Fixed Dollar SPIAs vs. Fixed Rate Cola SPIAs

In our last post, we asked whether now (or actually earlier this month) might be a good time to purchase a single premium immediate annuity (SPIA) to strengthen Floor Portfolios used to fund essential expenses. In that post (and prior posts) we focused on SPIAs that provide fixed dollar payments each month for life. In this post, we will discuss SPIAs that provide lifetime payments with annual fixed rate “cost of living adjustment” (or Cola) increases, and why you might want to consider this type of annuity rather than a fixed dollar SPIA to strengthen your Floor Portfolio. We include an example.

Is It a Good Time to Buy That Single Premium Immediate Life Annuity, Updated

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

• based on life expectancy, or 50% probability of survival, and
• based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will again examine the implied interest rate assumptions built into recent quotes from ImmediateAnnuities.com and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of September 17, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Estimating Present Values of Long-Term Care Costs and Survivor Benefits Payable After the First Death Within a Couple

The Actuarial Approach recommended in this website involves periodically (generally annually) comparing the present value of a retired household’s assets with the present value of its anticipated household spending liabilities to develop its Funded Status as of a valuation date (generally the beginning of the current year). The present value of assets used in this comparison is the current market value of accumulated savings plus discounted values of future lump sum payments or streams of payments from other income sources. The present value of household spending liabilities is the discounted value of future lump sum expenses or streams of expenses. To help retired households allocate their assets between risky (Upside Portfolio) and non-risky (Floor Portfolio) investments, separate rates (investment return assumptions) are used to discount future essential expenses/non-risky asset sources and future discretionary expenses/risky asset sources. 

“Safe” Withdrawal Rate Brouhaha

Periodically, we read articles from William Bengen, the inventor of the safe withdrawal rate (otherwise known as the 4% Rule), from various esteemed retirement academics, from the retirement researchers at Morningstar or from other retirement experts about this year’s version of the 4% Rule. For example, in 2021, Morningstar experts told us that the initial safe withdrawal rate was 3.3%. Then in 2022, they told us that it was 3.8%, and this year, it is back up to 4% as long as equity investments don’t exceed 40% of the retiree’s portfolio. And while the basic safe withdrawal rate may vary somewhat from year to year based on current economic conditions and whether or not it is followed blindly without adjustment (increasing the initial withdrawal amount by inflation each year), researchers generally have determined that historical investment experience supports a conclusion that an annual withdrawal in the neighborhood of 3-5% of a retiree’s portfolio at retirement, increased annually by inflation, has a high probability of lasting at least 30 years without depleting portfolio assets, assuming about 50% of the portfolio assets is invested in equities.

We’ve Changed the Default Assumptions in the Actuarial Financial Planner Models

The last time we changed the default assumptions in our Actuarial Financial Planner (AFP) models was May of last year. Because interest rates on government-issued securities have increased significantly since then, implied investment returns on immediate annuities have also increased and expectations for future inflation have decreased, we have decided to change the default assumptions used in the AFPs as follows:

• Increase Investment return on Floor Portfolio assets from 4.5% per annum to 5.0% per annum,
• Increase Investment return on Upside Portfolio assets from 7.5% per annum to 8.0% per annum, and
• Decrease annual rate of inflation from 3.5% per annum to 3.0% per annum.

Note that we have increased the “real” assumed rates of return on Floor and Upside Portfolio assets by 1% per annum. We have not changed the default assumptions used in the model for lifetime planning periods.

Confidently Boost Your Spending in Retirement with the Actuarial Approach

As discussed many times in this website, the Actuarial Approach employs a model and a process that involves systematic comparison of household assets and liabilities and tracking of the resulting household Funded Status over time for the purpose of making better financial decisions in retirement, including decisions relating to spending and investment. This is the same general process used by actuaries to help ensure the financial sustainability of many other financial systems, such as Social Security and defined benefit pension plans.

And while we tend to focus on avoiding over-spending in retirement, there are certain households that could probably afford to spend more if they wanted. In his well-written Kitces.com post of November 8, 2023 Adam Van Deusen outlines several technical framing strategies and behavioral tactics to help spending-hesitant clients increase their spending in order “to have a more enjoyable retirement.” We generally agree with Mr. Van Deusen’s recommendations and encourage you to read his article. In this post, we will focus on his recommended technical framing strategies (summarized below) and discuss how these strategies are easily accomplished using the Actuarial Approach. 

