Monday, December 7, 2015

Is the Actuarial Approach Really the Only Financial Planning Software Capable of Helping You Formulate an Actual Financial Plan?

This post is in response to Michael Kitces’ excellent December 7 post entitled, Is Financial Planning Software Incapable of Formulating An Actual Financial Plan?  I can’t improve on what Mr. Kitces has to say or how he says it, so I will simply encourage you to read his post. 

There is one statement, however, that Michael makes with which I will have to disagree:

“Answering a simple planning question like ‘how much do the markets have to decline before I need to cut spending in retirement, and how much would I need to adjust my spending to get back on track’ cannot be easily answered with any financial planning software available today!”

With all due respect to Mr. Kitces, I’m aware of at least one website that contains financial planning software that can easily answer these questions—this one.   The Actuarial Approach utilizing the “Excluding Social Security V 3.0” spreadsheet and its 5-year projection tab is available to anyone with access to the Internet and who has Microsoft Excel.  The 5-year projection tab allows retirees to see the effect on their annual spending budget (excluding income from Social Security, income from employment or miscellaneous income such as income from rental property) of variations of future investment return from the expected investment return used to determine the baseline spending budget under the Actuarial Approach.  It also tells users how to adjust spending to get back on track. 

I knew that the Actuarial Approach was an effective approach for developing a reasonable spending budget, but I didn’t realize that it was the only approach capable of helping you (or your financial advisor) formulate an actual financial plan.  If you don’t currently use it, you might want to give it a try.