you their services (Yeul Sachir, Atzmai Sachir, Autotax, Cheshbonit Sachir, Sveram & Taxpay to name a few.)  When choosing a billing company, it is important not only to look at the fee, but the level of customer service offered.  I have heard good reviews from customers from Yeul Sachir.  If you have worked with any of these companies, please share your experience in the comments below.

Many choose to be an OA because issuing a receipt from one’s own company looks more professional.

Despite what many say, and what I have been told in the past, it is not a big deal to close a tik.  Just speak to your accountant and he or she will probably do the paperwork for you for a small fee.

This is the first time I am posting about this topic and I anticipate feedback and corrections.  I’m going to be on vacation next week, so if there is any problem, please e-mail me and I’ll correct it when I come back.  In the meantime, please enter any comments relevant to this topic below.

Calculate savings with Golan Telecom, HOT Mobile, Rami Levy, Home Cellular

Use the No Fryers calculator to find out whether Golan Telecom, Home Cellular, HOT Mobile, or Rami Levy Communications are right for you!

In December 2011, Rami Levy was the first new player to debut.  Now, they have been joined by Home Cellular, HOT Mobile, and Golan Telecom.  Each offer straight-forward pricing, with some including “unlimited” plans.

How do you decide which is best for you and if any are a better deal than what you current have?  We’ll take a look at pricing and other factors which you should take into consideration.

Which is the best price?
Get your last couple of bills together, and figure out what your average use of minutes (all types – in network, other cellular, and landline), SMSs, and internet.  You’ll get your results in just three easy steps!

click here to see the rest of the article.

more than just food: items you can and should buy in the shuk

Back in the old country, I would search websites and stores in order to find a bargain, but here things are different.  In a country where Amazon.com means nothing and price tags are only a suggestion, shopping is less about making an informed decision and more about finding your prey and going in for the kill.  As any Israeli knows, the best place for aggressive energetic shopping is the shuk.    But while most people think of the shuk when buying food, there are tons of bargains to be had on other items as well.  For example:

(1) Children’s toys:  I know, I spoil my child, after all, everything I ever bought for my son was imported all the way from China and/or Vietnam.  Lead paint and child labor jokes aside, if you’re looking for something simple like a toy truck or a doll for a young child, there is no reason to spend 5 times as much on an identical item in a toy store.  There may be some toys which are worthwhile to get in the store, but the overwhelming majority of toys for your children (and their friends’ birthdays) can be bought in the shuk.

(2) Linens and clothes:  If you’re looking for a nice suit, I wouldn’t recommend beginning with the shuk; but if you’re looking for socks, undergarments, towels, sheets, t-shirts and shorts, there is no point in spending tons of money in the mall when the shuk offers the same thing for less than half the price.

(3) Electronics and Kitchen utensils:  While fancier electronics should be bought at a place with a suitable warranty, simpler household items such as an iron, kettle, space heater, toaster oven, bug zapper, hair curler and telephone are significantly cheaper in the shuk.  Also, common kitchen utensils such as pots, pans, knives, tenderizers, silicon tins and more are usually available in the shuk for very cheap.

Alternatively, these items can be found at bargain prices in Haredi neighborhoods as well.

What other items do you buy at the shuk?  Is there an alternative place you go to buy some of the items mentioned above for cheaper prices?

the hidden costs of ‘free’ travel insurance policies (from Ha’aretz)

 

Haaretz put out a great article about the buying insurance when going abroad:

The hidden costs of ‘free’ travel insurance policies

Nobody wants to think about ending their vacation in the hospital. That may be why, unlike car, health and life insurance, travel insurance is usually a last-minute affair.

By Rina Rozenberg

Nobody wants to think about ending their vacation in the hospital. That may be why, unlike car, health and life insurance, which most people investigate thoroughly before choosing a provider – consulting with friends and experts, comparing prices, even (shudder) reading the policies – travel insurance is usually a last-minute affair, arranged in between packing your bags and checking the weather forecast at your destination.

Another reason people take travel insurance so casually could be that it’s relatively inexpensive. Somebody offers you a policy with your ticket, or you get it through your credit card. Roughly half the travel insurance policies in Israel are issued by the country’s health maintenance organizations, the kupot holim, according to estimates by industry insiders. Most of the rest are from credit card companies and travel agencies, while actual insurance agents are believed to control only 10% of the market.

The price differences among these sources are negligible. But when it comes to coverage the differences are significant, making it important for travelers to do a little homework before setting out for the airport.

