Accumulating assets for retirement can be a daunting task. For many the reason is the mathematics – most people just don’t have time to figure out how the variables in the equation work. To start we need to have an idea how much money we need to save by retirement, or that age when we want to work, but not have to. Assuming for the moment that we know what that number is (another important equation in its own right), we can then calculate how to get to it.

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The accumulation equation is driven by three major components:

1. number of years to save (retirement age less current age)
2. the periodic contribution to the retirement fund, and
3. rate of return on invested assets

In times of high returns (think stock market of the 90s), it is possible to contribute less money because your assets are working harder for you. In times of low returns, like these days, then contributions must increase, assuming the number of saving years is equal. Of course, fewer years to save almost always mean bigger contributions.
However, too often people willfully ignore these factors as they near retirement, insisting on small contributions that can potentially earn big returns. This may lead to poor investment decisions and excessive risk taking simply because one does not want to make the hard budget or lifestyle choices required to raise the contribution amounts.

One way to deal with potential shortfalls in accumulation is “to pensionize” a portion of the retirement savings. This means to convert savings into a reliable stream of income for life, like any government or union pension provides. This is typically accomplished through immediate annuities offered by insurance carriers. Pensionizing savings with annuities not only creates a guaranteed income stream, but often yields higher payouts than traditional withdrawal schedules would allow due to the mortality credits* annuities provide through risk pooling. As always, it is wise to consult your financial professional when determining if “pensionizing” your savings is a viable option for your personal retirement plan.

[*The mortality credit is also known as the mortality yield. With a participating annuity, premiums paid by those who die earlier than expected contribute to gains of the overall pool and provide a higher yield or credit to survivors than could be achieved through individual investments outside of the pool. The mortality credit increases significantly with age and hedges longevity risk, often creating a return that would be impossible to match in the broader financial markets. Source: Annuity Digest (]

Daniel Bennett is a financial consultant based out of Santa Monica, California.

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