Retirement Planning

Start here if you want to learn about how, where, and how much to save for retirement.

Learn the ins and outs of kickstarting your goals with information about account types and to ways to calculate dollar amounts for your end goal.

How Retirement Planning Works

• The compound interest formula, A = P(1 + r/n)^(nt), is crucial for retirement planning because it shows how your savings grow exponentially by earning "interest on interest," making time your biggest ally; A (final amount) depends on P (principal), r (rate), n (compounding frequency), and t (time), with earlier investing yielding dramatically larger nest eggs due to the powerful effect of the time exponent.

How Compound Interest Works for Retirement

1. Interest on Interest: Earn returns not only on your initial investment but also on the accumulated interest already in your account
2. Exponential Growth: This process accelerates your wealth over time, especially across decades of retirement savings
3. Time is Key: The time in the formula listed above is an exponent, so starting earlier enables more compounding cycles, significantly increasing your final retirement fund.

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Example 

The future value of $6,600 in 20 years with an 8% compound interest rate is

$30,762.32. 

Compound Interest Calculation 

A = $6,600 (1+0.08) 20

A = $6,600 (1.08) 20

A = $30,762.32

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Life income works by converting savings into a guaranteed income stream, often through annuities, providing regular payments (like monthly) for the rest of your life, protecting against outliving savings, with options for payouts based on life-only, guaranteed periods, or cash refunds, ensuring funds last even if markets drop, and sometimes allowing beneficiaries to receive remaining value.

Key Mechanisms

• Contribution: You provide a lump sum or series of payments to an insurer or financial institution.
• Annuitization: This money is converted into an annuity, which promises regular payouts.
• Guaranteed Payments: Income is paid consistently (e.g., monthly) for your life, regardless of market changes, reducing the risk of outliving your money.
• Investment Linked Option: Some products (like Lifetime Income Funds - LIFs) allow you to invest the principal, with income tied to performance, while still offering a guaranteed minimum, and can offer growth potential.

Common Payout Options (Annuities)

• Life Only: Highest payments, but stop at death; no funds go to heirs.
• Life with Cash Refund: Payments for life; if you die before receiving your principal, beneficiaries get the difference.
• Life with guaranteed period: Payments for life, but guaranteed for a minimum number of years (e.g., 10 or 20); payments continue to beneficiaries until the period ends if you die sooner.

Other Forms of Life Income

• Life Income Funds (LIFs): Common in Canada, they lock pension funds into an account that provides mandatory annual withdrawals, offering control over investments until the fund is depleted or you choose a payout option.

Benefits

• Longevity Protection: Ensures you have income no matter how long you live.
• Market Protection: Protects your income stream from market downturns (especially with non-investment-linked annuities).
• Budgeting: Creates predictable income for planning.

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