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.
Dr. Blanchett, whose retirement research is frequently mentioned in this website, was the Director of Retirement Research at Morningstar when this article was published and is now the Head of Retirement Research at QMA. He is an esteemed thought-leader in the personal financial planning field and has published many articles in many scholarly publications.
In his article, Dr. Blanchett recommends including the present value of guaranteed income such as Social Security benefits, pensions benefits and life annuity income as assets in the household balance sheet in order to facilitate better investment and spending decisions. We totally agree and have been advocating this concept since the inception of our website. As retired pension actuaries, we sometimes refer to the household balance sheet as the Basic Actuarial Equation or Actuarial Balance Sheet, as this concept so ingrained in our actuarial training. See our post of May 21, 2015 for an illustration of the Actuarial Balance Sheet.
To determine the present value of an individual’s Social Security benefit to be included in the retiree’s balance sheet, Dr. Blanchett suggests using assumptions comparable to those we currently recommend as default assumptions in our Actuarial Budget Calculator (ABC) workbooks. Calculations of present values of Social Security benefits and other guaranteed income under the inputted assumptions are shown in the PV Calcs tab of the workbooks. We note that our default assumptions produce somewhat higher present values of guaranteed income than Dr. Blanchett’s as we use the longer expected lifetime planning periods advocated by Dr. Blanchett and discussed in our post of September 5, 2020.
Congratulations to Dr. Blanchett on his new position. We hope he continues his excellent research efforts as well as his advocacy of the benefits of using basic actuarial principles to improve personal financial planning.
