If the assumptions used in your retirement decumulation plan (including the important assumptions that the assets you plan to receive, and the expenses you expect to incur in the future) are exactly realized, your Funded Status should remain approximately the same from year to year. If your (or your financial advisor’s) assumptions are too conservative, future experience will be more favorable than assumed, and your Funded Status will increase over time. Conversely, if your assumptions are too aggressive, future experience will be less favorable than assumed and your Funded Status will decrease over time.
Most retirees prefer to be somewhat more conservative than aggressive in the funding of their retirement liabilities. They prefer the possibility of future spending increases to future spending decreases, even if such spending decreases involve discretionary expenses that presumably are not as critical as essential expenses. On the other hand, most retirees don’t want to be overly conservative and prefer to enjoy increased spending early in retirement if at all possible. This conflict of preferences and the uncertainty of the future make retirement planning difficult. Some financial advisors attempt to address this issue by administering risk tolerance questionnaires and by asking clients to select between spending strategies that have varying “probabilities of success” or “probabilities of future changes.”
In this post, we will attempt to quantify how conservative certain sets of assumptions are when using the Actuarial Financial Planner (AFP) with different Funding Status targets. We will do this by using an example hypothetical individual and comparing calculated withdrawal rates for this individual with withdrawal rates under the 4% Rule.
Example
John is a recently retired 64-year-old with a current annual Social Security benefit of $25,000 and accumulated savings of $1,000,000. He has determined his recurring essential expenses to be $50,000 per annum. He will solve for his annual recurring discretionary expenses by running the AFP under alternative sets of assumptions about the future and solving for a Funded Status of either 100% or 120%. This will determine his spending budget for the year and the amount that should be withdrawn from his accumulated savings together with his Social Security benefit to provide his spending budget. The amount he expects to withdraw from accumulated savings is then expressed as a percentage of his accumulated savings and compared with 4% or 4.7%, percentage withdrawal rates under the 4% Rule.
To make the withdrawal rates in this example consistent with withdrawal rates under the 4% rule, we have made the example very simple in terms of expenses. We have assumed no non-recurring expenses, including no LTC expenses.
John starts with the current default assumptions: 5% discount rate for essential expenses, 8% discount rate for discretionary expenses, 3% annual rate of inflation and a lifetime planning period of 30 years. John’s age of 64 was selected for this post to produce the 30-year LPP under the default assumptions which is consistent with the assumed lifetime under the 4% Rule.
With a Funded Status target of 100%, John’s recurring spending budget under the default assumptions is $25,908, his total spending budget for the year is $75,908 and the amount to be withdrawn from his savings would be $50,908, or 5.09% of his accumulated savings.
The table below shows different withdrawal rates for John for different sets of assumptions and different Funding Status target percentages.
John’s Withdrawal Rates Under Different Assumptions and Funding Targets
Assumptions | Withdrawal Rate Funding Status Target: 100% | Withdrawal Rate Funding Status Target: 120% |
5%/8%/3%/30 | 5.09% | 3.49% |
5%/5%/3%/30 | 4.34% | 3.20% |
8%/8%/3%/30 | 6.10% | 4.67% |
5%/8%/3%/25 | 5.83% | 4.16% |
5%/5%/3%/25 | 4.99% | 3.74% |
8%/8%/3%/25 | 6.67% | 5.14% |
The percentages in the first row were developed using the default assumptions in the AFP for Funding Status targets of 100% and 120%. The percentages in the second row were developed assuming the same 5% discount rate is used for both essential and discretionary expenses and results would be expected to be similar to those produced by approach advocated by Dr. Wade Pfau, as discussed in our post of August 31, 2025. The percentages in the third row were developed assuming the same 8% discount rate is used for both essential and discretionary expenses and results would be expected to be similar to results produced by some financial advisors who make no distinction between expected returns on non-risky and risky assets.
The bottom three rows show results under the same set of assumptions as the top three rows with the exception that 25 years is used for the lifetime planning period rather than 30 years.
It should be noted that these calculations are relatively easy to perform using the AFP and its assumption override function.
The withdrawal rate under the 4% Rule fluctuates from time to time. For many years it was 4% (hence the name), but now Mr. Bengen has declared it to be 4.7%. In any event, the 4% Rule is thought to be a fairly conservative approach, which is why we used it for comparison with the results produced by the AFP.
Under the default assumptions, the AFP withdrawal rate results for John are slightly less conservative than under the 4% Rule for a Funding Target of 100% and more conservative than under the 4% Rule for a Funding Target of 120%. Other assumption sets can be more or less conservative than under the default assumptions. For example, we would have no problem if users wanted to assume a 10% rate of return (7% real) rather than the default assumption of 8% per annum on risky assets used to fund discretionary expenses.
Note that while we are using the 4% Rule withdrawal rates to determine the level of conservatism built into the AFP model and the default assumptions, we are not encouraging users to use the 4% Rule or any other systematic withdrawal rate approach to determine their spending budgets unless adjustments like separate reserves for non-recurring expenses are also made.
Summary
There are lots of levers in the AFP to make spending budgets more or less conservative, including changing assumptions about the future and funding status targets. If
- your risk tolerance is relatively high,
- you prefer increased spending early in retirement, and
- you aren’t overly troubled by the thought of decreasing discretionary spending in the future,
you may wish to use more aggressive assumptions and lower funding targets. If not, you can stick with the default assumptions, knowing that if these assumptions are indeed too conservative, your spending will likely increase in the future (assuming your assets are not unexpectedly reduced and you have accurately captured all your future expenses, including future taxes, medical expenses and long-term care expenses, etc.).
