Are Guaranteed Lifetime Income Products Part of Your Investment Strategy in Retirement?

As discussed in our post of November 27, 2021, balancing the sometimes-conflicting requirements to grow, protect and carefully spend household assets is an important element of a financially successful retirement plan.

How Much Did You Spend in 2021?

The first three steps in our Recommended Financial Planning Process involve estimating your annual recurring and non-recurring expenses in retirement and categorizing those estimated expenses as either “Essential” or “Discretionary.” In this post, we suggest that you begin this process for 2022 planning purposes by gathering your actual spending data for 2021. In a future post, we will encourage you (as we do every year around this time) to perform an actuarial valuation of your assets and spending liabilities using your estimated future recurring and non-recurring annual spending. 

How Will Your Spending Change During Your Retirement?

This post is a follow-up to our post of March 19, 2021, “What is Your Plan for Future Spending in Retirement?” Impetus for this post was the recent release of a retirement spending pattern research paper by Anqi Chen and Alicia Munnell from the Center for Retirement Research at Boston College entitled, “Do Retirees Want Constant, Increasing or Decreasing Consumption?”

We briefly discuss the results of Mses. Chen and Munnell’s research and possible implications for your financial planning in or near retirement.

There’s a Much Simpler and More Robust Financial Planning Tool for Retirees Than a “Risk-Based Guardrails Model”

In their November 24, 2021 Kitces.com post, Dr. Derek Tharp and Justin Fitzpatrick once again tout their risk-based guardrails financial planning model for financial advisors to use with their retired clients. In their post, they state,

“a risk-based guardrails model can provide clients with a more accurate picture of how much they can sustainably spend than can models based on static withdrawal rates or withdrawal-rate guardrails” and

“movement from withdrawal-rate guardrails to risk-based guardrails represents a significant improvement in planning quality for retirees!”

Feel free to read their post if you are interested in a risk-based guardrails planning concept. 

Growing, Protecting and Spending Your Assets in Retirement—Finding the Right Balance with The Actuarial Financial Planner

How much you can afford to spend in retirement (or leave to your heirs) is a function of how much assets you possess. Generally, the more assets you have, the more you can afford to spend. Most retirees need to invest (grow) their assets in order to maintain or increase their desired standard of living in retirement. At the same time, however, retirees need to protect their assets and watch their spending to ensure that:

1. sufficient amounts remain throughout the entire period of their retirement to fund at least a minimum (essential) standard of living, and
2. other spending goals are achieved.

Using the Actuaries Longevity Illustrator in Your Retirement Planning

The Actuaries Longevity Illustrator (ALI) has recently been updated to reflect mortality changes made in the 2021 Trustees’ Report for Social Security. We have therefore also updated our actuarial workbooks to reflect these changes. Like prior year changes, the changes in this year’s version were not major (no more than one year increases or decreases in lifetime planning horizons from the prior year) even though the 2021 Trustees report reflected the increased pandemic mortality experience in 2020.

Using the Actuarial Financial Planner for Retirees

In our last post, we introduced our new Actuarial Financial Planner (AFP) workbooks for Single Retirees and Retired Couples. Several of our readers had questions about the new workbooks, so we decided to address these questions with an example in this post. We will also take this opportunity to discuss a related topic--investment in bonds vs. purchasing lifetime annuities.

Our Favorite One-Tab Actuarial Financial Planner for Retirees and Near Retirees

We are happy to add two more Excel Spreadsheets to our toolbox of MS Excel actuarial spreadsheet tools—The Actuarial Financial Planner (AFP) for Single Retirees and the Actuarial Financial Planner for Retired Couples. These spreadsheets are very similar to our Actuarial Budget Calculators (ABCs), but differ in the following ways:

Planning on Social Security

This post is a follow-up to our post of December 6, 2020 in which we suggested that, when developing your current year spending budget, “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.” In response to that post, we received several comments questioning the premise that Congress would even consider the possibility of reducing Social Security benefits for beneficiaries in pay status. We fully understand that most people would prefer that someone else be required to pay the higher taxes and/ or have their benefits reduced in order to bring the system back into financial balance. In general, however, unless your means are very modest or you are very old, we believe it is more prudent for you to plan on some level of future benefit reduction or increase in taxes instead of simply assuming that the entire burden of achieving Social Security’s future financial balance will be borne by someone else.

Aligning Your Strategic Plan in Retirement with Your Spending Goals, Your Tolerance for Risk and Your Other Preferences Doesn’t Have to be That Complicated

Dr. Wade Pfau Response Subsequent to publishing this post, we received an email from Dr. Wade Pfau. Dr. Pfau indicated that he believed our post contained several misunderstandings about the Retirement Income Style Awareness (RISA), including: The core RISA is just twelve questions and not complicated. The RISA is used as a first step to get people started and is not used to develop a full financial plan, and It is simply about how to fund (what we call) the Floor Portfolio Dr. Pfau indicated that our readers who would like to know more about the RISA are invited to attend an upcoming Retirement Income Challenge that is not available to the public. This special invite can be reached by clicking this link.  We thank Dr. Pfau for his feedback and look forward to learning more about the RISA and its applications.

As retired actuaries, we understand that perhaps not everyone thinks the same way we do. No, don’t worry, we will not be talking in this post about politics, masks or vaccinations. We will, however, once again offer our thoughts on why we believe our Recommended Financial Planning Process is a relatively simple process that can be used to align your strategic retirement plan with your spending goals, your tolerance for risk, and your other preferences without requiring a lot of complex regression analyses or risk tolerance questionnaires.

Don’t Know How Long You’ll Live in Retirement? Another Good Reason to Build a Robust Floor Portfolio to Fund Your Essential Expenses

This post is a follow-up to our post of September 14, 2021 entitled; “How Long Should You Plan to Live?” In that post, we advocated using our “default” assumption of the 25% probability of survival from the Actuaries Longevity Illustrator for non-smokers in excellent health when planning for your retirement. In this post, we look at the planning implications of using shorter or longer Lifetime Planning Periods (LPPs) than our default assumptions in your retirement planning. Based on our brief analysis, we believe that, for most reasonable LPP assumptions, it still makes sense for you to use the Safety-First InvestmentStrategy to build a robust Floor Portfolio comprised primarily of non-risky investments like Social Security, pensions and life annuities to fund your future expected Essential Expenses. Using this strategy and these types of investments will better enable you to match your non-risky investments with your essential expenses over your remaining lifetime, however long that period may turn out to be.

How Long Should You Plan to Live?

One of the most important assumptions you need to make when planning for your retirement in today’s low-interest rate environment is the expected length of your lifetime.  If you are married, you may also need to make assumptions with respect to how long your spouse may live, how long you both will be alive, and how long just one of you will be alive.  We call these assumptions your Lifetime Planning Periods (LPPs).  Note that an LPP is not how long you (or your spouse) expect to live (life expectancy), but a period, generally longer than life expectancy, to which you conservatively plan to live to avoid outliving your assets (or, alternatively, to reduce the need to significantly cut back essential spending if you live “too long”).  These assumptions can have a significant impact on spending and investment strategies that you may employ in retirement and can affect many of your retirement-related decisions.

“Immunize Then Optimize”—Different Names but Same Planning Concept as Funding Your Floor Portfolio First Then Your Upside Portfolio Second

Thanks again to Christine Benz, Director of Personal Finance at Morningstar for another informative article on retirement planning. In her September 3, 2021 article entitled For Retirement Portfolios, 'Immunize Then Optimize', she and Jeff Ptak interviewed author and investing expert Michael Falk on a number of investment and planning related subjects, including “how retirees and pre-retirees should be operating in this environment and the steps they can take to ensure the success of their plans.”

Preview of Upcoming SECURE Act Lifetime Income SLA Disclosures

In this post, we will deviate slightly from our normal focus of trying to help retirees make better financial decisions to focus on the upcoming lifetime income disclosure requirements imposed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, as implemented in subsequent Department of Labor/Employee Benefit Security Administration (DOL/EBSA) guidance (which has yet to be finalized). This post is a follow-up to our post of November 18, 2020.

Focus on Retirement Spending, Not Retirement Income, Part II

It is always nice when we run across a personal finance expert who speaks the same language that we do. This week, we read an article by Christine Benz entitled “Forget Income Replacement, Focus on Supplying Cash Flow Needs.” Ms. Benz is the Director of Personal Finance at Morningstar. The title of her article reminded us of our post of June 14, 2020, Focus on Retirement Spending, Not Retirement Income. 

What Services Do You Want (or Need) From Your Financial Advisor?

