Question

Hank is 25 and has just begun his first real "big people" job. He is beginning to plan for his retirement because, "If you fail to plan, you plan to fail." He considers that he will retire at age 65. (Note: How many years is Hank planning to work?) In retirement, he expects to need $3000/month to cover his expenses. Due to genetics and the overall health of his parents and grandparents, Hank figures his life expectancy to be 95. (Note: How long does Hank expect to live after he retires?) Hank figures (conservatively) that any investments he makes will return 6% compounded monthly.

Answer 1

Hank is planning to work for 40 years before retiring and expects to live for another 30 years post-retirement. He is factoring in compound interest to grow his retirement savings, following experts' advice to save early and aim for approximately ten times his annual income before retiring.

Step-by-step explanation:

Hank is meticulously planning for his retirement and is considering several key factors that will significantly impact his financial security in later life. Hank plans to work for 40 years before retirement since he is starting his job at age 25 and plans to retire at age 65. After retirement, he expects to live for another 30 years, as his life expectancy is 95. To cover his estimated $3000/month expenses, he will need a substantial nest egg. Hank's smart approach to starting his savings early and leveraging the power of compound interest at a conservative 6% rate compounded monthly aligns with financial experts' advice.

The importance of starting to save early cannot be overstated, as early investments grow significantly over time due to compound interest. For example, saving $3,000 at age 25 with an assumed 7% real annual rate of return can result in nearly fifteen-fold growth in 40 years. This illustrates the profound effects of compound interest over long periods. Nonetheless, Hank must also assess his expected lifetime earnings and follow the general recommendation of saving approximately ten times his annual income before retiring to maintain his lifestyle.