1 Don’t make do with the free coverage provided by your credit card issuer. It may not cover the cost of hospitalization.

The credit card companies do not charge customers for basic travel coverage, and in some cases it is automatic; the customer doesn’t even need to contact the company for it to kick in. The problem is that free policies tend to have more constraints and limitations than policies you pay for. Any serious injury or illness requiring surgery or protracted hospitalization will probably leave the policy holder owing huge sums to the overseas hospital.

That’s because they do not provide for full reimbursement. Free policies issued by the credit card companies set a cap on daily hospitalization and other costs, while policies that cost money generally cover more.

For instance, the Visa Cal credit card company will pay up to $450,000 for hospitalization and other medical costs, but has a $2,000-per-day limit on hospitalization reimbursement. If your medical care costs more per day (or in total ), you are responsible for the balance. Isracard has the same daily cap. Leumi Card’s is lower, at $1,350 a day. Sources in the insurance sector say hospitals in Europe and the United States charge at least $3,000 a day.

The credit card companies do offer policy upgrades – for a fee, of course.

2 Do you have high blood pressure, heart disease or some other preexisting condition, chronic or otherwise? You may need special coverage as part of your travel insurance.

A preexisting medical condition is a “medical condition for which the policy holder received drug treatment, medical care or hospitalization in the six months before the trip,” says Michal Weiner, head of the medical-insurance and personal accident department at AIG Israel. If you travel abroad without coverage for a preexisting medical condition that causes you trouble you will wind up footing the entire cost of care yourself, she warns.

The credit card companies’ basic, free policies do not provide this coverage; you can get it, but you have to pay.

Anyone with a chronic condition such as asthma, slipped disc, heart disease or diabetes – even if the condition is stable – should think about this carefully.

Of the kupot holim, Leumit and Maccabi each offers a one-size-fits-all travel insurance policy that cover preexisting conditions. Clalit and Meuhedet both offer riders, supplemental insurance, at a reasonable per diem rate.

3 Even if you bought an insurance policy through your health care fund, it isn’t the actual insurer, and the actual insurance company won’t be aware of your medical condition. You should advise your insurance agent accordingly.

A few months ago the insurance commissioner at the Finance Ministry, Oded Sarig, issued a draft clarification on medical insurance policies sold by insurance agents, which for the purposes of this article include the health-care funds.

One of the reasons for his paper was that, as Sarig noted, a health-care fund member could mistakenly think that when they purchase travel insurance from their health care provider, the policy is tailored to their medical profile. That’s a big mistake.

“The policy holder figures the health-care provider knows them thoroughly and checked their medical records before offering the policy, but it isn’t so,” says Yaron Baron, sales manager at the DavidShield insurance agency. “The kupat holim is serving as a marketing channel. Clal Insurance or Harel is providing the actual insurance.”

4 Usually a $500,000 policy is adequate. All travel insurance policies have a coverage ceiling of between $500,000 to $1 million; the truth is that the number usually doesn’t matter much.

“In most cases the coverage offered by medical and hospitalization policies is high enough,” says Baron, even though his agency offers PassportCard, with coverage of up to a million dollars. He thinks the number is mainly a marketing gimmick: He says he cannot recall a single case of a traveler needing more than $500,000, the lowest ceiling of any Israel travel insurance policy.

That does not mean that such cases do not exist, of course. Gabi Nakibly, VP marketing and sales at Clal Health Insurance, recalls the case of a customer who collapsed while in the United States and ended up in the hospital for 10 weeks. The bills came to $2 million. “Since we have working relations with hospitals, we managed to get the bill reduced,” Nakibly says, adding, “But that was an extreme case.”

5 Tailor your policy to your trip. If you’re going to spend your vacation mountain-biking on single-track trails skirting deep gorges, white-water rafting or doing some other extreme sport, do mention it to your insurance agent so you can purchase appropriate coverage. If you’re taking along expensive equipment mention that too, and find out how to get it insured as well.

Note that standard baggage insurance also has a cap, usually $1,000 per piece but sometimes as much as $3,000.

If you’re taking expensive items, such as a laptop, gold jewelry or a smartphone, you’ll need extended coverage.

6 Make sure your travel insurance picks up the cost of flying you back to Israel for medical care, if necessary. It will raise your premium for your entire trip by about $15 at Meuhedet, for instance.

7 No matter what insurance policy you buy, there will be co-payments: You will pay part of the bill. How much depends on the policy and the issuer.

And one other thing. Make sure to hold onto all your receipts; without them your insurer won’t reimburse a single cent.