Use the Actuarial Approach to Implement Your “Safety-First” Retirement Income Plan

Several of our readers have asked us to compare:

• the retirement planning strategy discussed in Dr. Wade Pfau’s recent Forbes article and his new book, “Safety-First Retirement Planning:  An Integrated Approach for a Worry-Free Retirement” with
• the seven-step planning process outlined in our post of August 25, 2019, which is designed to help users determine the amount of assets necessary to fund essential and discretionary expenses (floor and upside portfolios) in addition to determining recurring and non-recurring spending budget data points.

Good News/Bad News—We Have Changed Our Default Assumptions for 2020 Spending Budget Calculations

In order to compare the market value of your assets with the market value of your spending liabilities and help you develop a reasonable spending budget for the year, we recommend default assumptions that are intended to be consistent with assumptions currently used to price inflation-adjusted annuities.  For 2019 spending budget calculations, these assumptions were: 

Developing a Reasonable Spending Budget—Monte Carlo Modeling vs. Actuarial Approach

In this post, we will once again push back on those who believe the most important characteristic of a retirement planning approach is whether the model used in the process is “deterministic” or “stochastic.”  We believe that the purpose of the calculations and the assumptions and processes employed in the approach are more important factors for developing a reasonable result than the type of the model.  In this post, we will focus on why we believe the Actuarial Approach can be a better approach than Stochastic (or probabilistic or Monte Carlo) models for the specific purpose of developing a reasonable spending budget for individuals or couples, especially for DIYers.  We also note that Social Security actuaries use a very similar approach to measure Social Security’s financial condition and the impact of proposed changes to the program.  This post is a follow-up to several of our posts on this subject, including our post of April 6, 2018.   Feel free to skip this post if you are just looking for a reasonable spending budget number and are not all that interested in diving into the technical details of spending budget calculation models.

Who Will be Responsible for Your Retirement?

Prior to adoption of Social Security in the U.S., many individuals and couples were dependent upon their families and their own personal savings to support themselves in retirement.  Post WWII, family support was mostly replaced by the three-legged stool concept of retirement funding, consisting of Social Security benefits, employer-sponsored defined benefit pension benefits and personal savings.  Over the last thirty years, however, with the advent of 401(k) type defined contribution (DC) plans, declining interest rates and longer lifespans, many defined benefit plans have been terminated by plan sponsors and replaced by DC plans.  Generally, benefits payable from today’s DC plans are lump sum distributions (that may be rolled over to individual retirement accounts), with relatively few DC plans today offering lifetime income distribution options.

Is $1 Million of Savings Enough?

According to the 18th Annual Transamerica Retirement Studies Survey, about 64% of respondents indicated that they needed to save less than $1 million at the time of retirement in order to feel financially secure.  The median amount cited as being needed in the 2017 survey was $500,000.  To develop their response,

Recommended Financial Planning Process for Retirees and Near-Term Retirees

Several of our readers have asked us to briefly summarize the financial planning process that we have been discussing in the past few months in our posts.  So, this post contains our recommended seven-step process designed to help you make better decisions about:

Make Sure Your Retirement Plan Properly Funds Your “Lumpy Expenses”

While most retirement plans anticipate smooth, constant-dollar spending from year to year throughout retirement, most of us just don’t spend that way.  Our actual expenses in retirement can vary significantly from year to year and therefore, the pattern of our future expenses may be “lumpier” than expected by our plan.  Not only is it likely that we will incur unexpected expenses but it is also likely that some of our expected expenses won’t be incurred every year.   As we said in our post of February 7, 2019, if you aren’t separately budgeting for these non-recurring lumpy expenses, you probably don’t have a robust retirement spending budget (or plan).

The Real Problems with Using the 4% Rule to FIRE

Shortly after our July 9 post encouraging retirees to consider shoring up their floor portfolios by establishing budget buckets of low-risk investments to fund their future essential expenses, Michael Kitces released “The Problem With FIREing AT 4% And The Need For Flexible Spending Rules” aimed at very early retirees (Financially Independent/Retire Early individuals, or FI’ers).   His post discussed “safe” withdrawal approaches based on the 4% rule.  This rule of thumb anticipates at least 60% investment in equities, and, when assets are equal to 25 times expected annual expenses, may indicate when assets for an individual with a thirty year lifetime planning period are sufficient to retire (1/.04 = 25 times expected expenses).

Ok Retirees, Now May be a Good Time to Shore Up Your Floor Portfolio

This post is a brief follow-up to our post of April 23, 2018, Ok Retirees, What’s Your Plan for Dealing with the Upcoming Bear Stock Market?  In that post we said, “At some point in the future, we are going to experience another bear market.  We don’t know when it will occur, but we feel pretty safe in predicting that it will happen.”  We suggested in that post that you use our five-year projection tab to stress test your spending budget for potential poor investment returns.

Better Budgeting with “Actuarial Budget Buckets”

In this website we encourage you to use the full functionality of the Actuarial Approach and our workbooks to help you develop a better spending budget and a better sustainable spending plan in retirement.  In 2019 alone, our posts on this topic have included: