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.
To assist our readers in understanding these terms, Bobbie maintains our Glossary, and she insists that when we use specific words or terms, that their use be consistent with the definition in the Glossary. We try to be consistent in capitalizing the terms that are in the Glossary, and bolding them (at least in their first use in a post).
Four Frequently Used Terms
In this post, we are going to discuss what we mean by four terms frequently used in personal retirement planning literature (or by us). All but the term “retirement income” are defined in our Glossary:
- Personal Financial (or Strategic) Plan
- retirement income
- Strategic (or Structured or Systematic) Withdrawal Plan (SWP)
- Strategic (or Sustainable) Spending Plan (SSP)
Personal Financial Plan
A Personal Financial (or Strategic) Plan is a comprehensive overview, typically in a document, of your current financial status, your financial goals, and the strategies you intend to use to achieve them. The plan can and should be used to measure the progress you're making and should be updated periodically.
To us, the purpose of a Personal Financial Plan in retirement is to develop and maintain investment, spending, and tax strategies that best support your spending goals in retirement. Note that typical spending goals can include:
- not running out of assets,
- not having to reduce spending on essential expenses,
- being able to afford spending on non-recurring discretionary items,
- being able to afford spending on unexpected expenses
- being able to leave a bequest on death, etc.
We generally avoid discussion of tax strategies, but our Recommended Financial Planning Process does address investment strategies (in broad general terms) and spending strategies designed to support your spending goals. Our recommended financial plan also indicates when you may wish to consider changing your spending or spending goals.
Retirement Income
Since the primary focus of our website is to help you determine how much you can afford to spend in retirement, we generally avoid using the term “retirement income”, as it can mean different things to different people. Some retirees and financial experts believe that a robust financial plan involves having retirees (or their financial advisors) combine various sources of income with each year’s spending, limited to the sum of these sources. Sources of income for this purpose typically include streams of lifetime amounts from Social Security, pensions, life annuities and withdrawals from invested assets.
For purposes of determining the annual “income” attributable to invested assets, retirement income can mean interest and appreciation on such assets, or it can equal the amount withdrawn under a Strategic Withdrawal Plan. Some assets, such as home sales or part-time employment, are generally not considered to be retirement income. For this and other reasons, we believe it is important to focus on spending derived from assets rather than retirement income as discussed in our post of June 14, 2020. Since we do not have a specific definition of retirement income, we are not capitalizing the term, nor do we plan to define it in our Glossary.
Strategic Withdrawal Plan
A Strategic (or Structured or Systematic) Withdrawal Plan (SWP), as defined in the Glossary, is a plan for withdrawing amounts from an investment portfolio during retirement using a computational algorithm that does not consider Income From Other Sources (IFOS). The 4% Rule and IRS RMD Rule (and various permutations of these rules that we see frequently) are examples of SWPs. As noted above, withdrawals developed by SWPs may (or may not) be considered to be “retirement income” for a retiree.
Strategic (or Sustainable) Spending Plan
A Strategic (or Sustainable) Spending Plan (SSP), as defined in the Glossary, is a process for determining annual sustainable spending from total assets, and does not simply involve determining how much may be withdrawn from an investment portfolio as under a SWP. It is also a process for determining annual sustainable spending from total assets that is consistent with the retiree’s spending goals (including non-recurring spending and future pattern of recurring spending).
The spending budget determined using the Actuarial Approach is an example of a SSP. Annual withdrawals from invested assets under a SSP are not determined using a SWP, but instead are equal to the SSP amount for the year minus income from other sources, and may be positive or negative and may vary significantly from year to year depending on the pattern of a retiree’s income from other sources. See our post of December 1, 2020 and our follow-up post of December 3, 2020 for further discussion and an illustration of how a SSP can differ from a SWP.
Conclusion
This post discusses several terms that we see frequently in personal retirement finance literature or that we use. These terms are not always used consistently and this can sometimes cause confusion. For example, see our post of August 2, 2020 regarding alternative approaches suggested for developing spending/retirement income budgets.
As actuaries, we prefer to define terms to avoid confusion. You can find definitions for the above terms and others in our Glossary. Bobbie would love to get your comments on our Glossary and how to improve it.
