Long-Range Social Security Financing—It’s Worse Than We Predicted

In our post of February 15, 2025, we estimated Social Security’s financial status as of January 1, 2025 using:

• results from the 2024 OASDI Trustees report,
• an estimate from the Congressional Budget Office (CBO) of the effect of passage of the Social Security Fairness Act,
• our estimate of the effect of the annual actuarial loss to the system resulting from the change in the 75-year projection period, and
• no other changes in assumptions, system provisions or methods

Last February, we estimated that Social Security’s long-range actuarial balance as of January 1, 2025 would be -3.65% of present value of taxable payrolls for the next 75 years (down from -3.50% last year), or a Funded Status (PV of Assets/PV of Liabilities for the next 75 years) of 79.1% (down from 79.8% last year).  Our estimates turned out to be optimistic.

Kitces.com Suggests Advisors Include an Actuarial Approach in their Consulting Toolbelt

In its Weekend Reading for Financial Planners (June 7-8), Kitces.com and Adam Van Deusen included a link to and summary of our April 28, 2025 Advisor Perspectives article, “Advising a Retired Client Who Wants to Buy a Second Home (or Other Big-Ticket Item)”. Mr. Van Deusen did an excellent job summarizing the article and pointing out the benefits of using the Actuarial Approach and its Funding Status metric to measure and communicate the impact of a client’s financial decisions on the sustainability of their plan.

In his summary, Mr. Van Deusen says,

“In sum, financial advisors have more than one tool in their toolbelt when it comes to analyzing the impact of large purchases by their retired clients. And while advisors might not consider themselves to be actuaries, taking an actuarial approach could provide clients with a metric that allows clients to better understand the impact of potential purchases on the sustainability of their financial plan!”

Of course, we like to think that the Actuarial Approach advocated in this website and its Funded Status metric can easily be applied more broadly to all significant financial decisions in retirement, not just potential purchases. We strongly agree with Mr. Van Deusen that the Actuarial Approach would be a good tool to add to the toolbelt of a financial advisor, and we are happy to assist financial advisors who may have questions about the Actuarial Financial Planner Excel workbooks or the Actuarial Approach discussed in our website.

Funded Status—The Better Metric for Managing Assets and Spending in Retirement

As we have indicated many times in prior posts, the future isn’t going to happen as you (or your financial advisor) assume, and your spending goals and actual spending are likely to change over time. Therefore, your retirement plan should include a process for determining when future adjustments to your plan may be necessary. We believe such a process is much more important than any model you may use to project the future.

Planning for Essential Expenses in Retirement

One of the basic tenets of the Actuarial Approach recommended in this website is to fund the present value of expected essential expenses in retirement with non-risky assets/investments like:

• Social Security,
• Lifetime pensions,
• Life annuities,
• TIPs ladders,
• Multi-year guaranteed annuities, etc.

We call the total non-risky assets/investments used for this purpose the “Floor Portfolio,” as distinguished from the “Upside Portfolio” comprised of more risky assets used to fund discretionary expenses. We also refer to these portfolios as “buckets’ for funding essential and discretionary expenses. Recently, in our post of April 26, 2025, we introduced the concept of a third “Surplus” bucket to encourage households to increase spending when their Funded Status exceeds a specified level.

Recently, the Alliance for Lifetime Income released “Check off the Basics—A guide to Planning for Essential Expenses.” Like most of their material, this guide makes a lot of sense. We agree with their proposed approach, as it is very similar to the November, 2021 essay, “A New Approach to Building a Sustainable Retirement Plan Using Proven Actuarial Principles” that we wrote for them. 

Don’t Forget Your Taxes, Part II

This post is a brief follow-up to our post of May 6, 2023 in which we reminded you that taxes are essential expenses that must be planned for in retirement. As is the case with other expenses expected in retirement, you must make assumptions about how your current tax expenses will change in the future to develop a reasonable estimate of the total present value of future household expenses (i.e., household spending liabilities), against which the total present value of household assets is compared to develop your Funded Status.

Are You Still Worried About Increasing Your Spending?