Bucketing by Expense Type with the Actuarial Approach

Many financial advisors employ time segmentation buckets (sometimes simply referred to as “bucketing”) to help their clients fund their desired retirement spending. This usually involves three buckets based on the expected timing of future spending: short-term, intermediate-term and long-term spending. The Actuarial Approach advocated in this website encourages the use of a different bucketing strategy that involves two buckets that separate future expenses into “essential” and “discretionary” spending. This strategy was recently discussed in the October 30 Financial Advisor article entitled, “Michael Kitces warns Advisors About Sequence Risk, Defends 4.0% Rule.” Mr. Kitces is a well-known retirement thought leader for financial advisors. 

This post will set forth some of Mr. Kitces’ comments about the bucketing-by-expense-type strategy we recommend and will supplement Mr. Kitces’ comments with our commentary.

Plan on Future Adjustments to Your Retirement Plan Part II

This post is a follow-up to our post of April 16, 2023. In that post, we said,

“In our ‘real world,’ lots of things can happen in the future that can affect the ratio of household assets to household spending liabilities, including variations in:

• Annual investment returns (i.e., past performance is not a guarantee of future results),

• Longevity,

• Annual inflation (or other rates of increases or decreases in household expenses),

• Spending (this is a huge source of potential variability) and spending goals,

• Sources of income (i.e., Social Security or rental income)

• Assumptions about the future

All these things make it very difficult to predict the future with any degree of accuracy.” In light of these variations, we therefore concluded that it was prudent for retirees to plan on future adjustments in their retirement plans.

Automatic Funded Status Adjustments for Social Security is a Great Idea

This month, in Any Social Security Legislative Package Should Include an Automatic Adjustment Mechanism, Alicia Munnell, Director of the Center for Retirement Research at Boston College, recommended that Congress include an automatic adjustment mechanism to maintain Social Security’s desired funded status on an ongoing basis as part of the next round of Social Security reform. 

Actuaries Continue to Ignore the “Valuation Date Creep” Elephant in the Social Security Financing Room

This post is a follow-up to my July 3, 2023 Advisor Perspectives article, Applying the Actuarial Process to Retirement Planning, where I encouraged financial advisors to employ the same actuarial process for retirement planning that Social Security actuaries employ for Social Security financing.  In that article, I outlined the following six-step planning process and included an illustration showing how this process is applied to Social Security:

1. Make reasonable assumptions about the future (generally deterministic, not stochastic).
2. Calculate present values of assets (including future sources of income) and liabilities based on relevant demographic information, system provisions and assumptions made.
3. Periodically (generally annually) compare estimated present values of assets to liabilities to determine the system’s funded status (snapshot comparison).
4. Maintain a history of the system’s funded status over time and note trends.
5. When warranted or required, make changes to assets or liabilities (or both) to restore desired funded status (and/or to address possible cash flow issues).
6. Periodically evaluate/stress test assumptions to see if they need to be changed or to assess risk.

Is It a Good Time to Buy That Single Premium Immediate Life Annuity?

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

• based on life expectancy, or 50% probability of survival, and
• based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of September 17, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of January 9, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Manage Your Financial Risks in Retirement Like an Actuary

In his August 7, 2023 Advisor Perspectives article, Larry Swedroe, head of financial and economic research for Buckingham Wealth Partners, discusses what he calls the seven great “challenges” to retirement plans today. According to Mr. Swedroe, these challenges are:

• historically high equity valuations;
• historically low bond yields;
• increasing longevity;
• the potential need for expensive long-term care;
• the failure of government to fully fund the Social Security and Medicare programs;
• the likelihood of slower economic growth due to the rising debt-to-GDP ratio; and
• the end (and even likely reversal) of favorable tailwinds for corporate profits (falling interest rates, profits growing faster than GDP, and falling tax rates).”

Six of Mr. Swedroe’s challenges involve the asset side of a retired household balance sheet while two of them (increased longevity and the potential need for expensive long-term care) primarily involve the spending liability side of the household balance sheet. These challenges (and others discussed below) translate into increased “risks” that the historical assumptions frequently used in retirement planning projections by many financial advisors in Monte Carlo models or in other static planning approaches (like the 4% Rule) may be too optimistic. Fortunately for retirees, these risks can be managed by using the basic actuarial principles and processes advocated in this website and discussed below. 

