Why is the Actuarial Profession Reluctant to Advance Actuarial Solutions to the Decumulation Problem?

As a retired actuary who advocates the use of basic actuarial principles and processes to help retirees and near retirees make better financial decisions, I frequently wonder why my profession is so reluctant to advance actuarial solutions to the problem of decumulation in retirement. In this post, I will discuss:

• Mission and vision statements of the two major actuarial bodies in the U.S. (and how advancing an actuarial approach can be considered entirely consistent with these statements)
• Fundamental concepts of actuarial science that the actuarial bodies appear to ignore when providing planning advice to retired households (and an example), and
• Possible reasons why the actuarial profession in the U.S. is reluctant to advance actuarial solutions

Mission and Vision Statements of Two Major U.S. Actuarial Organizations

• The American Academy of Actuaries’ mission is to serve the public and the United States actuarial profession.
• The vision of the American Academy of Actuaries is that financial security systems in the United States be sound and sustainable, and that actuaries be recognized as preeminent experts in risk and financial security.
• Society of Actuaries (SOA) mission--Through education and research, the SOA advances actuaries as leaders in measuring and managing risk to improve financial outcomes for individuals, organizations, and the public.
• Society of Actuaries vision-- Actuaries are highly sought-after professionals who develop and communicate solutions for complex financial issues.

I don’t find anything in these statements that would prevent the U.S. actuarial organizations from advocating the use of basic actuarial principles and processes to help retirees and near-retirees make better financial decisions. In fact, I would argue these statements support just the opposite.

Fundamental Concepts of Actuarial Science

For many years, actuaries have been using basic (or fundamental) actuarial principles (or concepts) to help sponsors of financial systems accomplish financial goals. These fundamental actuarial concepts include:

• Making assumptions about the future 
• Time value of money 
• Concept of probabilities 
• Mortality 
• Use of actuarial present values 
• Use of a generalized individual model that compares assets with liabilities 
• Periodic gain/loss adjustment to reflect experience different from assumptions (annual valuations), and 
• Conservatism

These principles (and others that may not necessarily be applicable to a personal financial situation) are conveniently summarized in the 1989 monograph by Charles Trowbridge entitled, Fundamental Concepts of Actuarial Science. 

For some reason, the actuarial profession appears to ignore these basic actuarial principles when providing guidance to retirees and near retirees. For example, in their “landmark effort examining the major decisions encountered in retirement” entitled, Managing Retirement Decisions, the SOA Committee on Post Retirement Needs and Risks says:

“Many retirees have money in IRAs, 401(k) plans or other account-based retirement plans. One option is to leave the funds invested and, depending on the plan’s provisions, withdraw funds on a fixed schedule. To make withdrawals, they could use a popular rule of thumb called the “4 percent rule”. This suggests that, by investing appropriately, retirees could potentially be able to withdraw about 4 percent of their account balances each year and have the funds last for 30 years. Assuming a retirement account invests about 60 percent in stocks and 40 percent in bonds, a person using the 4 percent rule might expect to withdraw $4,000 per year (or $333.33 per month) for every $100,000 saved.” (From Designing a Monthly Paycheck in Retirement)

Ignoring the fact that this isn’t exactly how the 4% Rule operates, this rule of thumb withdrawal strategy involves none of the basic actuarial principles discussed above.

In other literature prepared by the actuarial bodies, writers have focused on the retirement “income” that may be generated by withdrawals from accumulated savings. This income can either be generated from adopting a Strategic Withdrawal Plan (like the 4% Rule) or as the difference between a fixed real dollar spending goal and income from other sources. We have no problem with this general concept but point out that under a more robust actuarial approach, the annual income (withdrawal) can be determined as the difference between an actuarially determined spending budget that more accurately reflects household spending goals and income from other sources.

So, why the resistance by the U.S. actuarial bodies to advocating the use basic actuarial principles for financial planning in or near retirement. I really don’t know, and it makes no sense to me (like a lot of things I experience these days), but I briefly explore some possible reasons below.

Possible Reasons why the actuarial profession is reluctant to advance actuarial solutions to the decumulation problem

• Stepping on financial advisor profession toes? I would argue that recommending proven actuarial strategies to financial advisors to ultimately help their clients is not stepping on their toes. Having the ability to develop a sound and sustainable financial plan would strengthen their ability to consult with clients and would just be another arrow in the financial advisor’s quiver.
• Too complicated? Actuarial present values can be difficult to calculate, but once that hurdle is cleared in a model, the math becomes fairly easy to understand and interpret. I don’t believe that the profession really wants to imply that individuals and financial advisors are too dim to understand how relatively simple actuarial models and processes can work.
• Too simple? Many individuals and financial advisors believe that stochastic (Monte Carlo) models are inherently superior to deterministic models. As discussed in several of my recent posts, I reject this notion as it applies to annual financial planning in retirement.
• Not enough potential revenue for actuaries? I’d like to believe that the profession is not this cynical.
• Not current practice? I understand that it is difficult to persuade individuals or organizations to switch from prevailing practices. That does not mean, however, that it would not be in their best interest to do so.
• Personality conflicts with those who recommend actuarial approaches? Huh? Who could possibly have personality conflicts with me?

Summary

The Actuarial Financial Planner uses basic actuarial principles similar to those used by pension plan actuaries and Social Security actuaries to measure the financial status of pension plans and Social Security. It is a robust approach that may be used by individuals and financial planners for household financial planning in or near retirement. I believe the AFP, or possibly a more generic actuarial approach, should be advanced by the two actuarial bodies in the U.S.