Are You Over-Estimating Your Future Retirement Spending Needs, Part II?

This post is a follow-up post to our post of August 22, 2017.   In this post, we will discuss how you can use our Recommended Financial Planning Process to avoid over-saving/under-spending before and after retirement.

How Conservative Are Your Planning Assumptions About the Future Part II

This post is a follow-up to our post of May 19, 2020, where we encouraged you to play with our ABC workbooks to become more comfortable with how your results can vary by employing different assumptions about the future.  We hope that trying out a few “override assumptions” will give you a better sense for how conservative or optimistic your planning assumptions about the future might be.  Subsequent to that post, we made changes to our default assumptions (see our post of August 16, 2020) to make them more consistent with current assumptions used for hypothetical inflation-indexed annuity pricing.  The current default budgeting assumptions are:

• Annual investment return/discount rate: 3%
• Annual rate of inflation/desired future recurring budget increases: 2%
• Lifetime planning period(s): Planning horizon from Actuaries Longevity Illustrator, 25% probability of survival for non-smoker in excellent health

DOL Issues Disappointing LISE Guidance

On August 18, 2020, the Department of Labor issued an interim final rule (IFR) regarding calculation and disclosure of the Lifetime Income Stream Equivalent (LISE) amounts of current account balances for participants in 401(k) and other qualified defined contribution plans. Subsequent to the release of the IFR, there has been significant attention in the financial press regarding the proposed rules and the assumptions specified by the DOL (on an interim basis) for converting (or translating) defined contribution plan account balances into LISE amounts. This post will not repeat the new rules set forth in the IFR and discussed in the many published articles, but will instead focus on what we perceive to be the significant guidance shortcomings, particularly the requirement to disclose fixed dollar (non-inflation indexed) lifetime annuity payments rather than inflation-adjusted payments.

Options for Spending 2020's Forfeited Trip

One of our readers recently asked whether it was good practice to “roll over” unspent budgeted 2020 travel and entertainment expenses to 2021 or later future years, as long as one does not “double dip” by also counting these unspent amounts as accumulated savings when determining recurring spending budgets.  Since this is likely to be a common situation for many of us retirees this year (other than Bobbie, who managed to travel to England early this year), we will address this question in this post.

We’ve Changed the Default Assumptions for the Actuarial Budget Calculators

The Default Assumptions we build into our Actuarial Budget Calculators (ABCs) are intended to be consistent with assumptions used by insurance companies in the pricing of inflation-indexed life annuities.  Since fully inflation-indexed annuities are no longer issued by U.S. insurance companies, selecting these assumptions has become more of a theoretical exercise.  However, we do have data on fixed income single premium life annuities and other sources to guide us to some degree.

Can You Afford to Retire?

In these uncertain times, it is natural (for Baby Boomers anyway) to wonder whether retirement or partial retirement may be financially viable. We have seen several articles discussing how much savings may be necessary to enjoy a “comfortable” retirement. In this post, we remind our readers that with the help of one of our Actuarial Budget Calculators for retirees (Single or Couples), and just a little bit of number crunching, you can derive a pretty good idea of how much you may need. We point you to our post of August 25, 2019, “Is $1 Million of Savings Enough?” for a step-by-step example of the approach we recommend. 

Actuaries Discuss Retirement Budgeting Approaches

On July 13, 2020, the American Academy of Actuaries (AAA) released an Issue Brief entitled, “Actuarial Perspectives on Determining a Retirement Income Budget.”  This post will provide the perspectives of two retired actuaries on this AAA Actuarial Perspectives Issue Brief.

How to Fix Advisor Retirement Planning Models

After posting, we received the following comment on this post from David Blanchett: “While it's true some financial planning tools don't do the things you list, I wouldn't ascribe the problem to Monte Carlo models... since there are few, if any, limitations for Monte Carlo simulations. Therefore, you might want to change the header to something like "Common Financial Planning Programs" to reflect the fact it's not the model itself (Monte Carlo), rather the tools that have been built using the model that aren't as good as they could be (or likely will be as they evolve)!” We thank Mr. Blanchett for his constructive feedback and agree with him, but we point out that these problems are much more easily fixed in our deterministic actuarial models than in the Monte Carlo models typically used today by financial advisors.

Be Empowered to Own Your Own Retirement

In his July 17, 2020 Forbes article, Your Retirement Asset Drawdown Strategy Should Fit Your Personal Story, Steve Parrish says,

“Before addressing the legitimate assumptions tied to retirement planning, the advisor should first help create and tell a story for the retiree to show the bigger picture. An approach to drawing down retirement income should be laid out in order to see how true that story feels to the owner. If the story fits, the retirement plan has a better chance of blending with that retiree’s style.”

In this post, we will push back on Mr. Parrish’s premise that retirees need to be told stories about draw-down strategies as a first step in developing a plan for retirement, and we will propose following our Recommended Retirement Planning Process as a better alternative.

Quantifying Spending Needs Versus Spending Wants – Example

This post will present and discuss another example of our Recommended Financial Planning Process. As a follow-up to our last few posts, we will compare results for an example couple under the Actuarial Approach with less satisfactory results obtained using two alternative approaches.