The Future Won’t Happen as Assumed

Thanks to Justin Fitzpatrick at Nerd’s Eye View for his recent article reminding us that planning assumptions about the future (in his article, mortality/longevity assumptions) are just assumptions that may not (generally won’t) be exactly realized as actual future experience emerges. He suggests that such assumptions should be monitored and tested periodically so that the risks to the client’s plan resulting from differences between actual future experience and assumed experience can be assessed and communicated to the client for the purpose of possibly changing the client’s plan.

Actuaries Double Down on Questionable Primary Cause of Social Security’s Financial Deterioration

Last week, the American Academy of Actuaries (AAA) released An Actuarial Perspective on the 2024 Social Security Trustees Report. This Issue Brief was released about six months after the release of the brief covering the 2023 Trustees Report that we discussed in our post of January 20, 2024.

Like the previous issue brief, the 2024 brief includes a shaded [added emphasis] area entitled, “Why Didn’t the 1983 Social Security Reform Work Out as Expected?” These briefs imply that, for the most part, the shortfall since 1983 resulted primarily from economic factors, including the growth of taxable payroll falling below expectations and lower than expected portfolio returns. 

Good Time to Check Your Client’s Funding Buckets

Be sure to read our latest Advisor Perspectives article about the “buckets” used to fund essential and discretionary expenses in retirement under the Actuarial Approach.

500th Post—We’re Retiring

This is the 500^th post of How Much Can I Afford to Spend in Retirement. The primary purposes of this post are to:

• Celebrate our 500^th post,
• Announce our retirement from active blogging, and
• Thank those who have helped us with the website in one way or another over the past 14 years

Retirement 

What does retirement mean in this context? It means that we are planning to cut way down on the quantity of our posts to pursue other goals in retirement. It does not mean that we won’t infrequently update the Actuarial Financial Planner spreadsheets, or that we won’t respond to reader comments or questions about the spreadsheets or maybe even add a new post infrequently.

We still believe that the Actuarial Approach (with its deterministic Actuarial Financial Planner model, general actuarial process and suggested spending adjustment guard-rails) is a superior approach for determining household spending in retirement. We also still believe that you should be using the Actuarial Approach in lieu of, or in addition to, the approach you are currently using for this purpose.

We simply no longer plan to respond to each financial planning opinion we read in the press that suggests otherwise. 

What Percentage Drop in Your Assets Might Trigger a Reduction in Your Discretionary Spending?

Nice to see two more recent articles in the retirement income press discussing the advantages of dynamic retirement approaches like ours that use guardrails to adjust spending in retirement. These two articles are:

• “Why Guyton-Klinger Guardrails Are Too Risky For Most Retirees (And How Risk-Based Guardrails Can Help)” and
• ‘Probability of Success’ Doesn’t Mean What Your Clients Think It Means
  

In the first article, the authors say:

“We think including spending adjustments in retirement planning is a major step forward.”

In the second article, the author says”:

“Retirement planning that rejects success/failure framing can help clients understand that a realistic retirement journey involves not failure, but adjustments.

Advisors can help clients plan for those adjustments by establishing a “spend more” guardrail that tells clients when their risk of underspending and regret is too high, and so they can afford to live a little and spend more. It also means setting a “spend less” guardrail that tells clients when their risk of overspending is too high, so they should find a way to tighten the belt or adjust their goals to bring that risk down.”

We agree.

Trying to Help Households Determine How Much They Can Afford to Spend in Retirement

It’s been almost 14 years since our first post on How Much Can I Afford to Spend in Retirement? This post is our 498^th post. As implied by the title of our website, our primary goal is to help individuals (or financial advisors for those individuals) determine how much they (or their clients) can afford to spend in retirement. Unlike most financial advisors, however, we attempt to do this by applying proven actuarial principles and processes to the decumulation problem.

Does Your Retirement Plan Have Spending Guardrails?

Ongoing planning in retirement involves periodically assessing whether spending may be increased or must be decreased to remain on track. In his recent Kitces.com article, How Communicating Guardrails Withdrawal Strategies Can Improve Client Experience and Decrease Stress, Dr. Derek Tharpe says:

“However, the results of these [Monte Carlo] simulations generally don't account for potential adjustments that could be made along the way (e.g., decreasing withdrawals if market returns are weak and the probability of success falls, or vice versa), making them somewhat less useful for ongoing planning engagements where an advisor could recommend spending changes if they become necessary.”

He also notes:

“Nonetheless, while these thresholds and the dollar amount of potential spending changes might be clear in the advisor's mind, they often go unspoken to the client. Which can lead to tremendous stress for clients, as they might see their Monte Carlo probability of success gradually decline but not know what level of downward spending adjustment would be necessary to bring the probability of success back to an acceptable level.”

If your retirement plan does not have spending guardrails, or your spending guardrails are “uncommunicated” by your financial advisor, you may wish to use the Actuarial Approach set forth in this website, or encourage your advisor to do so. For more discussion of our recommended guardrails, see our post of January 7, 2023.

Financial System Sustainability Superstars

Actuaries measure and monitor the health of financial systems by systematically comparing assets and liabilities and making adjustments when necessary to ensure system sustainability.

You can do the same thing for your personal financial system/retirement plan with assistance of the Actuarial Financial Planner (AFP) and by following the general actuarial process.

For more discussion of the general actuarial process, see our post of August 23, 2023.

Simplify Your Retirement Planning

As discussed in prior posts, the key to successful retirement planning is to

• annually determine your Funded Status,
• monitor it from year to year and
• Adjust spending when your Funded Status falls outside pre-determined guardrails (suggested: 95%, 120%)

In her recent Go Banking Rates article, Hanna Horvath outlines six key steps to building an effective retirement plan and spending budget. We agree that the steps outlined by Ms. Horvath are important, but each of these steps (and much more) is anticipated in the simpler process we recommend. 

Why does simplicity matter? You are much more likely to adopt and follow an approach if it is relatively easy to understand and to implement. Entering relevant data into the Input section of the Actuarial Financial Planner enables you to quickly develop your household Funded Status, and therefore, build a more effective retirement plan and spending budget.

We’ve Updated the Actuarial Financial Planner Models

In response to suggestions from several of our readers, we have added cells to the AFP models to permit inputting of additional non-recurring income and expense items. These new cells will enable you to estimate present values of items such as:

• Social Security survivor benefits
• Survivor benefits under Joint and Survivor annuities
• Future home sales
• Possible future Social Security cuts, and
• Many types of expected future non-recurring expenses