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).