Is Your 94% Monte Carlo “Safe” Retirement Plan Still Safe?

Inspiration for this post comes from Michael Finke’s excellent Advisor Perspective article, “How Financial Plans Must Adapt to Market Crashes.”  In this article, Dr. Finke notes, “The Monte Carlo analysis only shows the probability of success at a single moment in time.”  Subsequent investment returns in excess of the average return assumptions baked into the Monte Carlo model will increase the probability of success, and returns below these assumptions will reduce the probability of success.  He points out that the market’s recent decline in response to the coronavirus pandemic may have had a significant negative effect on your previously calculated financial retirement plan probability of success.

Good Time to Up Your Financial Knowledge Game

It is possible that this Coronavirus pandemic will produce significant changes that will result in your government and your employer assuming much more responsibility for ensuring your financial and physical well-being.  Even though we are actuaries, we aren’t able to actually predict what will happen.  When planning your future, however, you can assume:

• that you will be taken care of by some third party or someone else,
• you will be largely responsible for taking care of yourself, or
• some combination of these two alternatives will emerge.

Ok Retirees, What is Your Plan Now that Stocks Have Entered a Bear Market?

Despite a 6% increase today (March 17), the S&P 500 index is down almost 22% for the year and almost 25% for the last month.  We are now officially in a Bear Market.   We have been reading lots of recommendations from retirement experts on what retirees should be doing in response.  Therefore, we thought we would add a few of our thoughts on the subject. 

Your Retirement Plan Should Incorporate Reasonable Goals, Assumptions and Processes

In his March 11, 2020 guest post in Michael Kitces Nerd’s Eye View, Charles Fox  “shares how a more robust analysis that accounts for real world outcomes and the potential for retirement delay (or retiring early) can be a powerful tool to really help clients plan for their goals.”  Like many financial advisors, Mr. Fox is a strong proponent of using Monte Carlo modeling as a better way to communicate risks and enable clients to make informed decisions (than under Mr. Fox’s straw-man deterministic model).  And while we have no problem with Monte Carlo modeling, per se, we believe (as discussed most recently in our post of October 8, 2019) that the purpose of the calculations and the assumptions and processes employed in the approach are much more important factors for developing a reasonable retirement plan than the type of the model utilized.  We encourage you to read the Kitces post and compare the analysis suggested by Mr. Fox for his hypothetical person, Wendy, with the analysis that Wendy could obtain by using our Actuarial Budget Calculator (ABC) for Single Pre-Retirees. 

What is the Cost of Real Dollar Lifetime Retirement Income?

Based on financial economics principles, we recommend making assumptions about the future in our Actuarial Budget Calculator (ABC) workbooks that are approximately consistent with those used to price inflation-adjusted annuities.  In part, we recommend these assumptions (rather than more optimistic assumptions based on expected earnings) be used to determine the “market value” of one’s spending liabilities because, in theory, one could settle (or defease) some or all of their lifetime spending liabilities by going out and actually purchasing such an annuity.

Updated Glossary

As you may know from our biographies, we are two retired Fellows (of the Society of Actuaries) here at How Much Can I Afford to Spend in Retirement.   I (Ken) do most of the initial post drafting and Bobbie does most of the post review and correction.  In her review capacity, Bobbie does her level best to replace technical actuarial jargon, and other technical jargon, with English.  She takes her job of making the posts more understandable for a wider audience very seriously.  She will frequently ask me, “if I don’t understand what you are talking about, how do you expect your non-actuarial audience to understand?”

In pursuit of enhancing understanding of our posts, Bobbie has recently updated the glossary of terms that we frequently use.  You will find it in the “Glossary” section.  Feel free to suggest additional terms or changes you would like to see in this section, or elsewhere in our website, to make this site more useful to you.

Recommended Financial Planning Process for Retirees and Near-Term Retirees Example #2--Pensions are Nice

Every once in a while, we get an inquiry from a new reader asking us to briefly summarize the process we recommend for determining the financial feasibility of retirement for retiree wannabes or for determining spending budgets and possible investment strategies for actual retirees.  Recently, we have been pointing such readers to our posts of August 25, 2019 (Link 1)(Link 2) for a description of our recommended seven-step process and a numerical example.   However, we realize that as time passes, not all of our readers may be familiar with posts that are six months or more old.  Therefore, this post (and we intend periodic future posts) will revisit our recommended process and walk you through a different example each time.

How Much Can I Afford to Spend in Retirement Turns Ten

In March, 2010, our website started with publication of “Self-Insuring Your Retirement?  Manage the Risks Involved Like an Actuary.”  Since around 2005, I had been trying to find a home for this article (or articles similar in concept that advocated the same basic actuarial principles I had used as a pension actuary), but AARP, EBRI and the various US actuarial organizations were just not interested.  As I was about to retire in 2010, one of my younger work associates, Kin Chan, mentioned to me that websites were the new way to self-publish, and maybe I should explore that option.  Thanks to Kin’s suggestion and his help setting up our website, How Much Can I Afford to Spend in Retirement was launched.