Retirement Planning is Not an Event; It’s a Process

I recently received an email from the folks at Retirement Researcher inviting me to attend their latest Retirement Challenge. The preamble to their invitation said,

“Retirement planning isn’t an event… it’s a process, Ken.”

We couldn’t agree more, and although we have tried many times in this website to do so, we can’t say it any better. Successful ongoing planning in retirement depends less on the planning model employed and the accuracy of the assumptions used in the model and more on the process used to address deviations of actual and assumed experience as they occur.

American Academy of Actuaries New Social Security Tool is Also Deficient in Alerting the Public to Potential Cash Flow Issues

This post is a follow-up to our post of July 29, 2023 where we took the Academy to task for removing three important caveats about the Social Security Challenge tool and, therefore, potentially misleading the public about the long-term effectiveness of possible system “fixes.” In this post, we will discuss yet another feature of the tool that may also mislead the public about the effectiveness of these possible “fixes.” This feature ignores the potential negative impact on system assets of overly deferring the revenue increases or benefit reductions necessary to restore system’s actuarial balance. Thus, while certain changes may achieve actuarial balance (and even earn a “You’ve Solved It” pat on the back from the tool), these changes aren’t expected to keep the OASDI Trust fund from running out of money during the entire 75-year projection period, and therefore, should not be considered as viable, much less as a “fix.” After providing some background, we will discuss an example.

Why Did the American Academy of Actuaries Remove Important Caveats from its Social Security Reform Menu Tool?

Almost seven years ago, the American Academy of Actuaries added the following language to its Social Security Game to avoid misleading the public regarding changes that may be required to bring the system back into actuarial balance:

“The following should be noted when interpreting results from the Social Security Game:

• The 75-year actuarial balance calculation used in the game does not consider significant revenue shortfalls expected to occur after the end of the 75-year projection period, and thus possible solutions illustrated in this game are generally not sufficient to achieve “sustainable solvency,” a concept discussed in the Trustees Report.
• The possible solutions assume immediate adoption of System changes, rather than gradual implementation. If changes to the System are gradually implemented, the required increases in tax revenue or benefit decreases will need to be larger than noted in the game to achieve actuarial balance.
• The success of reforms will depend on how well actual future experience compares with the assumptions made by the trustees and the Social Security actuaries. There is no mechanism in current Social Security law to maintain the program’s actuarial balance once it has been achieved. Thus, there can be no guarantee that the System’s long-term problem will be “solved” for any specific length of time by enacting various system changes. “

Critical Planning Lesson Learned from Social Security

This post is a follow-up to my post of June 11, 2023, where I outlined the general actuarial process that we recommend for ongoing planning in retirement and my Advisor Perspectives article of July 3, 2023, where I illustrated how this same process is applied to Social Security. Several readers questioned why I illustrated the application of the general actuarial process using Social Security since, according to them, it clearly hasn’t worked very well for our primary U.S. retirement system. In this post, I will respectfully disagree with those readers and point out that not only is this proven actuarial process exceptionally robust, but it has actually worked quite well for Social Security and other financial systems. Notwithstanding, there is, an important lesson involving Steps 4 and 5 of the process that we can learn from Social Security when planning our own retirements. 

Life Expectancy vs. Lifetime Planning Period

The inspiration for this post was a recent conversation I had with my buddies at our weekly R.O.M.E.O (Rossmoor Old Men Eating Out) lunch and gab session. The exciting topics we discussed included:

• How much longer can we expect to live?
• How much longer should we plan on living? and
• What is the likelihood that the President of the United States will die in office during the term starting January 20, 2025 given the two likely candidates at this time.

American Academy of Actuaries Doubles Down on Misleading Answer to Cause of Social Security Funding Deterioration

In my Letter to the Editor in the May/June edition of Contingencies (a publication of the American Academy of Actuaries), I took the Academy’s Senior Pension Fellow, Linda Stone, to task for claiming that Social Security’s financial challenges were primarily the result of demographics. I disagreed with Ms. Stone’ claim in my letter and noted that a breakdown of the sources of Social Security’s funding status deterioration since 1983 is shown in Table 1 of Social Security Administration Actuarial Note (Year).8. In the letter, I said,

“This table shows that out of the total 2022 long-range actuarial balance of -3.43% of taxable payroll, 0.14, or -4%, was attributable to “Demographic Data and Assumptions.” Therefore, I conclude that the demographic assumptions used in the 1983 Trustees Report were pretty darned good, and demographics doesn’t appear to be the primary source of the growth in the system’s long-range actuarial deficit since 1983.”

