How Should Future Social Security “Reform” Affect Your 2021 Spending Budget?

In the next few months, we will be encouraging you to perform an actuarial valuation of your assets and future spending liabilities to determine your spending budget for 2021. When you do your January 1, 2021 actuarial valuation, we ask, in this post, that you consider the possibility that future Social Security reform may decrease the future benefits you receive from the system and/or increase your future taxes in some manner. Thus, we are asking our U.S. readers to consider how future uncertain Social Security reform might affect your current spending budget. To help you do this, this post will discuss the estimated size of Social Security’s financial problem and several ways you can use our recently updated Actuarial Budget Calculator workbooks to reflect the potential impact of future system reform in your current financial plan.

Why the Actuarial Approach Blows the Sox off Strategic Withdrawal Plans, Part II

Subsequent to release of our previous post, we received a suggestion from one of our readers that we show Bill and Jim’s spending graphically, since pictures can frequently communicate better than words. We agreed. Therefore, this post will illustrate Bill and Jim’s expected future spending under the Actuarial Approach if all assumptions made in the calculations are realized and will compare the results with spending expected under the 4% Rule under the same assumptions about the future. Amounts are shown in today’s dollars.

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

DOL Issues Disappointing LISE Guidance

On August 18, 2020, the Department of Labor issued an interim final rule (IFR) regarding calculation and disclosure of the Lifetime Income Stream Equivalent (LISE) amounts of current account balances for participants in 401(k) and other qualified defined contribution plans. Subsequent to the release of the IFR, there has been significant attention in the financial press regarding the proposed rules and the assumptions specified by the DOL (on an interim basis) for converting (or translating) defined contribution plan account balances into LISE amounts. This post will not repeat the new rules set forth in the IFR and discussed in the many published articles, but will instead focus on what we perceive to be the significant guidance shortcomings, particularly the requirement to disclose fixed dollar (non-inflation indexed) lifetime annuity payments rather than inflation-adjusted payments.

Options for Spending 2020's Forfeited Trip

One of our readers recently asked whether it was good practice to “roll over” unspent budgeted 2020 travel and entertainment expenses to 2021 or later future years, as long as one does not “double dip” by also counting these unspent amounts as accumulated savings when determining recurring spending budgets.  Since this is likely to be a common situation for many of us retirees this year (other than Bobbie, who managed to travel to England early this year), we will address this question in this post.

We’ve Changed the Default Assumptions for the Actuarial Budget Calculators

The Default Assumptions we build into our Actuarial Budget Calculators (ABCs) are intended to be consistent with assumptions used by insurance companies in the pricing of inflation-indexed life annuities.  Since fully inflation-indexed annuities are no longer issued by U.S. insurance companies, selecting these assumptions has become more of a theoretical exercise.  However, we do have data on fixed income single premium life annuities and other sources to guide us to some degree.

Can You Afford to Retire?

In these uncertain times, it is natural (for Baby Boomers anyway) to wonder whether retirement or partial retirement may be financially viable. We have seen several articles discussing how much savings may be necessary to enjoy a “comfortable” retirement. In this post, we remind our readers that with the help of one of our Actuarial Budget Calculators for retirees (Single or Couples), and just a little bit of number crunching, you can derive a pretty good idea of how much you may need. We point you to our post of August 25, 2019, “Is $1 Million of Savings Enough?” for a step-by-step example of the approach we recommend. 

Actuaries Discuss Retirement Budgeting Approaches

On July 13, 2020, the American Academy of Actuaries (AAA) released an Issue Brief entitled, “Actuarial Perspectives on Determining a Retirement Income Budget.”  This post will provide the perspectives of two retired actuaries on this AAA Actuarial Perspectives Issue Brief.

How to Fix Advisor Retirement Planning Models

After posting, we received the following comment on this post from David Blanchett: “While it's true some financial planning tools don't do the things you list, I wouldn't ascribe the problem to Monte Carlo models... since there are few, if any, limitations for Monte Carlo simulations. Therefore, you might want to change the header to something like "Common Financial Planning Problems" to reflect the fact it's not the model itself (Monte Carlo), rather the tools that have been built using the model that aren't as good as they could be (or likely will be as they evolve)!” We thank Mr. Blanchett for his constructive feedback and agree with him, but we point out that these problems are much more easily fixed in our deterministic actuarial models than in the Monte Carlo models typically used today by financial advisors.

