Friday, March 15, 2024

Financial System Sustainability Superstars

Actuaries measure and monitor the health of financial systems by systematically comparing assets and liabilities and making adjustments when necessary to ensure system sustainability.

You can do the same thing for your personal financial system/retirement plan with assistance of the Actuarial Financial Planner (AFP) and by following the general actuarial process.

For more discussion of the general actuarial process, see our post of August 23, 2023.

Wednesday, March 13, 2024

Simplify Your Retirement Planning

As discussed in prior posts, the key to successful retirement planning is to

  • annually determine your Funded Status,
  • monitor it from year to year and
  • Adjust spending when your Funded Status falls outside pre-determined guardrails (suggested: 95%, 120%)

In her recent Go Banking Rates article, Hanna Horvath outlines six key steps to building an effective retirement plan and spending budget. We agree that the steps outlined by Ms. Horvath are important, but each of these steps (and much more) is anticipated in the simpler process we recommend. 

Why does simplicity matter? You are much more likely to adopt and follow an approach if it is relatively easy to understand and to implement. Entering relevant data into the Input section of the Actuarial Financial Planner enables you to quickly develop your household Funded Status, and therefore, build a more effective retirement plan and spending budget.

Saturday, March 9, 2024

We’ve Updated the Actuarial Financial Planner Models

In response to suggestions from several of our readers, we have added cells to the AFP models to permit inputting of additional non-recurring income and expense items. These new cells will enable you to estimate present values of items such as:

  • Social Security survivor benefits
  • Survivor benefits under Joint and Survivor annuities
  • Future home sales
  • Possible future Social Security cuts, and
  • Many types of expected future non-recurring expenses

Saturday, March 2, 2024

Simple Key to Retirement Planning Success

Key: You should determine your Funded Status annually and monitor it from year to year.

Why? Your Funded Status is a summary statistic that reflects actual experience and can keep you on track to meet your spending goals in retirement.

For more discussion of the importance of determining and monitoring your Funded Status, and why doing so is superior to using the 4% Rule (and its many variations) or typical Monte Carlo models, see our post of April 16,2023.

To determine your Funded Status, download and complete one of our Actuarial Financial Planners from the Spreadsheets section of our website.

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.