In our last post, we tried to encourage retirees afraid of (or behaviorally resistant to) spending their wealth to consider increasing their spending whenever their Funded Status exceeded a specific threshold percentage. In this post, we will take another shot at increasing your spending comfort level assuming safely increasing spending during retirement is consistent with your spending goals.

The “spend-less” Funding Status guardrail we recommend is 95%, and the “spend-more” guardrail we previously recommended in our post of January 7, 2023 for considering increased spending was 120%. The 150% (or 140%) Funded Status spend-more threshold used in the example in our previous post was considerably higher than our recommended 120% “spend-more” guardrail. We did this primarily to illustrate the process that could be used to transfer assets from one’s “upside portfolio” bucket to a “surplus bucket” whenever the Funded Status exceeded the specified threshold. We have absolutely no problem if you want to use a higher threshold than 120% as your spend-more guardrail, especially if you may be afraid of having to decrease your spending in the future. 

However, in this post, we are going to look at just how conservative the 120% Funded Status spend-more guardrail is by stress-testing it for a hypothetical couple. 

Use the Funded Status Metric and a “Surplus Bucket” to Increase Spending in Retirement

Most of us are relatively conservative when it comes to determining how much we can afford to spend in retirement. All things being equal, we would rather die with too much money than too little. Apparently, however, some researchers are worried that we may not be spending anywhere near enough and should buy life annuities to rectify that situation. In their recent article, researchers Drs. David Blanchett and Michael Finke reach several conclusions, including:

• “Individuals tend to view money held in savings accounts differently than wealth held in the form of income.”
• “Retirees spend a much higher percentage of their annuitized income and spend about half the amount that they could safely spend from non-annuitized wealth.”
• “Our results provide evidence that retirees bracket wealth held in investments differently than wealth held as income and consequently spend less than would be optimal in a life-cycle model.”
• “Retirees who are behaviorally resistant to spending down savings may better achieve their lifestyle goals by increasing the share of wealth allocated to annuitized income”, and
• “Less knowledgeable and risk-averse retirees may be particularly prone to underspending [since?] out of fear of depleting wealth.”

As a result of their research, they argue for implementation of policies that incentivize (or default to) the annuitization of retirement wealth.

Can I Afford to Buy that Dream Lake House (or Some Other Big-Ticket Item)?

In many of our prior posts, including our post of March 8, 2025, we have strongly encouraged readers to estimate the potential impact on their Funded Status before making a significant financial decision. In the March 8 post, we looked at how easy it was for a hypothetical couple to crunch the numbers on whether they could afford to go on a dream world cruise.

In this post, we will look at a slightly more complicated financial decision—Can I afford to buy something that involves not just an upfront cash outlay, but also involves ongoing annual costs and may also involve some future income during the period of ownership or when the item is eventually sold.

Thank You, Mr. President

As of the close of stock markets on April 8, 2025, the S&P 500 index was down about 15% from its close at the beginning of the year. It seems pretty clear that this decrease is primarily attributable to implementation of President Trump’s tariff policies. Whether the market’s decline will worsen or recover this year is uncertain. It is also uncertain what the impact of these policies will have on short-term or long-term inflation.

Generally, we encourage our readers to remeasure their Funded Status once a year at the beginning of the year. However, it may make sense to remeasure (or estimate) the household Funded Status during a year in which investment performance is significantly higher or lower than expected or in which a significant purchase or other financial decision is being considered by the household.

In this post, we will discuss how you can easily estimate the impact of the recent stock market decline on your beginning of year Funded Status and provide an example. Knowing the impact can possibly help you make better financial decisions during 2025. 

All About That Process

The future isn’t going to happen as you (or your financial advisor) assume, and your spending goals and actual spending are likely to change over time. Therefore, as previously discussed in our posts of April 16, 2023 and October 24, 2023, your retirement plan should include how you will determine when future adjustments to your plan may be necessary. We believe it is important for a good retirement plan to implement a robust process for making necessary future adjustments, and this process is likely to be even more important than the projection tool, or metric, used to measure the financial status of your plan.