In light of lower-than-expected investment returns and higher-than-expected inflation this year, retiree and near retiree households are facing difficult financial decisions. These decisions may include;
- Can I afford to retire when I had planned?
- Can my spouse retire at the same time as I?
- Should our plan assume higher rates of inflation, and if so, for how long?
- Should one of us continue to work or plan to work part-time for a while?
- Should one or both of us postpone commencing our Social Security benefits?
- Should we reduce or defer our planned discretionary spending?
- Should we change our investment strategy, and if so, how? Should we make it more or less risky?
- Should we take our pension plan distribution in the form of a lump sum?
- Should we somehow tap into our home equity to supplement our retirement spending?
- Have we budgeted enough for future long-term care, future healthcare, future household repairs, etc.?
- Should we somehow reflect a possible future reduction in our Social Security benefits in our current spending budget?
So, how are retired and near-retired households making decisions like these?
According to the October, 2022 Stanford Center on Longevity report entitled, “Disconnected: Reality vs. Perception in retirement planning”,
“There’s also much room for improvement regarding the resources used by pre-retirees and retirees to help them make critical retirement decisions. Figure 2 (below) shows that almost three-fourths (72%) of respondents reported they relied on their own instincts for making decisions; that was the only resource reported being used by more than half of survey respondents.”
Figure 2 of SCL Report-- Reliance for Retirement Planning
Reliance description | % Reporting a great deal of reliance or reliance to some extent |
Your own instincts | 72% |
A financial advisor | 41% |
Communications from your employer | 33% |
Retirement planning software, calculators or tools | 32% |
Family, friends or co-workers | 31% |
Books, articles, blogs or other written works | 30% |
Seminars or webcasts | 22% |
Television or radio | 12% |
It is a little bit disappointing to us that “reliance on books, articles, blogs or other written works” falls behind “reliance on family, friends or co-workers”, but maybe we can also include our blog and its retirement planning tools in with the “retirement planning software calculator tools” to be more relevant. In either event, this report clearly indicates that many retired households are making important decisions without a great deal of reasonable input (which, by and large, is the main take away from the SCL report.
Actuarial Financial Planner
In our opinion, a good personal retirement planning process (or tool) will suggest actions relating to spending and investing that should be considered when considering retirement or when actual experience in retirement is more or less favorable than assumed (like during the current year). If your planning tool is not clearly suggesting actions this year with respect to your spending or your investment strategy (like many approaches that use Monte Carlo models or the 4% Rule are failing to do), then perhaps you should consider the Actuarial Financial Planner as a better planning tool.
The SCL report, co-authored by our friend and fellow actuary, Steve Vernon, is a worthy read. There is a great deal in this report that is quite consistent with what we are trying to do with our AFP tool, particularly the call for providing a step-by-step process to address the decisions that retired households need to make. For those who are unfamiliar with our seven-step recommended planning process, you can find a brief description here.
