Monday, February 26, 2024

A Planning Process That Works

You are responsible for your finances in retirement and need a plan that works. The Actuarial Approach, with its Funded-Status-focused process can help you:

  • Grow your assets,
  • Protect your assets,
  • Spend your assets in a manner consistent with your goals, and
  • Make better financial decisions.

To read more about the proven actuarial process we recommend, including a few hints for using the Actuarial Financial Planning models we provide, see our post of January 5, 2024

Check out our most recent Advisor Perspectives article if you are concerned about how future Social Security reforms may affect your plan.

Wednesday, February 21, 2024

Want a More Realistic Retirement Plan?

If you (or your financial advisor) aren’t planning for non-recurring expenses in retirement, you probably don’t have a realistic retirement plan. 

If you use a Strategic Withdrawal Approach (like the 4% Rule or its many variations) or your financial advisor uses a traditional Monte Carlo approach, your annual spending budget is usually expressed as a constant real dollar amount each year. Assuming constant real dollar spending for your entire period of retirement can either overstate or understate the assets you need to fund your retirement. This can occur because:

  • Some non-recurring expenses (such as travel expenses, new cars, pre-Medicare healthcare premiums, home remodeling expenses) are primarily front-loaded during retirement, or
  • Some non-recurring expenses (such as long-term care or bequest motives) are primarily back-loaded during retirement

If you want to develop a more realistic financial plan during retirement that reflects non-linear spending, we recommend you use a model like the Actuarial Financial Planner (AFP). The AFP distinguishes between future expected essential, discretionary, recurring and non-recurring expenses. See our post of April 16, 2022 for more discussion of this topic and our post of December 8, 2023 for discussion of steps you can take if there are an insufficient number of cells in the AFP to perform calculations of the present values of your non-recurring expenses (or other present values).

Monday, February 19, 2024

Time to Reduce Your Investment Risk?

With the S&P creeping up over 5,000, it may be time for retirees to look into decreasing their investments in risky assets, especially if their Floor Portfolio of non-risky assets/investments does not cover the present value of their expected future essential expenses. 

You can read more about what we consider to be the most important planning decision in retirement in our post of October 16, 2022.

Monday, January 29, 2024

Saturday, January 20, 2024

Actuaries Confuse the Primary Causes of the Social Security Funding Shortfall

The American Academy of Actuaries (Academy) recently published its annual Actuarial Perspective on the annual OASDI (Social Security) Trustees Report. Usually, these briefs are published by the Academy shortly after release of the trustee’s report, but this year’s brief (covering last year’s 2023 report) was significantly delayed for some reason.

Among other things, this year’s actuarial perspective on Social Security attempts to convince us that system’s current funding shortfall “was mostly caused by economic factors that came up short of expectations, including the growth of taxable payroll, and trust fund investment returns.” This is apparently the same conclusion reached by the system’s Chief Actuary as discussed in the article entitled, “Here’s the real cause of the Social Security funding shortfall, according to the program’s chief actuary

Friday, January 5, 2024

It’s that Time Once Again for Retired Households to Perform Their Actuarial Valuations

At the beginning of each calendar year, we encourage our retired (or near-retired) readers to perform an actuarial valuation of their household assets and spending liabilities to see whether changes should be made to their financial plans. A household actuarial valuation involves calculating and comparing present values of household assets and household spending liabilities for the purpose of determining the household’s Funded Status. To do this, we suggest you follow the easy 5-step valuation process outlined below using our Actuarial Financial Planner (AFP) models.

2023 was a better year for retirees after a pretty tough 2022. Most of us experienced better-than-assumed investment return experience, rising interest rates and lower levels of price inflation. As a result, we increased the default assumptions used in the AFP to estimate future investment returns and decreased the default assumption for future inflation (as discussed in our post of November 16, 2023). The combined effect of more favorable experience during 2023 and changes in our default assumptions will generally increase household funded statuses as of January 1, 2024. 

Wednesday, December 27, 2023

Fixed Dollar SPIAs vs. Fixed Rate Cola SPIAs

In our last post, we asked whether now (or actually earlier this month) might be a good time to purchase a single premium immediate annuity (SPIA) to strengthen Floor Portfolios used to fund essential expenses. In that post (and prior posts) we focused on SPIAs that provide fixed dollar payments each month for life. In this post, we will discuss SPIAs that provide lifetime payments with annual fixed rate “cost of living adjustment” (or Cola) increases, and why you might want to consider this type of annuity rather than a fixed dollar SPIA to strengthen your Floor Portfolio. We include an example.

Sunday, December 10, 2023

Is It a Good Time to Buy That Single Premium Immediate Life Annuity, Updated

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

  • based on life expectancy, or 50% probability of survival, and
  • based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will again examine the implied interest rate assumptions built into recent quotes from ImmediateAnnuities.com and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of September 17, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Friday, December 8, 2023

Estimating Present Values of Long-Term Care Costs and Survivor Benefits Payable After the First Death Within a Couple

The Actuarial Approach recommended in this website involves periodically (generally annually) comparing the present value of a retired household’s assets with the present value of its anticipated household spending liabilities to develop its Funded Status as of a valuation date (generally the beginning of the current year). The present value of assets used in this comparison is the current market value of accumulated savings plus discounted values of future lump sum payments or streams of payments from other income sources. The present value of household spending liabilities is the discounted value of future lump sum expenses or streams of expenses. To help retired households allocate their assets between risky (Upside Portfolio) and non-risky (Floor Portfolio) investments, separate rates (investment return assumptions) are used to discount future essential expenses/non-risky asset sources and future discretionary expenses/risky asset sources. 

Saturday, November 25, 2023

“Safe” Withdrawal Rate Brouhaha

Periodically, we read articles from William Bengen, the inventor of the safe withdrawal rate (otherwise known as the 4% Rule), from various esteemed retirement academics, from the retirement researchers at Morningstar or from other retirement experts about this year’s version of the 4% Rule. For example, in 2021, Morningstar experts told us that the initial safe withdrawal rate was 3.3%. Then in 2022, they told us that it was 3.8%, and this year, it is back up to 4% as long as equity investments don’t exceed 40% of the retiree’s portfolio. And while the basic safe withdrawal rate may vary somewhat from year to year based on current economic conditions and whether or not it is followed blindly without adjustment (increasing the initial withdrawal amount by inflation each year), researchers generally have determined that historical investment experience supports a conclusion that an annual withdrawal in the neighborhood of 3-5% of a retiree’s portfolio at retirement, increased annually by inflation, has a high probability of lasting at least 30 years without depleting portfolio assets, assuming about 50% of the portfolio assets is invested in equities.