Be Empowered to Own Your Own Retirement

In his July 17, 2020 Forbes article, Your Retirement Asset Drawdown Strategy Should Fit Your Personal Story, Steve Parrish says,

“Before addressing the legitimate assumptions tied to retirement planning, the advisor should first help create and tell a story for the retiree to show the bigger picture. An approach to drawing down retirement income should be laid out in order to see how true that story feels to the owner. If the story fits, the retirement plan has a better chance of blending with that retiree’s style.”

In this post, we will push back on Mr. Parrish’s premise that retirees need to be told stories about draw-down strategies as a first step in developing a plan for retirement, and we will propose following our Recommended Retirement Planning Process as a better alternative.

Quantifying Spending Needs Versus Spending Wants – Example

This post will present and discuss another example of our Recommended Financial Planning Process. As a follow-up to our last few posts, we will compare results for an example couple under the Actuarial Approach with less satisfactory results obtained using two alternative approaches.

Focus on Retirement Spending, Not Retirement Income

We’ve recently come across a fair number of articles encouraging individuals and couples to cobble together Retirement Income Generators, or sources of retirement income, to meet their spending needs in retirement.  These sources of income are generally expected to commence at retirement and are also expected to last for the life of the person or couple.  The theory behind this approach is that the sum of these income sources will replace the paychecks individuals and couples received while working, and make it easier for them to manage their finances in retirement.  And while this approach can work in fairly simplistic situations, and in fact is promoted as a simple alternative to other approaches, it falls short in many real-world situations.

Comparison of Retirement Spending Budget Calculation Approaches

Since our blog is all about helping people develop a robust spending budget, in this post we are going to do a deeper dive into the approaches generally used today by retirees (or for retirees) to develop their spending budgets.  We acknowledge up-front that not everyone actually feels the need to calculate a spending budget, so this post is focused on comparing the approaches generally used by those who do.

Actuaries Release New Essay Collections of Effective Retirement Planning Ideas

The Society of Actuaries has released two new essay collections containing ideas to improve retirement planning.  We encourage you to read these collections (or, at least the ones we wrote).  The two essay collections are:

Retired Actuaries Submit Comments to the Department of Labor Regarding Disclosure of Lifetime Income Stream Equivalents

Here are our comments to the Department of Labor regarding disclosure of Lifetime Income Stream Equivalent (LISE) amounts in defined contribution plan benefit statements. In summary, we made the following recommendations:

Changes Suggested by Actuaries Unlikely to Ensure Sustainable Solvency For Social Security

Every year, the Social Security trustees release a new OASDI Trustees report discussing the financial status of the Social Security system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective on the new OASDI Trustees Report (AP)”explaining the results in the new Trustees report and the Academy’s recommendations for possible system changes.  In an effort to provide our U.S. readers a slightly different actuarial perspective on the system’s finances (so they can attempt to plan for future possible changes to the program), this post will discuss some of the issues with which we agree and disagree with the AAA AP issue brief.  This post updates our posts of June 8, 2019, June 27, 2018 and August 3, 2017 on this subject.

How Conservative Are Your Planning Assumptions About the Future?

This post is a follow-up to our posts of April 11, 2020 and March 9, 2020.  In those posts, we discussed the default assumptions used in our Actuarial Budget Calculators (ABCs) and potential factors to consider if you believe our default assumptions are either too conservative or too optimistic, and you want to “override” them in your budget or essential expenses/Floor Portfolio present value calculations.

A Simpler Alternative to Our Recommended Financial Planning Process?

In this post, we will compare our Recommended Financial Planning Process with a retirement income strategy recently suggested by Steve Vernon, a fellow Fellow of the Society of Actuaries, in his April 6 Forbes article, Retirees May Want to Revisit Their Savings Withdrawal Strategy.  Thanks goes to Ken’s buddy, Kyle Brown, pre-eminent ERISA attorney, for recently suggesting that comparing our strategy with Steve’s might make a good post.  As background, Kyle, Steve and Ken all worked together at The Wyatt Company (and its successor firms) as consulting pension actuaries (and primary legal resource) for many years when we were younger.

Yes, Retirees and Near Retirees Can, and Should, Plan for Stock Market Crashes

From time to time we come across an article in the personal retirement planning media that we have significant problems with.  Kristen McKenna’s April 16, 2020 Forbes article, Can You Plan For A Stock Market Crash? is the most recent to push our buttons.  Although she makes several good points, we have problems with Ms. McKenna’s article, such as:

Retirees -- Should You Defer Commencement of Your Social Security Benefits?

