Saturday, August 13, 2022

How Should Purchasing an Annuity Affect Your Retirement Portfolio Investment Mix?

As discussed most recently in our post of July 27, 2022, annuity purchase rates for single premium immediate life annuities have become more favorable over the past five months. As a result, you may be considering purchase of a single premium life annuity in the near future to strengthen the Floor Portfolio you use to fund your Essential Expenses. In this post, we will once again discuss how changes in your

  • Present value of Essential Expenses,
  • Present value of Non-Financial Floor Portfolio assets, or
  • Accumulated savings

can affect the optimal investment mix in your financial asset portfolio (accumulated savings) under the Safety-First investment strategy.

Wednesday, August 10, 2022

The Retirement Researcher Constructs a Household Balance Sheet Using Basic Actuarial and Economic Principles

In Episode 25 and Episode 26 of their “Retire With Style” podcasts, Dr. Wade Pfau and the Retirement Researcher team discuss the benefits of constructing a household balance sheet to measure the adequacy of household assets vs spending goal liabilities. They call the ratio of household liabilities to household assets “the Funded Ratio.” The information contained in the balance sheet, including the Funded Ratio, combined with results of their Retirement Income Style Awareness (RISA) Profile (discussed in our post of October 6, 2021) serves as the basis for their recommended household retirement plan.

Wednesday, July 27, 2022

Updated Implied Discount Rates for Single Premium Life Annuities as of July 25, 2022

In our post of April 2, 2022, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs).  In that post, we provided implied discount rates consistent with quotes obtained from based on two different mortality assumptions (one based on life expectancy and the other based on a 25% probability of survival, which is the basis we recommend in our website for planning purposes).  In our post of May 18, 2022, we updated these implied interest rates consistent with SPIA quotes available on that date.   

In this post, we will examine the implied interest rate assumptions built into quotes from as of July 25, 2022 and compare the quotes and the implied interest rates with the results of the similar exercise we performed as of May 18.  You may wish to revisit our prior posts for more general discussion of annuity pricing assumptions.

Tuesday, July 26, 2022

Couples Planning in Retirement—How Much Will Household Expenses Decrease After the First Death?

We know that you probably don’t want to think about death or dying. But chances are fairly small that both you and your spouse will die at the same time. Therefore, if you are financial planning as a couple, your retirement plan should anticipate that one of you will predecease the other. And, while it is possible that some household expenses will remain about the same (or even increase), it is not unreasonable to assume that total household expenses will decrease after the first death within the couple. Of course, it is also possible that household sources of income will also decrease with the first death.

Thursday, July 21, 2022

Financial Planning in (or Near) Retirement Made Super Easy

What if I told you that there is a simple, but very robust one-tab Excel workbook that you can download that will take you about 15 minutes to complete each year and will provide you with data points that will enable you to determine important planning information for your entire period of retirement, such as:

  • How much you can afford to spend each year (spending budget)
  • How much to invest in risky vs. non-risky assets (investment strategy)
  • Whether you should consider going back to work on a full or part-time basis
  • Whether you should consider deferring your (or your spouse’s) Social Security benefit, and
  • Whether (and by how much) you should consider changing your spending budget or investment strategy in response to favorable or unfavorable experience (such as higher-than-expected inflation or poor investment performance)

Thursday, June 30, 2022

Do You Want Your Spending Budget in Retirement to be More (or Less) Conservative?

Long-time readers of our blog know that we aren’t big fans of Monte Carlo models generally used by financial advisors for financial planning. These models typically use historical investment return assumptions (or other assumptions that may not be clearly communicated to the clients) in simulations to produce what financial advisors claim to be probabilities of being able to spend $X per year in retirement. Of course, these probabilities are only as good as the assumptions used in the simulations and can change significantly as actual experience emerges (such as the actual investment returns experienced this year). You may wish to revisit our post of January 29, 2021 to read a discussion of the significant limitations of Monte Carlo models typically used today. 

Monday, June 27, 2022

We’ve Changed the Default Economic Assumptions in the Actuarial Financial Planners

Because interest rates on government-issued securities have increased significantly since the beginning of the year and implied investment returns on immediate annuities have also increased, we have decided to increase the default assumptions used in the AFPs for future:

  • Investment returns on Floor Portfolio assets to 4.5%,
  • Investment returns for Upside Portfolio assets to 7.5% and
  • Annual rates of inflation to 3.5%.

Saturday, June 18, 2022

The Actuarial Financial Planner—Helping You Design a Plan to Weather Tumultuous Periods and Achieve Your Financial Goals

The title of this post was shamelessly borrowed from the post of June 17, 2022, in which Adam Van Deusen said,

“The key point is that advisors can not only serve as empathetic listeners during periods of market stress, but also serve as a reassuring force to remind clients how their plan was designed to weather tumultuous periods and help them achieve their goals.” 

While we are not financial advisors and we don’t have clients, we do believe that our Actuarial Financial Planner (AFP) can be a very effective tool for helping users develop a plan specifically designed to weather tumultuous investment periods and to help them achieve their financial goals in retirement.

Saturday, June 11, 2022

Retirement Researchers Discuss Retirement Planning Approaches

For those of you who like to listen to retirement-finance-focused podcasts, we recommend you try the Wealth, Managed podcast of September 24, 2021 featuring Drs. Finke, Blanchett and Pfau, entitled “Approaches to Retirement Income Planning.” In this podcast, these preeminent retirement researchers discuss some of the cons of probabilistic approaches commonly used today by financial advisors utilizing the 4% Rule and Monte Carlo modeling and some of the pros of the Safety-First approach utilizing what Dr. Pfau calls the Funded Ratio. You may recognize the Funded Ratio as the Actuarial Approach described in this website and the Safety-First approach as the approach built into our Actuarial Financial Planner. 

Here is the link to their podcast:

Wealth, Managed with Michael Finke and David Blanchett: Ep. 21: Approaches to Retirement Income Planning on Apple Podcasts

Thursday, June 9, 2022

Planning on Social Security, Part II

The Social Security trustees recently released their 2022 OASDI Trustees Report detailing the financial status of the program. The news this year was actually a little better than last year’s. Based on the trustees’ intermediate assumptions,

  • The trust fund depletion date (TFD) in this year’s report is 2035, compared with 2034 in last year’s report,
  • The program’s 75-year actuarial deficit is only 3.42% of taxable payroll compared with 3.54% last year, and
  • The default option if Congress does not enact program changes prior to TFD is an across the board 20% decrease in program benefits in 2035 compared with a 21% decrease in program benefits in 2034.

In this post, we will once again raise the question that very few of our readers (or many baby boomers for that matter) care to actually think about--How should one plan for possible future decreases in Social Security benefits in light of the program’s financial situation?