Why the Actuarial Approach Blows the Sox off Strategic Withdrawal Plans (SWPs)

(Hint:  The Actuarial Approach focuses on how much you can afford to spend each year, not how much of your invested assets you can safely withdraw each year)

As discussed in our post of October 28, 2020, there is no shortage of recent articles claiming that the 4% Rule or the IRS RMD approach, or the seemingly infinite number of modifications of these SWPs, is the best approach for you to use to develop your spending budget in retirement.  Pardon our French, but we call “BS” on these articles.   If your goal in retirement is to structure annual withdrawals from your invested assets so that they are relatively stable from year to year and unlikely to run out while you are alive, then an SWP approach may be just what you are looking for.  However, if you are looking to structure your spending to meet your financial goals in retirement (including not running out of assets), you will want to check out the Actuarial Approach. 

We’ve Updated Our Two Actuarial Budget Calculators for Retirees

We recently received a suggestion from one of our readers that resulted in changes to our two ABCs for retirees. The suggestion came from Mr. Jerry Kiefer, a retiree with an engineering background. Mr. Kiefer was looking at our post of July 26, 2016 (we are not making this up), and suggested that it would be nice to reflect the expected proceeds from the sale of David’s, (our hypothetical retiree in that post) house in the expected runout of David’s assets in the ABC for Single Retirees. Mr. Kiefer correctly noted that doing so would eliminate the potential cash flow warning that was being produced when he entered the present value of the expected sale in the “PV Other Sources of Income” cell. 

Managing Your Finances in Retirement

Every once in a while, we come across an article in the retirement-focused press that contains what we believe to be reasonably good financial advice for retirees or near-retirees.  And by good retirement financial advice, we mean, of course, advice that is reasonably consistent with what we advocate in this website.   As you can probably guess from our prior posts, these “good advice” articles generally don’t advocate using the 4% Rule or any other SWP to withdraw amounts from your savings.

Actuaries Submit Comments on LISE Calculation and Disclosure Rules

On November 17, the Lifetime Income Risk Joint Committee of the American Academy of Actuaries submitted comments regarding the DOL/EBSA Interim Final Rule on Lifetime Income Stream Equivalents (LISEs) to be included in benefit statements provided to participants in defined contribution plans.   We agreed with most of their comments, as they were reasonably consistent with comments we submitted earlier this year.  Our comments were discussed in our posts of May 29, 2020 and September 1, 2020.  This post will summarize primary areas of broad agreement and one minor area of disagreement with the recently released Academy comments.

Free Planning Data from the CBO

Every year, the Congressional Budget Office (CBO) releases its 30-year projection of U.S. federal deficits, debt, spending, and revenues assuming current law remains substantially unchanged.  This projection can provide helpful information to individuals planning for the future.  In this post, we will summarize some of the key takeaways from the 2020 CBO report released last September and potential retirement financial planning implications for our readers.

Adjust the 4% Rule Enough and You Might End Up with Something as Good as the Actuarial Approach—Part 3

Despite its obvious flaws, the 4% Rule of thumb for determining “safe” withdrawals from invested assets retains its popularity among many personal financial journalists, financial advisers, academics and bloggers.  While experts acknowledge that the 4% Rule may have certain weaknesses, they claim that these flaws can be addressed with specific modifications.  We at How Much Can I Afford to Spend have never been big fans of the 4% Rule, with or without proposed modifications, and we believe the Actuarial Approach is a far more robust approach for budgeting and personal retirement financial planning.  Some of our posts on the 4% Rule include (in chronological order):

• October 9, 2014—20 Years of Drinking the 4% Rule Kool Aid
• June 24, 2015—Will “Ratcheting” the 4% Rule Make it Less Insane
• May 9, 2016 and June 3, 2016—Adjust the 4% Rule Enough and You Might End Up with Something as Good as the Actuarial Approach, Parts 1 and 2
• July 23, 2019—The Real Problems with Using the 4% Rule to FIRE
• June 14, 2020—Focus on Retirement Spending, Not Retirement Income

Determining Your Asset Mix in Retirement

One of the most important considerations in your retirement plan is how to invest your assets.  As part of our Recommended Retirement Planning Process, we suggest that you consider implementing a Liability Driven Investment (LDI) strategy where:

• investments in low-risk assets (the Floor Portfolio) are anticipated to be sufficient to fund spending on future essential expenses and
• investments in risky assets (the Upside Portfolio) are used to fund spending on future discretionary expenses.

Should I Buy It?

The primary focus of this website is the relatively boring topic of budgeting.   We encourage you to use an “actuarial” process to help you determine how much you can afford to spend each year so that you can make better financial decisions.   We don’t tell you how much you should actually spend or how you should spend your money.  We understand, however, that the actual buying decisions you make constitute the front-lines of your personal financial wellness battlefield.   Further, these decisions can affect your emotional well-being and are therefore much sexier than the prospect of developing an actuarial spending budget.  We get it.  You see something, you want it and you believe that buying it will make you happy (or happier).

Are You Over-Estimating Your Future Retirement Spending Needs, Part II?

This post is a follow-up post to our post of August 22, 2017.   In this post, we will discuss how you can use our Recommended Financial Planning Process to avoid over-saving/under-spending before and after retirement.

How Conservative Are Your Planning Assumptions About the Future Part II

This post is a follow-up to our post of May 19, 2020, where we encouraged you to play with our ABC workbooks to become more comfortable with how your results can vary by employing different assumptions about the future.  We hope that trying out a few “override assumptions” will give you a better sense for how conservative or optimistic your planning assumptions about the future might be.  Subsequent to that post, we made changes to our default assumptions (see our post of August 16, 2020) to make them more consistent with current assumptions used for hypothetical inflation-indexed annuity pricing.  The current default budgeting assumptions are:

• Annual investment return/discount rate: 3%
• Annual rate of inflation/desired future recurring budget increases: 2%
• Lifetime planning period(s): Planning horizon from Actuaries Longevity Illustrator, 25% probability of survival for non-smoker in excellent health