Thursday, November 16, 2023

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.

You are not required to use the default assumptions. They are provided to give you our best estimate of future experience over your lifetime planning period. To override the default assumptions, simply click on the “Default” box in Column D and select “Override.” Then type the override assumption in column F. So, for example, if you wanted to see what the impact of using the new default assumptions is, you could enter the old assumptions as override assumptions and compare the results with the results produced by the new default assumptions. 

The new investment default investment return on Floor Portfolio assets of 5.0% is less than the implied interest rate for immediate annuities for retirees aged 70 and younger as discussed in our post ofSeptember 17, 2023 but it is greater than the implied interest rate for immediate annuities for retirees aged 75 and older. As discussed in our post of April 11, 2020, older retirees may wish to use a more conservative (lower) interest rate assumption for Floor Portfolio assets.

As discussed in our post of March 20, 2022, more conservative users may want to use a higher inflation assumption to reflect expectations of temporary or longer-term higher levels of inflation.

We will continue to monitor general interest rates, implied rates of returns in immediate annuity contracts and rates of inflation to see if additional changes in the default economic assumptions used in the AFP may be warranted. We have not made similar changes to our other spreadsheets, but you can change the default assumptions in those workbooks by using the override feature discussed above.