Systematic Comparison of Assets and Liabilities, Part 2

This post is a follow-up to our post of April 11, 2023 entitled, “Systematic Comparison of Assets and Liabilities—Its How We Actuaries Roll.” In this post we will describe the general process actuaries use to systematically compare assets and liabilities for many financial systems such as pension plans, Social Security and, as recommended in this website, personal financial retirement plans. We believe this general actuarial process is just as important, if not more important, in the management of a system’s finances than the models or assumptions actually used to project or calculate a system’s assets and liabilities.

Wade Pfau Touts Use of Basic Actuarial and Financial Principles for Retirement Planning

Thanks to Dr. Wade Pfau,

• Founder of Retirement Researcher,
• Principal and Director of Retirement Research for McLean Asset Management,
• Research Fellow with the Alliance for Lifetime Income and Retirement Income Institute,
• Professor at the American College of Financial Services, and
• Widely recognized retirement thought leader,

for once again advocating the use of essentially the same basic actuarial and financial economics principles for retirement planning for retirees and near retirees that we have advocated in this website for years.

You can read Dr. Pfau’s thoughts on comparing household assets and spending liabilities and assumptions to use for this purpose in this May 26, 2023 Financial Advisor article.

Ken Steiner Interviewed on Money Mountaineering Podcast

Check out my interview with Pete Neuwirth on his 9th episode of Money Mountaineering.   You will quickly discover why I made my living as an actuary rather than as a tv personality. 

Unfortunately, Congress Did Not Adopt a Better Financing Approach for Social Security in 1983

In 1982, I wrote a paper for the Transactions of the Society of Actuaries entitled, “A Better Financing Approach for Social Security¹”. At the time, the National Commission on Social Security Reform was studying ways to solve the system’s impending short-term funding crisis and long-term funding imbalance, which eventually led to adoption of the 1983 Amendments to the system.

My proposed approach was relatively simple and anticipated:

• Making reasonable deterministic assumptions about the future
• Annual valuations to systematically compare the present values of system assets and liabilities
• A level tax rate if all assumptions about the future were realized (and no future changes in assumptions or benefits),
• Significant trust fund accumulation,
• Automatic adjustments of future tax rates to amortize:
  • Gains and losses from experience more or less favorable than assumed
  • Changes in actuarial assumptions
  • Changes in system benefits

I also discussed in the paper that if Congress did not want to implement the automatic tax rate changes (or didn’t like the expected trust fund accumulation), it could always decide to adjust benefits accordingly.

Don’t Forget Your Taxes

Taxes (federal, state, local, real-estate, Social Security, Medicare, etc.) are essential expenses that, unfortunately, must be planned for in retirement. As is the case with other expenses expected in retirement, we must make assumptions about how current tax expenses will change in the future to develop a reasonable estimate of the total present value of future household expenses (i.e., household spending liabilities), against which the total present value of household assets is compared. This post will address assumptions for projecting tax expenses using the Actuarial Financial Planner (AFP) and will include an example.

Would You Trade Your Pension for What is Behind Door #2?

Every so often we read something in the retirement-advice media with which we simply cannot agree. Recently, we ran across a video from Kiplinger entitled, “Why A Pension Lump Sum is Better than An Annuity Payment.” This video appears to be based on the May 5, 2022 article by Brian Skrobonja, CHFC, (updated on January 27, 2023) entitled, “Pension Lum Sum vs. Annuity Option, Which Is Better?” When the article was first released last year, we took issue with it and discussed its shortcomings in our post of May 5, 2022. If you are interested in this subject, we encourage you to re-read our post of May 5, 2022.

Plan on Future Adjustments to Your Retirement Plan

Ongoing retirement planning involves making best estimate (or conservative) assumptions about the future and making necessary adjustments to your retirement plan when those assumptions inevitably turn out to be incorrect. At How Much Can I Afford to Spend, we believe using our Actuarial Financial Planner (AFP) model annually to calculate your funded status can best help you with ongoing (or dynamic) retirement planning. 

