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.

Are You Financially Better Off Today Than You Were on January 1, 2021?

According to many of the talking heads at Fox and other conservative media sources, a huge factor in selecting who to vote for in the upcoming presidential election is whether you are better or worse off financially than you were at the beginning of the Biden/Harris term. While we don’t believe that this comparison should be anywhere as important in your decision process as suggested by members of the conservative media, let’s take a look at the math involved in answering this question so that you can estimate the change in your own financial status rather than simply focusing on how much prices on certain items have increased since January 1, 2021.

Social Security Financing--When You’re in a Hole, Stop Digging

In this website, we encourage retired households to periodically (generally annually) compare the present value of their assets with the present value of their spending liabilities to determine a snapshot Funded Status. We also promote monitoring the household Funded Status over time to see whether adjustments in assets or spending liabilities may be necessary or appropriate to keep spending in retirement on track and consistent with spending goals.

As discussed many times in this website, this is the same process that is used by actuaries to measure and monitor funding progress for many other financial systems, including defined benefit pension plans and Social Security. If a system’s Funded Status (Assets/Liabilities) is significantly in excess of 100% and exhibits a pattern of increasing over time, it may be reasonable to decrease system assets and/or increase system liabilities to avoid over-funding. On the other hand, if a system’s Funded Status is less than 100% and has exhibited a pattern of decreasing over time, actions should be taken to bring the system’s Funded Status back up to at least 100% to ensure long-term system sustainability. 

Don’t Undervalue Your Sources of Lifetime Income

Kudos to the American Academy of Actuaries (AAA) for releasing a new Issue Brief encouraging public pension plan administrators to provide eligible plan members with certain reference amounts when offering lump-sum “buy-outs” in exchange for some or all of their pension benefits The Issue Brief concludes, “members may find the following reference amounts particularly helpful:

• An estimate of the cost to replace any benefits otherwise payable in the private
  market; and
• The approximate annual investment return on the buyout amount required to replace
  the forgone benefits, assuming an average life expectancy.”

In addition, AAA also encourages disclosure of the assumptions used to develop the buy-out offer (and also presumably disclosure of the assumptions used to develop the above reference amounts.)

Self-Insuring Your Long-Term Care (and Other Non-Recurring Expenses)

This post is a follow-up to our post of April 16, 2022 regarding planning for non-recurring expenses in retirement, with emphasis in this post on long-term care costs. We also build on the example discussed in our previous post.

Expenses in retirement are not generally linear from year to year. That is why simple spending rules of thumb like the 4% Rule (with or without guardrails), or even more sophisticated Monte Carlo models that develop probabilities that a household can spend $X per year in real dollars, frequently fail to reflect real-world spending in retirement and are, therefore, likely to miss the mark. Developing and maintaining a robust spending plan in retirement is a classic actuarial problem involving the time-value of money and life contingencies. This problem is easily solved utilizing basic actuarial principles, including periodic comparisons of household assets and spending liabilities.

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.