As we have indicated many times in prior posts, 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, your retirement plan should include a process for determining when future adjustments to your plan may be necessary. We believe such a process is much more important than any model you may use to project the future.
Monte Carlo models touted by financial advisors are good one-and-done projection models that can show ranges and probabilities of future results based on assumptions about the future. However, these stochastic models don’t predict the future any better than deterministic models and, more importantly, they generally don’t provide a process for changing your plan when the future turns out to be different than assumed.
The Actuarial Approach recommended in this website provides a robust process for managing your assets and spending liabilities in retirement and a simple Funded Status metric to help you adjust your plan to better accomplish your goals. We recommend the following easy-to-follow guardrails be used to manage your assets and spending liabilities in retirement.
Asset Management Guardrails
Asset/Liability Comparison | Recommended Action |
PV Non-Risky Assets less than PV Essential Expenses | Consider Increasing Non-Risky Assets and/or decreasing expenses classified as Essential |
PV Non-Risky Assets greater than PV Essential Expenses | Consider increasing risky assets and/or increasing expenses classified as Essential |
Funded Status less than 95% | Consider increasing assets and/or decreasing spending liabilities |
Spending Management Guardrails
Asset/Liability Comparison | Recommended Action |
Funded Status less than 95% | Consider decreasing spending liabilities and/ or increasing assets |
Funded Status greater than 120% | Consider spending increases |
Funded Status greater than “Surplus” threshold percentage (e.g., 150%); | A “Nudge” For households who may be “behaviorally resistant” to increasing spending even when warranted: Consider transfer from Upside Portfolio to Surplus Bucket to reduce Funded Status to surplus threshold percentage |
You may find the following two recent Advisor Perspectives articles to be of interest in illustrating how helpful the Funded Status metric can be in your planning.
