Plan on Future Adjustments to Your Retirement Plan Part II

This post is a follow-up to our post of April 16, 2023. In that post, we said,

“In our ‘real world,’ lots of things can happen in the future that can affect the ratio of household assets to household spending liabilities, including variations in:

• Annual investment returns (i.e., past performance is not a guarantee of future results),

• Longevity,

• Annual inflation (or other rates of increases or decreases in household expenses),

• Spending (this is a huge source of potential variability) and spending goals,

• Sources of income (i.e., Social Security or rental income)

• Assumptions about the future

All these things make it very difficult to predict the future with any degree of accuracy.” In light of these variations, we therefore concluded that it was prudent for retirees to plan on future adjustments in their retirement plans.

Automatic Funded Status Adjustments for Social Security is a Great Idea

This month, in Any Social Security Legislative Package Should Include an Automatic Adjustment Mechanism, Alicia Munnell, Director of the Center for Retirement Research at Boston College, recommended that Congress include an automatic adjustment mechanism to maintain Social Security’s desired funded status on an ongoing basis as part of the next round of Social Security reform. 

Actuaries Continue to Ignore the “Valuation Date Creep” Elephant in the Social Security Financing Room

This post is a follow-up to my July 3, 2023 Advisor Perspectives article, Applying the Actuarial Process to Retirement Planning, where I encouraged financial advisors to employ the same actuarial process for retirement planning that Social Security actuaries employ for Social Security financing.  In that article, I outlined the following six-step planning process and included an illustration showing how this process is applied to Social Security:

1. Make reasonable assumptions about the future (generally deterministic, not stochastic).
2. Calculate present values of assets (including future sources of income) and liabilities based on relevant demographic information, system provisions and assumptions made.
3. Periodically (generally annually) compare estimated present values of assets to liabilities to determine the system’s funded status (snapshot comparison).
4. Maintain a history of the system’s funded status over time and note trends.
5. When warranted or required, make changes to assets or liabilities (or both) to restore desired funded status (and/or to address possible cash flow issues).
6. Periodically evaluate/stress test assumptions to see if they need to be changed or to assess risk.

Is It a Good Time to Buy That Single Premium Immediate Life Annuity?

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

• based on life expectancy, or 50% probability of survival, and
• based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of September 17, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of January 9, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Manage Your Financial Risks in Retirement Like an Actuary

In his August 7, 2023 Advisor Perspectives article, Larry Swedroe, head of financial and economic research for Buckingham Wealth Partners, discusses what he calls the seven great “challenges” to retirement plans today. According to Mr. Swedroe, these challenges are:

• historically high equity valuations;
• historically low bond yields;
• increasing longevity;
• the potential need for expensive long-term care;
• the failure of government to fully fund the Social Security and Medicare programs;
• the likelihood of slower economic growth due to the rising debt-to-GDP ratio; and
• the end (and even likely reversal) of favorable tailwinds for corporate profits (falling interest rates, profits growing faster than GDP, and falling tax rates).”

Six of Mr. Swedroe’s challenges involve the asset side of a retired household balance sheet while two of them (increased longevity and the potential need for expensive long-term care) primarily involve the spending liability side of the household balance sheet. These challenges (and others discussed below) translate into increased “risks” that the historical assumptions frequently used in retirement planning projections by many financial advisors in Monte Carlo models or in other static planning approaches (like the 4% Rule) may be too optimistic. Fortunately for retirees, these risks can be managed by using the basic actuarial principles and processes advocated in this website and discussed below. 

Retirement Planning is Not an Event; It’s a Process

I recently received an email from the folks at Retirement Researcher inviting me to attend their latest Retirement Challenge. The preamble to their invitation said,

“Retirement planning isn’t an event… it’s a process, Ken.”

We couldn’t agree more, and although we have tried many times in this website to do so, we can’t say it any better. Successful ongoing planning in retirement depends less on the planning model employed and the accuracy of the assumptions used in the model and more on the process used to address deviations of actual and assumed experience as they occur.

American Academy of Actuaries New Social Security Tool is Also Deficient in Alerting the Public to Potential Cash Flow Issues

This post is a follow-up to our post of July 29, 2023 where we took the Academy to task for removing three important caveats about the Social Security Challenge tool and, therefore, potentially misleading the public about the long-term effectiveness of possible system “fixes.” In this post, we will discuss yet another feature of the tool that may also mislead the public about the effectiveness of these possible “fixes.” This feature ignores the potential negative impact on system assets of overly deferring the revenue increases or benefit reductions necessary to restore system’s actuarial balance. Thus, while certain changes may achieve actuarial balance (and even earn a “You’ve Solved It” pat on the back from the tool), these changes aren’t expected to keep the OASDI Trust fund from running out of money during the entire 75-year projection period, and therefore, should not be considered as viable, much less as a “fix.” After providing some background, we will discuss an example.

Why Did the American Academy of Actuaries Remove Important Caveats from its Social Security Reform Menu Tool?

Almost seven years ago, the American Academy of Actuaries added the following language to its Social Security Game to avoid misleading the public regarding changes that may be required to bring the system back into actuarial balance:

“The following should be noted when interpreting results from the Social Security Game:

• The 75-year actuarial balance calculation used in the game does not consider significant revenue shortfalls expected to occur after the end of the 75-year projection period, and thus possible solutions illustrated in this game are generally not sufficient to achieve “sustainable solvency,” a concept discussed in the Trustees Report.
• The possible solutions assume immediate adoption of System changes, rather than gradual implementation. If changes to the System are gradually implemented, the required increases in tax revenue or benefit decreases will need to be larger than noted in the game to achieve actuarial balance.
• The success of reforms will depend on how well actual future experience compares with the assumptions made by the trustees and the Social Security actuaries. There is no mechanism in current Social Security law to maintain the program’s actuarial balance once it has been achieved. Thus, there can be no guarantee that the System’s long-term problem will be “solved” for any specific length of time by enacting various system changes. “

Critical Planning Lesson Learned from Social Security

This post is a follow-up to my post of June 11, 2023, where I outlined the general actuarial process that we recommend for ongoing planning in retirement and my Advisor Perspectives article of July 3, 2023, where I illustrated how this same process is applied to Social Security. Several readers questioned why I illustrated the application of the general actuarial process using Social Security since, according to them, it clearly hasn’t worked very well for our primary U.S. retirement system. In this post, I will respectfully disagree with those readers and point out that not only is this proven actuarial process exceptionally robust, but it has actually worked quite well for Social Security and other financial systems. Notwithstanding, there is, an important lesson involving Steps 4 and 5 of the process that we can learn from Social Security when planning our own retirements. 

Life Expectancy vs. Lifetime Planning Period

The inspiration for this post was a recent conversation I had with my buddies at our weekly R.O.M.E.O (Rossmoor Old Men Eating Out) lunch and gab session. The exciting topics we discussed included:

• How much longer can we expect to live?
• How much longer should we plan on living? and
• What is the likelihood that the President of the United States will die in office during the term starting January 20, 2025 given the two likely candidates at this time.