Should Israelis Take Pension at 60 or Wait Until 67?

A 60-year-old Israeli man, still working and earning a good salary, is contemplating whether to start receiving his pension now or wait until age 67. New pension funds allow individuals to begin drawing a pension at 60 while continuing to work. However, a significant tax is levied on pensions before age 67, as they are added to salary income.

A simplified example illustrates the financial implications: taking 7,200 shekels monthly at 60 versus 9,100 shekels at 67. Without considering taxes, waiting until 67 would require over 26 years to recoup the difference, meaning the wait would only be beneficial for those living past 93. This calculation, however, ignores the crucial impact of taxes.

For someone earning 25,000 shekels gross, their marginal tax rate is 31%, and the pension income is taxed at approximately 35%. This reduces the net monthly pension at 60 to about 4,700 shekels, or roughly 393,000 shekels by age 67, instead of the gross 604,800 shekels. After age 67, assuming the individual stops working and is eligible for tax exemptions on pensions, both the 7,200 and 9,100 shekel pensions are largely tax-free, maintaining the 1,900 shekel monthly difference.

Recouping the net difference of 393,000 shekels at 1,900 shekels per month would take approximately 17 years, bringing the breakeven point to around age 84. This is close to the average life expectancy for an Israeli man (around 85), making the decision less clear-cut for the average person. Those with a family history of longevity or who are in good health might benefit from waiting, while individuals with health issues might gain more from starting their pension earlier.

Additional considerations include survivor benefits for a spouse and the risk of outliving one's savings, which a higher pension from age 67 can mitigate. Conversely, individuals with significant monthly expenses like mortgages, those supporting children, or those transitioning to lower-paying part-time work might find immediate cash flow from a pension at 60 more beneficial, especially if it reduces their overall tax burden. Some pension products allow for partial withdrawal, enabling individuals to supplement their income without depleting their entire savings.