Sunday, March 1, 2020

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.

Also, thanks to Bobbie Kalben for joining the team in 2016 and providing many useful suggestions.  According to Bobbie, she came to this blog while looking for an appropriate method for managing her own spending in retirement (which, admittedly, was also a shared interest of Ken’s).  After reviewing many other books, articles, and websites on the topic that she as a pension actuary felt were woefully inadequate, she finally discovered How Much Can I Afford to Spend in Retirement.  She knew she had finally found the very best approach, bar none (her words).  After several phone calls and emails between them, Bobbie and Ken began collaborating.

Over 325 posts after our first article post, we are still plugging away with our message encouraging you to think like an actuary to make better financial decisions before and during retirement.  This ten-year anniversary post is a celebration of what we have accomplished in the last ten years (often with the assistance of our readers) and what we hope to accomplish in the future.

While our thinking and Actuarial Budget Calculator (ABC) spreadsheets have evolved over the past ten years, the basic actuarial and financial economics concepts we advocate have remained essentially unchanged.  Developing a sustainable retirement plan is a relatively complicated process, but we believe there are many intelligent individuals and couples out there who, with a relatively small investment of their time, can benefit from the free planning tools and processes made available here.

While we understand why financial advisors, academics and others with their own objectives and agendas may not fully embrace our tools and processes, we continue to be baffled at the lack of support from our own profession.  We discussed our puzzlement over this lack of support from the actuarial profession in our post of May 12, 2018.

We employ basic actuarial and financial economics theory by using the theoretical cost of inflation-adjusted annuities to derive our default assumptions for the cost of lifetime retirement income.  This same approach was utilized by the Society of Actuaries to develop the cost of retirement in their article, “Big Question, When Should I Retire?

In its letter encouraging improvements to the Lifetime Income Disclosure Act (which later became part of the new SECURE Act of 2019), the American Academy of Actuaries indicated that, “With the transition for many workers from participating in defined benefit to defined contribution plans, the responsibility increasingly now rests on employees to determine whether their personal retirement savings, along with Social Security and savings funded through employers on their behalf, will be sufficient to provide for a secure retirement.  The requirement in the Lifetime Income Disclosure Act that plan participants regularly be provided information regarding the lifetime income value that can be expected from their retirement saving account is an important step in that direction.”  We agree.

And, to make this responsibility easier for employees, we believe the expected lifetime income from retirement accounts communicated to participants should be expressed in inflation-adjusted dollars, just like Social Security income.  This is exactly the approach we advocate in our ABC workbooks and in our last post.

If the American Academy of Actuaries truly believes that showing the lifetime income value of a person’s retirement savings account is an important first step in the process of helping individuals and couples plan for their retirement, then using a similar approach for the purpose of calculating a sustainable spending budget or developing a “floor/upside” investment strategy, is a huge leap forward, and is one that the profession should definitely get behind.  In our opinion, to fail to endorse the concepts used in the Actuarial Approach simply because deterministic  assumptions may be employed (but also makes our approach much more accessible to a broader audience than approaches using stochastic assumptions) is short-sighted and inconsistent with the American Academy of Actuaries’ mission.

In Summary

Despite the lack of support of the Actuarial Approach in some sectors, and our insistence on a policy of doing all this for no compensation, we remain passionate about our goal of helping people make better personal financial retirement decisions.  With continued help from our readers, we look forward to another ten years of improving our actuarial workbooks and processes so that you (and we) can better manage your (our) retirement.