As noted in many of our posts, our mission is to help you make better (or good) financial decisions in or near retirement. Two of the many decisions you will need to make are 1) whether to retain the services of a financial advisor and 2) which services you should use if you do retain one. This post is a follow-up to our post of January 31, 2020 and discusses the question of how much retirement planning you might want to do on your own vs. how much you might want to involve a good financial advisor. The answer may depend on a number of factors, including:

Fortunately, You Don’t Need to Think Like a Nobel Laureate to Make (or Help Your Clients Make) Informed Retirement-Related Financial Decisions

Our primary mission here at How Much Can I Afford to Spend in Retirement is to help people make better financial decisions (usually in or near retirement). To try to accomplish our mission, we promote use of the same basic actuarial principles we applied during our careers as pension actuaries. Our primary audience includes intelligent DIYers and Financial Advisors. As noted in our website, we receive zero compensation from visits to our blog or from any activity associated with the blog. We have, on several occasions, however, received nominal prize awards for essay submissions. 

How Should the Increased Mortality Associated with Covid-19 Affect Your Retirement Plan?

On July 21, 2021, the U.S. Centers for Disease Control and Prevention (CDC) announced in a new report that life expectancy [at birth] in the US “declined by a year and a half during 2020 due in large part to the coronavirus pandemic.” According to USA today, the decrease from 78.8 years to 77.3 years was the largest drop since World War II. Decreases were much larger for Hispanics and non-Hispanic Blacks than for non-Hispanic Whites.

We’ve Added an Actuarial Balance Sheet Tab to our Retiree Workbooks

Inspired by the Dr. David Blanchett article, “Guaranteed Income Belongs on the Retiree Balance Sheet” and discussed in our post of June 9, 2021, we decided to combine the results developed in several separate tabs of our two retiree Actuarial Budget Calculator workbooks (Single Retired and Couple Retired) into the form of a traditional actuarial balance sheet, which compares total household assets with total household spending liabilities. It is our hope that this balance sheet will give you a different perspective on your finances in retirement and will facilitate your retirement planning. 

Worry Less and Spend More in Retirement

Yes. This is another post extolling the benefits of building a Floor Portfolio to fund your future Essential Expenses in retirement. Recently released research shows that households spend more of their assets if they hold a portion of their wealth as guaranteed lifetime income and not as investments. In addition to providing economic benefits, shifting assets from investments to guaranteed lifetime income can also provide psychological benefits that give households a “license to spend” their assets. So, you can worry less, spend more and achieve your financial goals by shifting some of your assets from investments to guaranteed lifetime income.

Selecting a Financial Advocate You Can Trust

In our post of June 19, 2021, we discussed how cognitive decline can derail your plans to achieve your financial goals in retirement. We suggested in that post that you read recent research available from the Stanford Center on Longevity (SCL) and Society of Actuaries for steps that can be taken to transition financial decision-making to children, family members or other agents on a timely basis.

Retirement Planning Using Basic Actuarial Principles—Keeping it Relatively Simple

As noted in our post of April 11, 2021, the financial planning process recommended in this website (Recommended Financial Planning Process) is a relatively simple and straight-forward process. It is a “two-bucket” planning approach that involves establishing 

• a Floor Portfolio to fund your current and future Essential Expenses, where assets in this portfolio are invested in non-risky investments, and
• An Upside Portfolio to fund your current and future Discretionary Expenses, where assets in this portfolio may be invested in riskier investments.

Looking to Calm Those Retirement Spending Fears—Part 2

This post is a follow-up to our post of December 22, 2019 in which we said,

“We here at “How Much Can I Afford to Spend in Retirement” won’t tell you how much you should spend in retirement or how to spend it. We do understand, however, that the many uncertainties involved in retirement planning can and do lead to anxiety, stress and sub-optimal decisions. Managing uncertainty is an area where we believe we can help. And while our Actuarial Approach to personal financial planning will not eliminate uncertainties and retirement risks, it can give you robust tools and processes to manage these risks, calm your retirement spending fears and help you make better spending decisions.”

Achieving Your Financial Goals in Retirement

The purpose of our website is to help you achieve your financial goals in retirement. Unfortunately, there are several situations that may cause some households to fail to meet their goals. In a recent article, 7 Ways Clients Can Fail in Retirement, Financial Advisor writer Jacqueline Sergeant outlines some of the reasons for failure discussed by veteran advisor and author Greg Sullivan in a recent book he has written. This post will discuss these reasons and how you can use the Actuarial Approach and Recommended Financial Planning Process discussed in this website to try to avoid them. 