In our last post, we briefly mentioned that recent decreases in interest rates favored deferring commencement of U.S. Social Security benefits until age 70 versus starting them earlier.  The subject of when to commence Social Security benefits if you have retired has received attention in the media recently as a result of the Coronavirus pandemic and associated layoffs.  For example, in her April 11 Washington Post column, Michele Singletary asks the question, “Should you take Social Security early?” She indicates that at least for some, the Coronavirus has changed the math on waiting until age 70.

Discount Rate / Investment Return Assumption for Actuarial Budget Calculators

This post is a follow-up to our post of March 9, 2020, “What is the Cost of Lifetime Real Dollar Retirement Income?”  Since we released that post, assumed interest rates used by life insurance company actuaries to develop single premium fixed dollar life annuity quotes appear to have been reduced even further, and assumed short-term investment interest rates used in these quotes appear to have been reduced even more than long-term interest rates.  As a result, you may wish to consider using a lower Discount Rate/investment return assumption in your Actuarial Budget Calculator (ABC) planning calculations.

Social Security: Bad Luck for Those Born in 1960?

In addition to killing many people worldwide and causing significant disruption to many aspects of our lives, it looks like the Coronavirus Pandemic could also negatively affect projected Social Security benefits for millions of people born in 1960, unless some corrective action is taken by Congress.

Funding Essential Expenses in Retirement

This post is a follow-up to our posts of November 8, 2019, “Use the Actuarial Approach to Implement your ‘Safety-First’ Retirement Income Plan” and July 18, 2017, “McLean Asset Management Endorses Basic Actuarial Principles for Personal Financial Planning.”  Inspiration for this post is Dr. Wade Pfau’s April 3, 2020 Forbes article, “Is Buying an Annuity in a Bear Market a Good Idea?”

Is Your 94% Monte Carlo “Safe” Retirement Plan Still Safe?

Inspiration for this post comes from Michael Finke’s excellent Advisor Perspective article, “How Financial Plans Must Adapt to Market Crashes.”  In this article, Dr. Finke notes, “The Monte Carlo analysis only shows the probability of success at a single moment in time.”  Subsequent investment returns in excess of the average return assumptions baked into the Monte Carlo model will increase the probability of success, and returns below these assumptions will reduce the probability of success.  He points out that the market’s recent decline in response to the coronavirus pandemic may have had a significant negative effect on your previously calculated financial retirement plan probability of success.

Good Time to Up Your Financial Knowledge Game

It is possible that this Coronavirus pandemic will produce significant changes that will result in your government and your employer assuming much more responsibility for ensuring your financial and physical well-being.  Even though we are actuaries, we aren’t able to actually predict what will happen.  When planning your future, however, you can assume:

• that you will be taken care of by some third party or someone else,
• you will be largely responsible for taking care of yourself, or
• some combination of these two alternatives will emerge.

Ok Retirees, What is Your Plan Now that Stocks Have Entered a Bear Market?

Despite a 6% increase today (March 17), the S&P 500 index is down almost 22% for the year and almost 25% for the last month.  We are now officially in a Bear Market.   We have been reading lots of recommendations from retirement experts on what retirees should be doing in response.  Therefore, we thought we would add a few of our thoughts on the subject. 

Your Retirement Plan Should Incorporate Reasonable Goals, Assumptions and Processes

In his March 11, 2020 guest post in Michael Kitces Nerd’s Eye View, Charles Fox  “shares how a more robust analysis that accounts for real world outcomes and the potential for retirement delay (or retiring early) can be a powerful tool to really help clients plan for their goals.”  Like many financial advisors, Mr. Fox is a strong proponent of using Monte Carlo modeling as a better way to communicate risks and enable clients to make informed decisions (than under Mr. Fox’s straw-man deterministic model).  And while we have no problem with Monte Carlo modeling, per se, we believe (as discussed most recently in our post of October 8, 2019) that the purpose of the calculations and the assumptions and processes employed in the approach are much more important factors for developing a reasonable retirement plan than the type of the model utilized.  We encourage you to read the Kitces post and compare the analysis suggested by Mr. Fox for his hypothetical person, Wendy, with the analysis that Wendy could obtain by using our Actuarial Budget Calculator (ABC) for Single Pre-Retirees. 

What is the Cost of Real Dollar Lifetime Retirement Income?

