It’s been almost 14 years since our first post on How Much Can I Afford to Spend in Retirement? This post is our 498th post. As implied by the title of our website, our primary goal is to help individuals (or financial advisors for those individuals) determine how much they (or their clients) can afford to spend in retirement. Unlike most financial advisors, however, we attempt to do this by applying proven actuarial principles and processes to the decumulation problem.
As noted on our Home Page, we receive zero direct or indirect compensation from visits to this website or from any activity associated with this blog. We are not trying to sell you (or anyone else) any consulting services, spreadsheets or financial products.
We read with great interest articles written by others claiming to develop better approaches for helping retirees successfully address the decumulation problem. Therefore, we were intrigued when we recently read “Giving Retirees the Freedom to Spend” by Dr. Michael Finke and Ms. Tamiko Toland. In their article, the authors were critical of current practice (using typical Monte Carlo analysis and the 4% Rule and its many variations). They said,
“Most clients have no idea what retirement failure means to them and how a given failure rate should influence their planning. We present a planning framework that improves on existing models by dynamically adjusting for market performance and longevity.
“How do we help people understand how much they can safely spend? The key is to start with a spending model that accurately represents expected retiree spending behavior. Flexible spending adjusts with portfolio value changes, much as individuals do in practice. “
If you like the author’s proposed dynamic framework, you’re going to love the dynamic actuarial approach we propose. In addition to dynamically adjusting for market performance and longevity, the actuarial approach anticipates:
- Different recurring and non-recurring expenses
- Different essential and discretionary expenses
- Different rates of future increases for different types of expenses
- All sources of income
- All sources of outgo
- Different expected investment returns on risky vs. non-risky investments/assets, and
- Different spending needs upon the first death within a couple
The Actuarial Approach helps you develop a strategic spending plan based on all your assets and spending goals, not a strategic withdrawal plan based only on your portfolio.
See our post of April 16, 2022 for more discussion of more realistic planning for non-recurring expenses.
