The S&P 500 closed just under 4,000 today and is down approximately 16% year to date. The default assumption for returns on risky investments in our Actuarial Financial Planner (AFP) workbooks is 6%, so to date, we are looking at actuarial losses in the neighborhood of 20% on Upside Portfolio assets invested in equities for 2022. Of course, the equity markets may bounce back tomorrow, next week or next month, and these losses may be completely eliminated by year end.
So, is it too early to start thinking about adjusting our 2022 spending to reflect possible stock market losses in 2022? We have no idea because we have no idea what will actually happen during the remaining eight months of the year.
However, we do know that some of our readers like to make adjustments in their spending budget as the year progresses to avoid a larger change at the beginning of next year. We heard from a recent retiree, Jerry Kiefer, who likes to look at his retirement finances on a monthly basis, and we discussed with him how one might use our actuarial workbooks to do this. As a result, we have decided to add several new items to our AFPs:
- Expected EOY Accumulated Savings (Floor)
- Expected EOY Accumulated Savings (Upside)
- Expected EOY Accumulated Savings (Total)
- Expected Withdrawal from Accumulated Savings (for the year), and
- Expected Withdrawal as a % of total Accumulated Savings
If you assume that all the investment losses from stock market decreases will occur in the Upside Portfolio, you can multiply the expected actuarial loss for the year by the Expected EOY Accumulated Savings (Upside) to get a feel for the present value of discretionary expenses that may need to be reduced as a result. For example, if we assume the expected EOY Accumulated Savings (Upside) is $370,000, this amount is substantially all equities, and the expected actuarial loss for the year on equities is 20%, we are looking at a possible reduction in the present value of discretionary spending next year of $74,000 (0.2 X $370,000). If you go to the PV Calcs tab in the AFP and look at the calculations of present values of recurring discretionary expenses, you can see the annual amounts of recurring discretionary expenses that produce a present value of approximately $74,000, or you may decide to reduce some non-recurring discretionary expenses with the same present value (or some combination of the two).
Of course, you can always
- Decide to wait until next year to worry about investment losses incurred during 2022,
- Dip into your Rainy-Day fund to cover the losses,
- Take a part-time job to cover the losses, or
- Smooth the losses over several years
Conclusion
We generally tend to look at the AFP at the beginning of each year when we do our annual valuation. This means that we generally tend to ignore market ups and downs during the year. However, if you want to reflect actual experience more frequently than once per year, that is ok with us. We have added several items to the AFP that may help you do this.
