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.
In our post of June 11, 2023, we outlined the general process used by actuaries to ensure ongoing sustainability of financial systems such as pension plans and Social Security and encouraged you to employ the same process for your household retirement planning. We repeat the six steps of this recommended process below.
The General Actuarial (or Focus on Funded Status) Process has six steps:
- Make reasonable assumptions about the future (generally deterministic, not stochastic),
- Calculate present values of household assets (including future sources of income) and household spending liabilities based on relevant demographic information, desired future spending and assumptions made,
- Periodically (generally annually) compare calculated present values of household assets and spending liabilities (balance sheet) to determine the household’s Funded Status (snapshot comparison),
- Maintain a history of the household’s Funded Status over time and note trends,
- When warranted, make changes to assets or liabilities (or both) to restore desired Funded Status (and/or to address possible cash flow issues). See our post of January 7, 2023 for our recommend algorithm for determining when plan changes should be implemented, and
- Periodically evaluate/stress test assumptions to see if they need to be changed or to assess risk
Our Actuarial Financial Planners (AFPs) for single and retired couples can help you with steps 1-3 (particularly the necessary present value calculations) and step 6. It is a one-tab Excel spreadsheet that is not particularly complicated but permits consideration of non-linear spending not normally considered in more “sophisticated” Monte Carlo models generally used by financial advisors.
