Wednesday, February 24, 2016

Tick All the Core Financial Planning Boxes with the Actuarial Approach

Thanks to Dr. Wade Pfau for another fine article on Retirement Planning.  His latest is called, “Eight Core Ideas to Guide Retirement Income Planning.”  In this article, Dr. Pfau presents the key messages and themes that guide his research and writing.  I have to say that his key messages are pretty darn consistent with the Actuarial Approach and recommended assumptions discussed in this website.

In his first key message, “Play the long game,“ Dr. Pfau recommends planning for a long life.  This recommendation is consistent with our recommendation to plan on living until age 95 or your life expectancy if longer.

His second key message is to try to find “efficient” solutions that will increase both lifetime spending and legacy goals.  While the Actuarial Approach can be used to determine which retirement income tools can maximize a retiree’s assets (the present value of future benefits under a given set of assumptions), it generally will not address the benefits of different tax strategies.

Wade’s third and fourth key messages caution retirees against using overly optimistic portfolio return assumptions.  Unless the retiree is significantly invested in cash, we recommend the approximate interest rate currently available to settle the retiree’s liabilities with annuity purchases, irrespective of the retiree’s actual investment mix (or alternative investment mix recommended by the retiree’s advisor).

Wade’s fifth and sixth key messages encourage retirees and their advisors to consider retirement income diversification strategies to better manage retirement risks.  These messages are certainly consistent with our recommendations and spending budget spreadsheets.

Wade’s seventh and eight key messages are the cornerstone messages of the Actuarial Approach.  Both Wade and I encourage retirees and their financial advisors to tackle the household retirement problem in the “same way that pension funds [and their actuaries] treat their obligations.  Assets should be matched with Liabilities with comparable levels of risk.” Wade prefers the term “Household Balance Sheet” where I use the term “Actuarial Balance Sheet” from my pension actuarial training. 

Bottom Line:  If you agree with Wade’s key messages/themes, you are going to like the Actuarial Approach.