Do You Want Your Spending Budget in Retirement to be More (or Less) Conservative?

Long-time readers of our blog know that we aren’t big fans of Monte Carlo models generally used by financial advisors for financial planning. These models typically use historical investment return assumptions (or other assumptions that may not be clearly communicated to the clients) in simulations to produce what financial advisors claim to be probabilities of being able to spend $X per year in retirement. Of course, these probabilities are only as good as the assumptions used in the simulations and can change significantly as actual experience emerges (such as the actual investment returns experienced this year). You may wish to revisit our post of January 29, 2021 to read a discussion of the significant limitations of Monte Carlo models typically used today. 

We’ve Changed the Default Economic Assumptions in the Actuarial Financial Planners

Because interest rates on government-issued securities have increased significantly since the beginning of the year and implied investment returns on immediate annuities have also increased, we have decided to increase the default assumptions used in the AFPs for future:

• Investment returns on Floor Portfolio assets to 4.5%,
• Investment returns for Upside Portfolio assets to 7.5% and
• Annual rates of inflation to 3.5%.

The Actuarial Financial Planner—Helping You Design a Plan to Weather Tumultuous Periods and Achieve Your Financial Goals

The title of this post was shamelessly borrowed from the Kitces.com post of June 17, 2022, in which Adam Van Deusen said,

“The key point is that advisors can not only serve as empathetic listeners during periods of market stress, but also serve as a reassuring force to remind clients how their plan was designed to weather tumultuous periods and help them achieve their goals.” 

While we are not financial advisors and we don’t have clients, we do believe that our Actuarial Financial Planner (AFP) can be a very effective tool for helping users develop a plan specifically designed to weather tumultuous investment periods and to help them achieve their financial goals in retirement.

Retirement Researchers Discuss Retirement Planning Approaches

For those of you who like to listen to retirement-finance-focused podcasts, we recommend you try the Wealth, Managed podcast of September 24, 2021 featuring Drs. Finke, Blanchett and Pfau, entitled “Approaches to Retirement Income Planning.” In this podcast, these preeminent retirement researchers discuss some of the cons of probabilistic approaches commonly used today by financial advisors utilizing the 4% Rule and Monte Carlo modeling and some of the pros of the Safety-First approach utilizing what Dr. Pfau calls the Funded Ratio. You may recognize the Funded Ratio as the Actuarial Approach described in this website and the Safety-First approach as the approach built into our Actuarial Financial Planner. 

Here is the link to their podcast:

Wealth, Managed with Michael Finke and David Blanchett: Ep. 21: Approaches to Retirement Income Planning on Apple Podcasts

Planning on Social Security, Part II

The Social Security trustees recently released their 2022 OASDI Trustees Report detailing the financial status of the program. The news this year was actually a little better than last year’s. Based on the trustees’ intermediate assumptions,

• The trust fund depletion date (TFD) in this year’s report is 2035, compared with 2034 in last year’s report,
• The program’s 75-year actuarial deficit is only 3.42% of taxable payroll compared with 3.54% last year, and
• The default option if Congress does not enact program changes prior to TFD is an across the board 20% decrease in program benefits in 2035 compared with a 21% decrease in program benefits in 2034.

In this post, we will once again raise the question that very few of our readers (or many baby boomers for that matter) care to actually think about--How should one plan for possible future decreases in Social Security benefits in light of the program’s financial situation? 

Is Rebalancing a Good Strategy for Retirees?

This post is a follow-up to our post of February 9, 2022, “Reflecting Non-Financial Assets in Your Asset Allocation Strategy” and our February 21, 2022 Advisor Perspectives article, “Including Non-Financial Assets in a Client’s Allocation.” The question addressed in this post is whether periodically rebalancing portfolio assets to maintain a specific percentage allocation between risky and non-risky investments (i.e., 60% equity/ 40% fixed income) is a good strategy for meeting one’s spending goals in retirement.