Actuaries Promote Actuarial Methods/Tools for Retirement Planning

The actuarial profession has recently released two items that support the use of actuarial methods/tools for personal financial retirement planning.  The American Academy of Actuaries (AAA) released an Issue Brief titled, “Actuarial Observations on Retirement Income Approaches” and The Society of Actuaries (SOA), in conjunction with Stanford Center on Longevity, issued, “Viability of the Spend Safely in Retirement Strategy.”  While it should be noted that while neither of these two releases specifically endorses the Actuarial Approach advocated in this website, they do acknowledge that actuarial methods/tools can provide sound personal retirement planning analysis.  This post will briefly discuss these two releases and our response to them.

Do You Want to be More Aggressive with Your Upside Portfolio?

One of the advantages of the “Floor and Upside”, or “Safety-First”, retirement planning strategy is that once you have established a floor portfolio of low-risk investments intended to fund your future essential expenses, you can be more aggressive when investing and spending from the upside portfolio intended to fund your future discretionary expenses.  This is because, theoretically, it should not pose an undue hardship for you to reduce your future discretionary expenses if the need should arise.  It is important to note, however, that we are not pushing you to be more aggressive with investment or spending from your upside portfolio, but if being more aggressive with respect to spending from your upside portfolio is something that appeals to you, this post will show you how you can override the default assumptions applicable to discretionary spending to implement a more aggressive overall spending strategy.  We also include an example that utilizes results from our Actuarial Budget Calculator (ABC) workbooks.

Use the Actuarial Approach to Implement Your “Safety-First” Retirement Income Plan

Several of our readers have asked us to compare:

• the retirement planning strategy discussed in Dr. Wade Pfau’s recent Forbes article and his new book, “Safety-First Retirement Planning:  An Integrated Approach for a Worry-Free Retirement” with
• the seven-step planning process outlined in our post of August 25, 2019, which is designed to help users determine the amount of assets necessary to fund essential and discretionary expenses (floor and upside portfolios) in addition to determining recurring and non-recurring spending budget data points.

Good News/Bad News—We Have Changed Our Default Assumptions for 2020 Spending Budget Calculations

In order to compare the market value of your assets with the market value of your spending liabilities and help you develop a reasonable spending budget for the year, we recommend default assumptions that are intended to be consistent with assumptions currently used to price inflation-adjusted annuities.  For 2019 spending budget calculations, these assumptions were: 

Developing a Reasonable Spending Budget—Monte Carlo Modeling vs. Actuarial Approach

In this post, we will once again push back on those who believe the most important characteristic of a retirement planning approach is whether the model used in the process is “deterministic” or “stochastic.”  We believe that the purpose of the calculations and the assumptions and processes employed in the approach are more important factors for developing a reasonable result than the type of the model.  In this post, we will focus on why we believe the Actuarial Approach can be a better approach than Stochastic (or probabilistic or Monte Carlo) models for the specific purpose of developing a reasonable spending budget for individuals or couples, especially for DIYers.  We also note that Social Security actuaries use a very similar approach to measure Social Security’s financial condition and the impact of proposed changes to the program.  This post is a follow-up to several of our posts on this subject, including our post of April 6, 2018.   Feel free to skip this post if you are just looking for a reasonable spending budget number and are not all that interested in diving into the technical details of spending budget calculation models.

Who Will be Responsible for Your Retirement?

Prior to adoption of Social Security in the U.S., many individuals and couples were dependent upon their families and their own personal savings to support themselves in retirement.  Post WWII, family support was mostly replaced by the three-legged stool concept of retirement funding, consisting of Social Security benefits, employer-sponsored defined benefit pension benefits and personal savings.  Over the last thirty years, however, with the advent of 401(k) type defined contribution (DC) plans, declining interest rates and longer lifespans, many defined benefit plans have been terminated by plan sponsors and replaced by DC plans.  Generally, benefits payable from today’s DC plans are lump sum distributions (that may be rolled over to individual retirement accounts), with relatively few DC plans today offering lifetime income distribution options.