Using an Actuarial Balance Sheet to Develop a Better Retirement Plan

As advocates of using basic actuarial and financial economics principles to help people make better personal financial decisions, we are always pleased on those rare occasions when we run across articles from others (either actuaries or non-actuaries) advocating similar principles. In his June 1, 2021 ThinkAdvisor article, “Guaranteed Income Belongs on the Retiree Balance Sheet”, Dr. David Blanchett describes the potential financial planning benefits of including guaranteed income in the retiree balance sheet, a basic actuarial principle.

How to Modify Your “Retirement Paycheck” to Make it Work Better as a Spending Budget tool in Retirement

We frequently read articles encouraging retired individuals and couples to cobble together different sources of retirement income (or “design their retirement paycheck”) to meet spending needs in retirement. We call this approach the “Sum of Income Sources” (SOIS) approach. The theory behind this approach is that the sum of the income sources will replace some or all of the paychecks individuals and couples received while working; theoretically making it easier for them to manage their finances in retirement. And while this approach can work well in fairly simple situations, and in fact is promoted as a simpler alternative to other approaches (like the Actuarial Approach advocated in this website), it can fall short in many real-world situations unless it is properly modified. In this post, we will demonstrate the potential shortcomings of this approach and discuss how non-linear sources of income can be modified to make the SOIS approach work somewhat better.

How Much is Good Retirement Spending Advice Worth?

In her May 4 Think Advisor article, “Moshe Milesky: Advisors Should Charge More for Retirement Spending Advice,” Ginger Szala interviews Moshe Milesky about his new book, “Retirement Income Recipes in R” and why current and future financial advisors (and others interested in asset decumulation in retirement) should read it. 

Decisions, Decisions, Decisions

We, here at How Much Can I Afford to Spend in Retirement, advocate the use of basic actuarial and financial economics principles to help our users make better retirement-related financial decisions. We don’t claim to address every possible decision you may need to make before or after you retire. For example, we don’t address the tax ramifications of withdrawals from after-tax vs. pre-tax accounts (or any specific tax strategies for that matter) or how much you should spend on insurance products vs. self-insuring your risks.

Keeping It Simple

In our post of April 5, we encouraged you to develop a strategic plan for retirement that considers your spending goals, your tolerance for risk and your other preferences. We suggested that you could accomplish this task by using our Recommended Financial Planning Process, which we believe is a relatively simple and straightforward process. Of course, what may seem simple to one person may be complicated to another. While our recommended process does involve calculations of present values, our Actuarial Budget Calculator (ABC) workbooks perform these present value calculations for you, thereby significantly simplifying the process in our opinion.

Aligning Your Strategic Plan in Retirement with Your Spending Goals, Tolerance for Risk and Other Preferences

This post is a follow-up to our post of January 31, 2020—How to Develop and Implement a Strategic Plan for Your Retirement. In that post we encouraged our readers to assume responsibility for their own retirement by developing a strategic plan that aligns their spending and investment strategies with their retirement goals. In this post, we will encourage you to also consider your tolerance for risk and other preferences you may have, as recently suggested by two prominent retirement researchers. We will also discuss how you can accomplish this task relatively easily if you are using our Recommended Financial Planning Process. If you are not familiar with this process, you can find a description of it here.

Words Matter

Generally, our posts are written by Ken and are reviewed by Bobbie. This post is a bit different from our others in that it is co-written by both Ken and Bobbie, because she is very interested in being precise with terms. Since we often use terms that may not be familiar to our readers, Bobbie believes that we should define these terms so that all know what is meant by them.

What is Your Plan for Future Spending in Retirement?

The three key drivers involved in determining how your (or your household’s) assets will be spent in retirement generally are:

1. Your (or your household’s) future lifetime(s),
2. Your future investment returns, and
3. The pattern of your current and future spending

This post will focus on item 3. We will discuss recent research into actual observed spending patterns and possible implications for your financial plan.

