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