The obvious reason that we like this particular column so much is because in it Dr. Milevsky advocates using the same basic financial economics principles (annuity based pricing of spending liabilities) that we advocate in our website to develop your Actuarial Budget Benchmark (ABB). He says:
“As such, the annuity price is effectively the cost of your retirement income plans and the only answer to the question posed in the title of this column. Any other answer involves extra risk, possibly invisible to the naked eye. It is often obscured from view thanks to heroic assumptions hardwired into financial calculators.”
In this column, Dr. Milevsky cautions us to be suspicious about retirement plan strategies (such as those that may be developed using Monte Carlo modeling or safe withdrawal approaches) that appear to offer higher levels of spending at little or no perceived additional risk.
Note that Dr. Milevsky is (and we also are) not recommending that retirees actually go out and purchase annuities, only that they be used to price the cost of retirement. Combining this pricing concept with basic actuarial principles yields your Actuarial Budget Benchmark (ABB), which provides an indication of potentially how aggressive or how conservative your current proposed spending plan may be.
As discussed in our post of June 27, you can use your ABB to help you develop an investment and spending strategy with which you are comfortable, based on:
- Your tolerance for future spending cuts
- The proportion of your retirement spending covered by sources outside of your investment portfolio, and
- The availability of reserves (such as Rainy Day funds, LTC reserves or flexible bequest motives, for example)