Saturday, April 30, 2016

Use the Actuarial Approach to Win the “Retirement Finance Game”

In three recent posts in The Retirement Cafe, Dirk Cotton, winner of the 2015 RIIA Practitioner Thought Leadership Award, has developed a “top-level” model for Retirement Planning.  In his third installment Dirk, who likes to use game theory in explaining his concepts, said “Retirement finance is a random walk along a Markov chain, or to a game theorist, a sequential game against nature. Each year we make forecasts based on what we know (our current financial status and the financial environment), what we expect to happen in the future, and what unexpected outcomes we believe we might experience in the future (risks). We make our move based on this analysis and our risk tolerance. Then nature takes its turn and we repeat.” I recommend reading all three of Dirk’s posts for a different (and eloquent) description of the complicated problem with which most of us retirees must struggle in order to meet our financial goals in retirement. 

I believe the Actuarial Approach (and its annual valuation, or “discrete-time states” process) is entirely consistent with the top-level conceptual model developed by Mr. Cotton and provides very useful tools to help retirees win the “retirement finance game.”