Measuring and Managing Your Financial Risks in Retirement

In prior posts, we’ve discussed the three M’s that constitute the actuarial process for keeping your spending in retirement on track and consistent with your spending goals:

1. Measuring your Funded Status each year
2. Monitoring your Funded Status from year to year, and
3. Making changes in your assets or spending liabilities when your Funded Status falls outside a reasonable corridor (guardrails).

In this post, we will discuss two more M’s: Periodically Measuring and Managing your financial risks. If you have completed Steps 1 and 2 above and are contemplating increases in your spending plan this year, we suggest that now may be a good time to measure and possibly manage your financial risks before implementing your plan.

What’s the Present Value of Your Accumulated Savings?

If you are not an actuary, you may not be familiar with present values. This basic actuarial concept is integral to determining your Funded Status (the present value of your household assets/sources of income divided by the present value of your future expected spending) using the Actuarial Financial Planner (AFP) workbooks available on this website. By entering relevant information in the input section of our spreadsheets, the AFPs will calculate your present values and your Funded Status.

Why It’s Important to Monitor Your Funded Status from Year to Year

We encourage you to remember the following 3Ms when determining how much you can afford to spend in retirement:

1. Measure your Funded Status periodically (we recommend at least annually at the beginning of each calendar year)
2. Monitor your Funded Status from year to year, and
3. Make changes when your Funded Status falls outside a reasonable corridor (guardrails)

Some of our readers question why the second M is important. We will answer in this post.

It’s Time, Once Again, to Measure Your Funded Status

Happy New Year! It’s the time of year that we ask you to perform your actuarial valuation to measure your Funded Status. We have updated the Actuarial Financial Planner (AFP) spreadsheets for this purpose and encourage you to use the granular spending budget that we outlined in our previous post together with the updated AFP spreadsheets, to measure your January 1, 2025 Funded Status. 

Better Planning Starts with Granular Budgeting, Part II

This post is a follow-up to our post of November 19, 2024.  In it, we discuss how updating your spending budget each year is an important step in the process of successfully managing your finances in retirement.  We will also provide some tips on how to accomplish this task using the Actuarial Financial Planner.

For most retired households, spending is not linear from year to year.  It can vary significantly, especially if spending on non-recurring items is involved.  Therefore, static financial planning approaches that assume constant real-dollar spending from year to year (like the 4% Rule or Monte Carlo models that develop a probability that the household will be able to spend $X per year) can lead to under- (or over) spending in retirement, and just as important, can lead to spending that is inconsistent with household spending goals.

How Long Do You and Your Spouse Plan to Live?

This post focuses primarily on the implications of assuming, or planning, to live longer than one’s life expectancy. 

For the purpose of this post, we are going to assume that when you are asked how long you plan to live and you reply, “I plan to live to 95 (or 100),” you actually have a financial plan, and it involves assuming that you will die at age 95 (or 100).

Should You use a Dynamic Process with Guardrails to Keep Spending on Track in Retirement? Yes, But Not with a Monte Carlo Model Typically Used by Financial Advisors

This post is a follow-up to our post of March 7, 2021 and several other of our posts and articles noting that a model like the Actuarial Financial Planner (AFP) is a better model to use when employing a dynamic process to keep spending on track during retirement. 

The Actuarial Approach--Better Than The 4% Rule, Simpler Than Monte Carlo Modeling and More Effective Than Either

Looking to keep your spending on track and consistent with your spending goals in retirement? Forget the 4% Rule and complicated Monte Carlo simulations. Use the same basic approach/process that actuaries use for Social Security and pension plans. 

The Actuarial Approach involves:

1. Periodically (we recommend annually) comparing the present value of your assets with the present value of your spending liabilities to determine your Funded Status.
2. Taking appropriate actions when your Funded Status falls outside reasonable guardrails.

That’s it! And you can use one of our free Actuarial Financial Planners to perform the present value calculations. As discussed in our previous post, this process does involve annually entering your granular spending budget items and your sources of income as well as expected future increase rates for these items. But, we believe the effort you put into this annual process will be worth it.

Better Planning Starts with Granular Budgeting

Thanks to Rivan Stinson for teeing up the Actuarial Approach in Stinson’s recent Washington Post article titled, “Retiring soon? Plot a detailed budget first before tapping your 401(k).” In her article, Stinson writes,

“Once you make this granular budget, it’s time to crunch the numbers on how much your savings and investments, along with Social Security and a pension (if you have one), would cover.”

Creating a granular budget and comparing the present value of expected spending under the budget with the present value of household assets (including future payments from Social Security, annuities, pensions or other sources of income) to determine the household Funded Status are essential steps in the Actuarial Approach Recommended financial planning process.

How Bad is Social Security’s Financial Condition?

This post is a follow-up to our post of October 14, 2024 entitled, “Social Security Financing---When You’re in a Hole, Stop Digging.” In this post, we will look at the retirement plan of a hypothetical couple with approximately the same underfunded status as Social Security. We employ this analogy to try to give readers a better sense of the system’s current financial predicament and the need for sooner, rather than later, action to address it.