On the other hand, some financial advisors and academics encourage use of “safe” alternatives (like the 4% Rule or Monte Carlo model results with 90% or greater probability of success) where future retirement plan adjustments are generally not anticipated. This type of planning is referred to as “one-and-done” (or static) retirement planning. We also refer to this second type of retirement planning as “head-in-sand” retirement planning as it is very difficult to predict the future accurately and, as a result, it is very easy to either overspend or underspend relative to your spending goals when using these static approaches. For more discussion of ongoing vs. static planning, see our post of January 15, 2023. 

Systematic Comparison of Assets and Liabilities—It’s How We Actuaries Roll

In our last post, we discussed how Social Security actuaries compare system assets with system liabilities on an annual basis to determine the system’s funded status (long-range actuarial balance). We noted that the process used for this purpose for Social Security is very similar to the process we recommend for developing a spending plan in retirement.

What is Social Security’s Funded Status?

This post is a geeky dive into the primary metric used to measure Social Security’s funded status and how similar this metric is to the Funded Status measure generated by the Actuarial Financial Planner (AFP) that we encourage retired households to use in their financial planning.

What’s Your Funded Status?

While our recent posts suggesting that households focus on their Funded Status are perhaps beginning to sound like a broken record, we can’t help but notice that this general approach (also known as the Funded Ratio] is gaining support in the retirement press. For example, in the March 25-26 Kitces.com Weekend Reading post, the author says:

“Ultimately, the key point is that integrating dynamic rules into a retirement income plan can have significant implications on optimal retirement income decisions. And because it takes a comprehensive look at a client’s assets (incorporating both current portfolio balances and future expected income) and allows for spending flexibility in retirement (though the funded ratio’s sensitivity to assumptions can make it tricky to work with in practice), using the funded ratio to determine adjustments in retirement income could help advisors maximize their clients’ spending in retirement compared to more static approaches!”

And while we disagree with the above assertion that “the funded ratio’s sensitivity to assumptions can make it tricky to work with” (or any trickier to work with than other approaches), we will take this opportunity to once again describe the very simple steps involved in determining your household Funded Status using the Actuarial Financial Planner (with slight modifications from previous descriptions), so that you can put it to use in your planning. 

Focus on Your Spending Budget and Your Funded Status, Not on Withdrawals from Your Accumulated Savings

It seems that every other article we read these days in the retirement media involves someone’s thoughts about how best to withdraw funds from accumulated savings to supplement income from other sources such as Social Security, pensions and annuities in retirement. The most common withdrawal strategy for this purpose, of course, is “the 4% Rule”, but there are literally thousands of alternative withdrawal strategies (and more being developed every day). Advocates of these strategies stress that “converting” accumulated savings to “retirement income” is essential to ensuring that one’s annual retirement income (“I”) exceeds one’s annual expenses (“E”), or (“I > E”). In fact, several authors have proclaimed this “common-sense equation” to be, “The most important rule of personal finance — spend less than you earn.”

Why is the Actuarial Profession Reluctant to Advance Actuarial Solutions to the Decumulation Problem?

As a retired actuary who advocates the use of basic actuarial principles and processes to help retirees and near retirees make better financial decisions, I frequently wonder why my profession is so reluctant to advance actuarial solutions to the problem of decumulation in retirement. In this post, I will discuss:

• Mission and vision statements of the two major actuarial bodies in the U.S. (and how advancing an actuarial approach can be considered entirely consistent with these statements)
• Fundamental concepts of actuarial science that the actuarial bodies appear to ignore when providing planning advice to retired households (and an example), and
• Possible reasons why the actuarial profession in the U.S. is reluctant to advance actuarial solutions

Using the AFP to Develop a More Aggressive Financial Plan in Retirement

In our last post, we indicated that there are several levers in the AFP that more conservative users can employ to reflect their lower tolerance for potential future spending reductions, including:

• Using more conservative (than default) assumptions about the future to determine their household Funded Status,
• Building up a larger Funded Status over time, or
• Classifying more expenses as “essential.”

In this post, we will flip the coin and look at levers available for those with a higher tolerance for potential future spending reductions, or for those with insufficient assets to cover their spending liabilities using the default assumptions (and therefore, have little choice but to assume more risk).

We include an example. 

Improving Retirement Planning by Employing Basic Actuarial and Financial Economic Principles

In our post of July 23, 2020 entitled, “How to Fix Advisor Retirement Planning Models,” we summarized some of the problems with commonly used Monte Carlo approaches used by financial advisors to develop plans for retirees and near retirees. These problems were identified by three retirement thought-leaders (Michael Kitces, Michael Finke and David Blanchett) in a panel discussion at the Engage 2020 virtual conference. 

