Monday, October 14, 2024

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. 

Sunday, September 15, 2024

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.)

Monday, September 9, 2024

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.

Friday, August 16, 2024

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.

Saturday, July 27, 2024

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. 

Monday, July 15, 2024

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.

Thursday, April 4, 2024

500th Post—We’re Retiring

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

  • Celebrate our 500th 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. 

Tuesday, April 2, 2024

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:

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.

Wednesday, March 27, 2024

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 498th 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.

Saturday, March 23, 2024

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.