Friday, June 2, 2017

Society of Actuaries Confirms Impact of Continuing to Work on Spending Budget

In our posts of November 14, 2016 and April 28, 2014, we discussed the impact, on a hypothetical retiree’s spending budget, of continuing to work rather than retire.  Using the annuity-based pricing assumptions we recommend in our website to determine your Actuarial Budget Benchmark (ABB), we determined that a typical spending budget may increase by as much as 10% per year because of deferring retirement (assuming annuity purchase rates remain relatively constant throughout the deferral period).

In a recently revised retirement decision brief entitled, “Big Question: When Should I Retire?” the Society of Actuaries (SOA) confirmed our near 10% per year increase calculation for a single female named Joan.  The SOA brief indicates, “Joan would see a 37% increase in monthly income if she delays retirement for four years.”  The SOA reached this conclusion by

  • converting Joan’s expected 401(k) balance, at various retirement ages, to a monthly income, 
  • using recent inflation-adjusted annuity purchase rate quotes obtained from Hueler Investment Services, Inc., and 
  • adding the result to Joan’s projected Social Security benefit payable at the various ages.
Like our analysis, the SOA analysis also assumes that annuity purchase rates will remain relatively constant throughout Joan’s projected period of continued employment.

Not only were we pleased to see confirmation of our previous posts, but we were happy to see that the SOA’s monthly spending budget calculations at Joan’s possible retirement ages were very consistent with our ABB calculations.  For example, if she retirees at age 66 and spends her entire Social Security benefit and annuity at that age, the SOA indicates that her monthly spending would be $2,334, or $28,008 for that first year.  By comparison, our ABB calculation for Joan produces a spending budget at age 66 of $2,327 per month, or $27,924 for that year (or about 99.7% of the SOA estimate).

If you like how the SOA used an annuity-based pricing model to develop a spending budget in this relatively simple example for Joan, you will love it when you use our Actuarial Approach to develop a spending budget or ABB for your more complicated situation.

All of the SOA’s retirement decision briefs, including the one referenced above, may be found here.