Budgeting for Real-World Situations

This post is a follow-up to our post of March 3, 2018 where we discussed the distinction between Systematic Withdrawal Plans (SWPs) and Sustainable Spending Plans (SSPs).  In that post, we discussed why we believe it is important for you (or your financial advisor) to develop a SSP (and not use a SWP), particularly if your situation differs from the frequently overly-simplified situations assumed by many SWP advocates, academics and other retirement experts.  This post will discuss how the Actuarial Budget Benchmark (ABB) can be used together with our recommended smoothing algorithm to help you develop a robust SSP to properly handle most real-world situations.  We will also present an example to demonstrate how this SSP can work over a ten-year projection period and will encourage you (or your financial advisor) to model what your future spending budgets might be under reasonable assumptions so that you can test your financial plan.

Retired Actuary Comments on Proposed Changes to Actuarial Standard of Practice No.32 (ASOP 32) Applicable to Social Security

Because Social Security benefits are, for most people in the U.S., a major component involved in determining how much they can afford to spend in retirement, we periodically focus on Social Security financing issues in this blog (with apologies to our non-U.S. readers).  Most recently, we addressed some of these issues in our post of June 27, 2018, “A Slightly Different Actuarial Perspective on the 2018 Social Security Trustees’ Report”.

It is not “Absurd” to Express Expected Future Healthcare Costs as a Lump Sum Present Value

In his October 17 post, “Getting Real About (Annual) Health Care Costs in Retirement”, Michael Kitces discusses that, while the lump sum present value of expected healthcare costs in retirement may be “scary”, expected healthcare costs can become more manageable (or “plannable”) and less scary, to the average person, when expressed as a stream of annual costs with an equivalent present value.  He states “recognizing that health care costs may be ‘just’ about $5,000/year per person (or $10,000/year for a couple) for 20+ years of retirement is not necessarily as daunting as a $273,000+ lump sum obligation for retiree health care costs!”

ALRIE is a Better Nest Egg to Lifetime Income “Translator”

In his October 10, 2018 article, “Retirement savings:  How to translate your nest egg into monthly income,” Robert Powell suggests two possible ways of expressing accumulated savings as lifetime income.  According to Mr. Powell, the easiest way to do this is to obtain a quote for a single premium immediate annuity (SPIA) as, “Doing so will give you a sense of how much monthly income you would receive for life from an annuity based on the value of your retirement nest egg.” 

What’s the Plan, Betty and Stan?

Periodically in our blogposts we take the time to remind you that in addition to using the Actuarial Approach to help you develop a reasonable spending budget and keep it on track over time, you can also use it to model deviations from assumed future experience.  As discussed in our post of November 26, 2017, modeling deviations from assumed future experience can be valuable in helping you develop a more robust personal financial plan.  It gives you the opportunity to think about what you would do, for example, if:

• Your equity investments suffer a significant loss, 
• Your spouse dies, 
• Your or your spouses’ health deteriorates rapidly, 
• Your children need money, 
• You lose a source of income, or 
• Your house needs significant repairs
  

Will You Really Need to Generate More Lifetime Income in Retirement Than You Think?

Last week, the Wall Street Journal published an article questioning the fairly common rule of thumb recommended by many retirement experts that individuals need to replace about 70% to 80% of their pre-retirement pay in retirement.  The WSJ article, written by Dan Ariely and Aline Holzwarth, was titled, “How Much Money Will You Really Spend in Retirement?  Probably a Lot More Than You Think.”  For those unable to read the WSJ article, you can read a related article in MarketWatch entitled, Retirement is going to cost a lot more than you think—here’s what to do.  The authors of these articles argue that instead of needing to replace 70% to 80% of pre-retirement pay in accordance with the commonly used rule of thumb, you should be looking at funding income replacement of 130% or more of your pre-retirement pay.  This post will respond to these articles.  In summary, even though we are not particularly big fans of using the 70%-80% of pre-retirement pay rule of thumb, we are even less impressed with the authors’ recommended 130% of final pay rule of thumb.

Saving Some of Your Part-Time Employment Income in Retirement for Later

In today’s relatively tight labor market, some employers have been looking to fill employment positions by hiring their retirees on a part-time basis.  The current low unemployment environment presents an opportunity for retirees who either need additional income or who may be disenchanted with full retirement to negotiate a potentially more rewarding and more balanced work relationship with their former employer on a less than full-time basis.  This opportunity was discussed in the New York Times article, “In a Tight Labor Market, Retirees Fill Gaps their Previous Employers Can’t” (subscription may apply). 

Ten Possible Ways to Increase Your Current Retirement Spending Budget Under the Actuarial Approach

As soon as the ink had dried on our last post, in which we reminded readers that the only real way to guarantee the amount of retirement income you can expect to receive is through the purchase of life annuities, we started receiving feedback that we were being too conservative, and we should be giving equal (or more) time to self-insuring and more aggressive spending strategies.    In response to this feedback, this post will discuss more aggressive spending strategies and ten ways for you to possibly increase your current spending budget using the Actuarial Approach.  

There are No Guarantees if You Self-Insure Your Retirement

Periodically, we believe it is important to remind our readers that self-insuring one’s retirement is a risky business and the only real way to guarantee the amount of retirement income one can expect to receive from one’s accumulated savings is through the purchase of life annuities.  We are not necessarily recommending that you should do this (we don’t make investment recommendations); we are simply pointing out that there are risks associated with self-insuring that should be considered when developing your investment/spending strategies for retirement.

So, How Much Does It Take to “FIRE”?

For every nineteen people who have trouble saving much of anything for retirement, there is one on the other end of the savings spectrum who is almost religious in his or her zeal for saving and retiring early.  And more power to these folks.  As proof that these “hyper savers” actually exist and to learn more about their philosophies, you can visit the Reddit forum called “Financial Independence,” which is closely related to FI/RE (Financial Independence/ Retire Early).  According to the forum (which has almost 400,000 subscribers), “FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible.”