Stress Testing Your Retirement Plan for Rising Interest Rates / Inflation

In our post of January 29, 2021, we suggested that you consider periodically stress-testing your retirement plan for unfavorable future investment experience by performing a 5-year spending budget projection assuming future assumed “crash-like” Equity returns. We included a 5-year projection example in that post for a couple who followed our Recommended Financial PlanningProcess.  The couple in that example experienced no decrease in their projected Essential Expense spending during the five-year projection period, but did experience fairly significant (but presumably manageable) decreases in their discretionary spending in the initial years of the five-year projection.

Life Annuities Can Be Worth More Than What You Pay for Them

At How Much You Can Afford to Spend, we encourage retirees (and retired couples) to adopt a Liability Driven Investment (LDI) strategy and consider building a Floor Portfolio of low-risk assets to fund their essential expenses.   Low-risk assets include lifetime income sources like Social Security, pensions and life annuities as well as other investments like cash and individual bonds.  In our post of February 2, 2021, we discussed how relatively easy it is to build your own Floor Portfolio.

Yes, “Probability-of-Success-Driven Guardrails” is a Good First Step

Kudos to Michael Kitces and Derek Tharp for attempting to fix some of the deficiencies in spending models typically used today by financial advisors, as previously discussed in our post of July 23, 2020. In their post of March 3, 2021, they highlight some of the problems with Strategic Withdrawal Plans (SWPs) and Monte Carlo models typically used today by financial advisors, and they propose incorporating the guardrail concept for determining annual withdrawals in SWPs advocated in the “Guyton-Klinger Rule” into Monte Carlo “Probability of Success” models to enable financial advisors to better advise their clients. And while we believe the resulting “Probability-of-Success-Driven Guardrails” (or Kitces/Tharp) approach is definitely an improvement over current practice, we remain unconvinced that it is superior to the Recommended Financial Planning Process advocated in this website.

Borrowing and Investing Proceeds in a Low-Interest Rate Environment

We’ve seen several articles recently suggesting that it might make financial sense to take out a home mortgage or car loan at current low interest rates and invest some or all of loan proceeds in equities or other risky investments. The expectation of such Leveraged Investing is that the higher expected returns from equities will more than cover the cost of the relatively cheap loan. The same issue also applies to households considering whether they should accelerate and pay-off their mortgages or car loans vs. investing those payments in risky investments. As an example of a recent article on this subject, the February 9, 2021 Squared Away blog from the Center on Retirement Research entitled, Readers See Pros, Cons to Paid-off Mortgage, contains the following quote:

Building Your Floor Portfolio

Sadly, our friend Dirk Cotton passed away on January 28 at age 68.  You can find many of his sage thoughts on retirement planning in his blog, The Retirement Cafe.  While we never met Dirk, we traded many emails and spoke on the phone frequently.  We were big fans of Dirk and his ideas.  If you search our website, you will find 15 of our previous posts that referenced his posts.

How Effective is Your Financial Advisor’s Monte Carlo Analysis as a Retirement Planning Tool?

Thanks to Mark Chamberlain, Co-Founder of The Open Architecture 2020 Group, for pointing us to an interesting Retirement Management Journal paper by James B. Sandidge entitled, “Odds Are Retirees Don’t Care about the Odds.” Mr. Sandidge’s well-expressed reservations about Monte Carlo Analyses typically used by Financial Advisors struck a chord with us as we have expressed our own misgivings in many of our prior posts. In fact, in our most recent post of January 10, 2021, we said,

How Conservative is Your Financial Advisor’s Calculated Spending Budget?

It always fun for us to review budget calculations done by others. In this post we will review example calculations done for Hank and Marie in Michael Kitces’ and Derek Tharp’s January 6 post, Why 50% Probability Of Success Is Actually A Viable Monte Carlo Retirement Projection. We briefly discuss Hank and Marie’s data below, the assumptions we made and compare results using our Actuarial Budget Calculator (ABC) with results from the Kitces’ Monte Carlo model to gauge how conservative their model results are. In summary, their model is less conservative (more aggressive) than the ABC with default assumptions, in that it produces higher initial total spending budgets. 

Time to Perform Your January 1, 2021 Actuarial Valuation

Congratulations.  You made it through 2020!  

In our ongoing effort to turn you all into actuaries, this post will recommend that you perform an “actuarial valuation” based on your personal data as of January 1, 2021.  As part of this process, we will also encourage you to  prepare an “actuarial report” to document your thought-process and any planning decisions you make for this year.