Check These Five Boxes to See if You Are Financially Ready to Retire

The Actuarial Financial Planner (AFP) is a useful tool to facilitate household decision-making in or near retirement. In this post we will discuss how the AFP (and possibly the Actuarial Budget Calculator for Single Retirees) can be used to determine if you are financially ready to retire. We include an example below to illustrate the process.

Ongoing vs. One-Time Financial Planning in Retirement

The Actuarial Financial Planner (AFP) advocated in this website is a relatively simple, deterministic actuarial model (i.e., it uses deterministic assumptions about the future to determine results).  By comparison, many financial advisors use more complicated Monte Carlo models which involve the use of one or more stochastic assumptions.  In this post, we will once again discuss why we believe the AFP is the more appropriate model for the purpose of ongoing (as opposed to one-time) financial planning in retirement.

This post is a follow-up to our post of December 25, 2022.  We start by providing background on deterministic vs. stochastic models and then discuss one of the main purposes of financial planning--periodically rebalancing household assets and spending liabilities to keep spending on track during retirement.  We conclude that the AFP better accomplishes this purpose than Monte Carlo models commonly used today.

Managing Risks in Retirement

Actuaries use models, dynamic processes and periodic risk assessments to measure and manage risks for financial systems. The same basic actuarial principles and processes used by actuaries for other financial systems can be applied to the problem of how much a retired household can afford to spend in retirement.

In his January 3, 2023 Advisor Perspectives article, fellow Fellow of the Society of Actuaries and friend, Pete Neuwirth, describes risks faced by retired households during “decumulation.” He concludes his article by saying:

“The fundamental nature of decumulation is different from accumulating sufficient assets to provide for a sustainable retirement. While the extensive body of investment and asset-allocation theory developed over the last 50 years is applicable, decumulation is more of a risk management problem where actuarial science should be brought to bear.

At its core, decumulation is an asset-liability and cashflow matching problem governed by random variables from unruly and difficult to determine probability distributions. It will take researchers in both the investment and actuarial professions to make progress.”

I agree. 

Updated Implied Discount Rates for Single Premium Life Annuities as of January, 9, 2023

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com based on two different mortality assumptions (one based on life expectancy (50% probability of survival) and the other based on a 25% probability of survival, which is the basis we recommend in our website for planning purposes).

In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of January 9, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed as of November 25, 2022. You may wish to revisit our prior posts for more general discussion of annuity pricing assumptions.

The key takeaway from this post is that implied interest rates (rates of return) on SPIAs have decreased over the past several months. We have no idea, however, if they are going to decrease even more in future months (or even increase).

Automatic Funded Status Adjustments to Your Spending Budget

The Actuarial Approach advocated in this website is a dynamic spending approach that anticipates periodic determinations (or valuations) of the retired household funded status and, if necessary, adjustments in the household spending plan to maintain a desired funded status level. Contrast our recommended approach with static approaches (like the 4% Rule or static Monte Carlo models) that anticipate a one-and-done determination of future household spending with presumably a relatively high probability of success. 

In our last post, we provided an example of the actuarial approach for a couple (Bill and Betty), whose Actuarial Financial Planner (AFP) funded status decreased from 112% as of January 1, 2022 to 99% as of January 1, 2023. In that post, we left it up to Bill and Betty (and their personal tolerance for risk) to determine actions they might want to consider in light of this decrease. In this post, we propose an alternative automatic approach for Bill and Betty (and other households) to use to adjust their spending budget if their AFP funded status either becomes too low or too high now or in the future.

Retirees, it’s Time to Update Your Financial Plan

At the beginning of each new calendar year, we encourage our retired readers to perform an actuarial valuation of their household assets and spending liabilities to see whether changes should be made in the spending and investment components of their financial plans, especially if they haven’t done so recently. This year, we will use an example and the Actuarial Financial Planner (AFP) to illustrate the five easy steps we recommend for performing this annual actuarial valuation. 

2022 was a tough year for retirees. In addition to poorer-than-assumed investment return experience, we also experienced higher-than-assumed rates of price inflation. The combined effect on most retiree’s household balance sheets was to significantly reduce the size of household assets and Rainy-Day Funds (the balancing item between household assets and household spending liabilities). Going forward for 2023, retired households will need to decide what actions, if any, should they plan on to address these reductions.