The future isn’t going to happen as you (or your financial advisor) assume, and your spending goals and actual spending are likely to change over time. Therefore, as previously discussed in our posts of April 16, 2023 and October 24, 2023, your retirement plan should include how you will determine when future adjustments to your plan may be necessary. We believe it is important for a good retirement plan to implement a robust process for making necessary future adjustments, and this process is likely to be even more important than the projection tool, or metric, used to measure the financial status of your plan.
We at How Much Can I Afford to Spend in Retirement recommend the following process for determining when future adjustments to your plan may be necessary:
Actuarial Approach--Three Key Planning Steps
- Measure your Funded Status (assets/liabilities) at the beginning of each year
- Monitor your Funded Status from year to year, and
- Manage your spending, assets and risks in retirement as necessary
With respect to managing your spending in the third bullet above, we suggest using the following guardrails:
Spending Guardrails: If your Funded Status falls below 95%, you should consider decreasing discretionary spending, and if your Funded Status exceeds 120%, you may consider increasing discretionary spending.
We believe the Funded Status metric used in the Actuarial Financial Planner is a straight-forward and robust metric and, when used with the process above, can help households (and their financial advisors) determine when plan changes may be necessary. In our opinion, it is a much better metric for this purpose than the probability of success metric typically used by financial advisors in Monte Carlo projections. As discussed in our previous post, it is also a much better metric for helping households make financial decisions by providing a quick and understandable answer to the question, “How will my Funded Status be affected by this decision?”
Summary
Determining
when your plan needs to be adjusted in the future is just part of good
planning. To manage future adjustments, you need a good process and good
metric or two. If you (or your financial advisor) don’t already use it,
we recommend trying the Actuarial Approach.