Based on financial economics principles, we recommend making assumptions about the future in our Actuarial Budget Calculator (ABC) workbooks that are approximately consistent with those used to price inflation-adjusted annuities.  In part, we recommend these assumptions (rather than more optimistic assumptions based on expected earnings) be used to determine the “market value” of one’s spending liabilities because, in theory, one could settle (or defease) some or all of their lifetime spending liabilities by going out and actually purchasing such an annuity.

Updated Glossary

As you may know from our biographies, we are two retired Fellows (of the Society of Actuaries) here at How Much Can I Afford to Spend in Retirement.   I (Ken) do most of the initial post drafting and Bobbie does most of the post review and correction.  In her review capacity, Bobbie does her level best to replace technical actuarial jargon, and other technical jargon, with English.  She takes her job of making the posts more understandable for a wider audience very seriously.  She will frequently ask me, “if I don’t understand what you are talking about, how do you expect your non-actuarial audience to understand?”

In pursuit of enhancing understanding of our posts, Bobbie has recently updated the glossary of terms that we frequently use.  You will find it in the “Glossary” section.  Feel free to suggest additional terms or changes you would like to see in this section, or elsewhere in our website, to make this site more useful to you.

Recommended Financial Planning Process for Retirees and Near-Term Retirees Example #2--Pensions are Nice

Every once in a while, we get an inquiry from a new reader asking us to briefly summarize the process we recommend for determining the financial feasibility of retirement for retiree wannabes or for determining spending budgets and possible investment strategies for actual retirees.  Recently, we have been pointing such readers to our posts of August 25, 2019 (Link 1)(Link 2) for a description of our recommended seven-step process and a numerical example.   However, we realize that as time passes, not all of our readers may be familiar with posts that are six months or more old.  Therefore, this post (and we intend periodic future posts) will revisit our recommended process and walk you through a different example each time.

How Much Can I Afford to Spend in Retirement Turns Ten

In March, 2010, our website started with publication of “Self-Insuring Your Retirement?  Manage the Risks Involved Like an Actuary.”  Since around 2005, I had been trying to find a home for this article (or articles similar in concept that advocated the same basic actuarial principles I had used as a pension actuary), but AARP, EBRI and the various US actuarial organizations were just not interested.  As I was about to retire in 2010, one of my younger work associates, Kin Chan, mentioned to me that websites were the new way to self-publish, and maybe I should explore that option.  Thanks to Kin’s suggestion and his help setting up our website, How Much Can I Afford to Spend in Retirement was launched.

The SECURE Act – So, What is a “Lifetime Income Stream Equivalent” of Your 401(k) Account Balance? How Will It be Calculated? And Why Should You Care?

In accordance with Section 105(a)(2) of the Employee Retirement Income Security Act (ERISA), as amended by the SECURE Act of 2019, defined contribution plan sponsors will soon be required to disclose two lifetime income stream equivalents (LISEs) of a participant’s current account balance under the plan at least once during each twelve-month period in participant benefit statements.  The two required LISEs are:

How to Develop and Implement a Strategic Plan for Your Retirement

In our post of September 25, 2019, we encouraged you to take responsibility for your own retirement.  In this post, we will build on our previous post by encouraging you to adopt and implement a strategic plan for your retirement.

How Do Expected End-of-Life Expenses Affect Your Current Recurring Expense Spending Budget?

One of our readers recently indicated that he was planning on using the proceeds from the sale of his home to fund several years of assisted living for spouse and himself when and if the need for such long-term care arose.  The reader wanted to know how to use our Actuarial Budget Calculator (ABC) to explore doing this, and how such a plan would affect their current recurring spending budget.  This post is a follow-up to our post of January 12, 2016 and addresses how you can use our ABCs to determine how your anticipated long-term care and bequest expenses will affect your current recurring expense spending budget.

“Big ERN” Discovers the Basic Actuarial Balance Equation

Thanks to one of our readers, Ian Holliday of the U.K., for letting us know that Karsten, a blogger at Early Retirement Now (with the nickname “Big ERN”) has made available a Google spreadsheet entitled EarlyRetirementNow Actuarial SWR Toolbox.    His new actuarial spreadsheet is very similar conceptually to the Actuarial Budget Calculators for single retirees and retired couples that we make available in this website.  He utilizes the Basic Actuarial Balance Equation and calculates the present values of assets and spending liabilities (using deterministic assumptions—no simulations) to develop a recurring expense spending budget “data point.”