We encourage you to remember the following 3Ms when determining how much you can afford to spend in retirement:
Some of our readers question why the second M is important. We will answer in this post.
Happy New Year! It’s the time of year that we ask you to perform your actuarial valuation to measure your Funded Status. We have updated the Actuarial Financial Planner (AFP) spreadsheets for this purpose and encourage you to use the granular spending budget that we outlined in our previous post together with the updated AFP spreadsheets, to measure your January 1, 2025 Funded Status.
This post is a follow-up to our post of November 19, 2024. In it, we discuss how updating your spending budget each year is an important step in the process of successfully managing your finances in retirement. We will also provide some tips on how to accomplish this task using the Actuarial Financial Planner.
For most retired households, spending is not linear from year to year. It can vary significantly, especially if spending on non-recurring items is involved. Therefore, static financial planning approaches that assume constant real-dollar spending from year to year (like the 4% Rule or Monte Carlo models that develop a probability that the household will be able to spend $X per year) can lead to under- (or over) spending in retirement, and just as important, can lead to spending that is inconsistent with household spending goals.
This post focuses primarily on the implications of assuming, or planning, to live longer than one’s life expectancy.
For the purpose of this post, we are going to assume that when you are asked how long you plan to live and you reply, “I plan to live to 95 (or 100),” you actually have a financial plan, and it involves assuming that you will die at age 95 (or 100).
This post is a follow-up to our post of March 7, 2021 and several other of our posts and articles noting that a model like the Actuarial Financial Planner (AFP) is a better model to use when employing a dynamic process to keep spending on track during retirement.
Looking to keep your spending on track and consistent with your spending goals in retirement? Forget the 4% Rule and complicated Monte Carlo simulations. Use the same basic approach/process that actuaries use for Social Security and pension plans.
The Actuarial Approach involves:
That’s it! And you can use one of our free Actuarial Financial Planners to perform the present value calculations. As discussed in our previous post, this process does involve annually entering your granular spending budget items and your sources of income as well as expected future increase rates for these items. But, we believe the effort you put into this annual process will be worth it.
Thanks to Rivan Stinson for teeing up the Actuarial Approach in Stinson’s recent Washington Post article titled, “Retiring soon? Plot a detailed budget first before tapping your 401(k).” In her article, Stinson writes,
“Once you make this granular budget, it’s time to crunch the numbers on how much your savings and investments, along with Social Security and a pension (if you have one), would cover.”
Creating a granular budget and comparing the present value of expected spending under the budget with the present value of household assets (including future payments from Social Security, annuities, pensions or other sources of income) to determine the household Funded Status are essential steps in the Actuarial Approach Recommended financial planning process.
This post is a follow-up to our post of October 14, 2024 entitled, “Social Security Financing---When You’re in a Hole, Stop Digging.” In this post, we will look at the retirement plan of a hypothetical couple with approximately the same underfunded status as Social Security. We employ this analogy to try to give readers a better sense of the system’s current financial predicament and the need for sooner, rather than later, action to address it.
According to many of the talking heads at Fox and other conservative media sources, a huge factor in selecting who to vote for in the upcoming presidential election is whether you are better or worse off financially than you were at the beginning of the Biden/Harris term. While we don’t believe that this comparison should be anywhere as important in your decision process as suggested by members of the conservative media, let’s take a look at the math involved in answering this question so that you can estimate the change in your own financial status rather than simply focusing on how much prices on certain items have increased since January 1, 2021.
In this website, we encourage retired households to periodically (generally annually) compare the present value of their assets with the present value of their spending liabilities to determine a snapshot Funded Status. We also promote monitoring the household Funded Status over time to see whether adjustments in assets or spending liabilities may be necessary or appropriate to keep spending in retirement on track and consistent with spending goals.
As discussed many times in this website, this is the same process that is used by actuaries to measure and monitor funding progress for many other financial systems, including defined benefit pension plans and Social Security. If a system’s Funded Status (Assets/Liabilities) is significantly in excess of 100% and exhibits a pattern of increasing over time, it may be reasonable to decrease system assets and/or increase system liabilities to avoid over-funding. On the other hand, if a system’s Funded Status is less than 100% and has exhibited a pattern of decreasing over time, actions should be taken to bring the system’s Funded Status back up to at least 100% to ensure long-term system sustainability.