Actuaries Want Plan Sponsors to Provide More Complicated Benefit Statements

In its July 6, 2018 letter to Senator Johnny Isakson, sponsor of the Lifetime Income Disclosure Act, the American Academy of Actuaries (AAA) suggested several “improvements” to Senator Isakson’s act applicable to hard-copy defined contribution plan statements provided to plan participants.  As opposed to the relatively simple and straight-forward requirement proposed by the senator that at least one participant statement per any 12-month period contain “the lifetime income stream equivalent of the total benefits accrued with respect to the participant,” the AAA would like to see plan sponsors provide significantly more information to their participants.  Needless to say, this additional information would make the hard-copy benefit statement required by law much more complicated to prepare and potentially more confusing to participants.

One More Advantage of Using the Actuarial Approach—No Sequence of Return Risk

Sequence of Return Risk (SORR) is a common retirement planning risk discussed by financial advisors, academics and other retirement experts.  It is the risk of running out (or seriously depleting your) assets by continuing to spend constant amounts from those assets while experiencing an unfavorable sequence of investment returns.  In its unsmoothed form, the Actuarial Approach and Actuarial Budget Benchmark (ABB) advocated in this website is a dynamic approach that will avoid SORR.  It automatically recalculates the annual spending budget to maintain the balance between the market value of the retiree’s assets and the market value of the retirees’ spending liabilities.   As discussed many times in this website, if some other approach is used to develop a spending budget (because of a desire to smooth fluctuations, to establish a rainy day fund or for whatever reason), calculating the ABB annually can still serve as a valuable “data point” in the budget setting process.  At a minimum, it can tell you how much you need to reduce your spending in a down investment market to avoid SORR.    This post is a follow-up to our posts of June 27, 2016 and April 20, 2017, and its intent is to simply demonstrate mathematically why we make the claim that using the Actuarial Approach will avoid SORR. 

A Slightly Different Actuarial Perspective on the 2018 Social Security Trustees Report

Every year, the Social Security trustees release a new report discussing the financial status of the system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective” issue brief explaining the new report.  In an effort to provide our readers a slightly different perspective on the system’s finances, this post will discuss some of the issues we have with the AAA issue brief (and to a lesser degree, with the Trustees’ report).  This post updates our post of August 3 from last year which discussed the 2017 Trustees report/AAA issue brief.  Clearly, our post from last year had very little effect on the AAA, as most of the language in their 2018 Actuarial Perspective remains unchanged from their 2017 issue brief.  Before diving into our issues this year, however, we will attempt to provide just a little background.

Top Ten Reasons Not to Save Now for Retirement

With tongue planted firmly in cheek and with apologies to David Lettermen’s top ten lists, this post will discuss the top ten reasons why you shouldn’t be saving now for your retirement.  Before jumping right into these reasons, however, we are going to attempt to build your excitement level a little by providing a brief background on how retirement finances actually work.

We Have Updated Our Four Actuarial Budget Calculator (ABC) Workbooks

In our ongoing effort to simplify the present value calculations involved in the Basic Actuarial Equation used to help you develop a reasonable spending budget that is consistent with your financial goals, we have updated our ABC workbooks for:

• Single Retirees 
• Single Pre-retirees 
• Retired Couple 
• Pre-retired Couple
  

These Excel workbooks are available for download at no charge from the “Spreadsheets” section of our website.  We encourage you to download one or more of these workbooks and try them out.  Please remember to “Enable Editing” when you open the spreadsheets.

Wake Up Millennials: What the Latest Social Security Trustees Report is Telling You

On June 5th, the Social Security Trustees released their annual Trustees Report summarizing the financial status of the system.   In the press release announcing the new report, the Acting Press Officer of the Social Security Administration noted that the expected year of depletion of the system’s trust fund assets (under best estimate assumptions) remained at 2034, the same projected year of depletion as in the previous year’s report.   So, another year goes by and most of us simply shrug at this news and go about our business.

Expressing Projected Accumulated Savings as Lifetime Retirement Income—Good News for Defined Contribution Plan Sponsors

We are pleased to announce the release of a new workbook—The Actuarial Lifetime Retirement Income Estimator (ALRIE).  Like our other workbooks, this Excel workbook may be downloaded at no charge from the “Spreadsheets” section of our website.   This workbook is a pared-down version of our Actuarial Budget Calculator (ABC) workbooks and is focused on developing an estimate of the amount of real dollar monthly lifetime retirement income (in today's dollars) that may be generated from an individual’s (or couple’s) current and projected accumulated savings.  Unlike the ABC workbooks, it is not intended to help individuals or couples develop a sustainable annual spending budget, but it does employ the same basic actuarial and financial economic principles in its calculations.

Actuarial Budget Benchmark (ABB)—A Much More Robust Spending Algorithm

In our post of May 1, we talked about how the ABB differs from Monte Carlo models, and we sort of promised that we weren’t going to talk about this subject again for a while.  Subsequent to our post, our friend Dirk Cotton over at The Retirement Cafe also discussed this subject in his post of May 14, 2018.  Dirk did a very good job of explaining the different uses of these models (better than we did), so if you are still interested in this subject, we encourage you to read Dirk’s post.  We also recommend that you read it just because Dirk said some nice things about the ABB.  Because of our promise, however, we are going to keep this post very brief.

We Continue to be Baffled by the Two Primary U.S. Actuarial Organizations

One of the nice things about having your own website is that you don’t have to rely on the kindness of strangers to communicate your ideas.  Our mission at How Much Can I Afford to Spend is a simple one:   advocating the use of basic actuarial and financial economics principles to try to help reasonably intelligent numbers people make better financial decisions.  And while we include advice and free workbooks in our website in an attempt to fulfill this mission, we occasionally submit articles to other media to try to reach a larger audience.

The Search for Certainty in the Uncertain World of Personal Retirement Financing

This post is a follow-up to our last few posts discussing the pros and cons of stochastic modeling vs. the Actuarial Approach (including deterministic calculation of your Actuarial Budget Benchmark, annual valuations and periodic scenario testing).  Following our friend Dirk Cotton’s post of March 30 and our response post on April 6, we engaged in a number of very thoughtful and informative email discussions with Dirk on this subject, and Dirk added his post of April 23 outlining the limitations of simulations.  The substantive personal financing issues on which we and Dirk agree far outnumber the issues where we may have different viewpoints.  The purpose of this post is to bring this interesting discussion to a close on our end (at least for the time-being).  In order to avoid repeating a lot of what has been discussed in the recent posts, we will:

• Briefly summarize the stochastic model vs. Actuarial Approach discussion.
• Encourage you (or your financial advisor) to employ both models (or combine them) to facilitate better (more informed) financial decisions. 
• discuss new EBRI research and its implications, and
• attempt to tie these seemingly unrelated topics together.