Should Your Plan Anticipate Future Social Security Benefit Cuts (Part 2)?

This post is a follow-up to our post of July 2, 2025. In that post, we talked about the possibility of future Social Security benefit cuts and how you can use the Actuarial Financial Planner to estimate the financial impact on your current Funded Status of possible future reductions in your benefit(s). 

It is almost a year later, and we have no more certainty as to policy changes that might be implemented on or prior to the system’s forecasted trust fund exhaustion. We do know that this issue has gained significant attention in the U.S. as both political parties are proclaiming that they will be the party to “Save Social Security” and the other party will not. Unfortunately, no one knows exactly what that phrase means, except that it presumably involves policy changes that would prevent the trust funds from becoming insolvent. It is still unclear, however, how much of the projected funding gap would be closed through increased revenue or though reductions in benefit payments. In this post, we will discuss how much of the trust fund exhaustion problem can, or possibly will, be solved by increased revenue and/or benefit cuts.

Top 20 Reasons Why I Recommend the Actuarial Approach for Managing Spending and Investing in Retirement

The Actuarial Approach:

1. Employs an easy-to-understand and robust financial metric (Household Funded Status)
2. Permits adoption of easy-to-implement guardrails that suggest future spending changes
3. Uses basic actuarial principles and processes (time value of money, comparison of assets and liabilities, mortality, annual valuation process, etc.) consistent with general principles and processes used by actuaries to measure the financial sustainability of other financial systems
4. Uses basic financial economic principles (Liability Driven Investing (LDI), risk-adjusted discounted cash flows (RADCF))
5. Can reflect all future spending liabilities and all sources of income/assets.
6. Permits matching of the present value of non-risky assets/investments with the present value of essential expenses to guide investment decisions
7. Provides flexibility in risk tolerance (through personal selection of assumptions and selection of essential vs. discretionary expenses)
8. Provides flexibility in liability measurement by permitting different future increase assumptions for different types of expenses (for example, higher future assumed increases for health expenses or taxes and lower future assumed increases for future discretionary expenses)
9. Provides an actuarial model that uses a simple, one-tab input/output Excel spreadsheet
10. Is more robust than Strategic Withdrawal Plans or Monte Carlo models frequently used by advisors.
11. Provides a reasonable, rational and reliable valuation process (the household funded status is expected to remain constant from year to year if all assumptions, including spending, are realized and unchanged.
12. Helps assess and manage risks in retirement through stress-testing of assumptions
13. Easily accommodates non-linear spending (front-loading of expenses for example) or non-linear sources of income (future asset sales for example)
14. Facilitates superior budgeting
15. Helps households make more informed financial decisions (by showing the expected impact on the Funded Status of actually making the decision).
16. Quantifies how much you can afford to spend in retirement, not how much you can safely withdraw from your portfolio
17. Contains many levers to make your decumulation plan more or less conservative (changing assumptions, varying size of target Rainy-Day Fund or changing mix of essential/discretionary spending)
18. Enables more accurate couples planning
19. Contains no potentially confusing probabilities of success/failure
20. Is free

Can You Afford to Remodel Your Home in Retirement?

Your spouse wants to remodel your kitchen and several bathrooms in your house. You’ve received a quote for the work for about $100,000. Using a strategic withdrawal approach and a Monte Carlo modeling approach, your financial advisor has previously told you that you can only safely afford to spend about $110,000 per year in retirement, so it looks like paying for your normal annual expenses in addition to the remodeling job your spouse desires is simply out of the question at this time.

Funded Status—A Better Metric for Managing Spending Decisions in Retirement

This post is a follow-up to our post of August 23, 2025 where we encouraged financial advisors and DIYers to ditch Monte Carlo modeling and its probability of success metric and adopt the Actuarial Approach and its funded status metric if they wanted to better manage spending decisions in retirement.

Can Your Artwork Collection Fund Your Spending in Retirement?

One of the key determinants of how much you can afford to spend in retirement is the amount of assets you have accumulated. All things being equal, the greater your assets, the more you can afford to spend. This truism can readily be seen from the following basic actuarial balance equation for personal finance.

Present value of assets = Present value of future spending + Rainy day fund

This equation, of course, is the basis for the Actuarial Approach and the Actuarial Financial Planner models found in our website. The ratio of the left-hand side of the equation to the present value of future spending is the Funding Status metric we encourage you to use to measure, monitor and make changes to your spending plan.

Personalize Your Lifetime Planning Period (LPP) Assumptions

In our December 31, 2025 post, we referred to a three-step process that we encouraged you to use to replace the default LPP assumptions in the Actuarial Financial Planner to refine and personalize your Funded Status measurements. 

Last week, Advisor Perspectives published my article entitled, “Use This 3-Step Process to Develop Better End-of-Life Assumptions for Your Clients.” We include the three steps in this post from that article. A link to this article is also available in the “articles” section of our website.

It’s All About the Present Values

In Episode 211 of their Retire with Style podcast series, Dr. Wade Pfau and Alex Murguia discuss the importance of using present values in financial planning for retirement.  They conclude their podcast by saying that present values are “the heart and soul of retirement financial planning calculations,” and “It only took us 200+ episodes to get to the heart of the matter.”  We agree. 

Measuring and Managing 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 as of January 1, 2026 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. Stress testing your assumptions is a relatively easy process using the Actuarial Financial Planner (AFP) to see what the results of changing assumptions or inputted data has on your Funded Status. 

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 (or re-measure) your Funded Status. We encourage you to use the granular spending budget chart that we outlined in our post of December 25, 2024 to gather the estimated 2026 data to be inputted in this year’s Actuarial Financial Planner (AFP). 

Last year, Congress enacted new legislation affecting personal income taxes. You may wish to revisit your assumptions for 2026 and future years’ tax expenses. Remember that your taxes may increase in the future for various reasons, including application of RMDs and sales of appreciated assets. You should factor these expected increases in the present value of your expenses when determining your Funded Status.

Default Assumptions for 2026 Actuarial Financial Planner

We’ve increased the default investment return/discount rate for risky investments/discretionary spending from 8% to 10%. All other assumptions are unchanged from those used last year. As with all the default assumptions in the spreadsheet, you can change them if you want by following the assumption change override process. You can also change them to stress test your plan.