Don’t Undervalue Your Sources of Lifetime Income

Kudos to the American Academy of Actuaries (AAA) for releasing a new Issue Brief encouraging public pension plan administrators to provide eligible plan members with certain reference amounts when offering lump-sum “buy-outs” in exchange for some or all of their pension benefits The Issue Brief concludes, “members may find the following reference amounts particularly helpful:

• An estimate of the cost to replace any benefits otherwise payable in the private
  market; and
• The approximate annual investment return on the buyout amount required to replace
  the forgone benefits, assuming an average life expectancy.”

In addition, AAA also encourages disclosure of the assumptions used to develop the buy-out offer (and also presumably disclosure of the assumptions used to develop the above reference amounts.)

Self-Insuring Your Long-Term Care (and Other Non-Recurring Expenses)

This post is a follow-up to our post of April 16, 2022 regarding planning for non-recurring expenses in retirement, with emphasis in this post on long-term care costs. We also build on the example discussed in our previous post.

Expenses in retirement are not generally linear from year to year. That is why simple spending rules of thumb like the 4% Rule (with or without guardrails), or even more sophisticated Monte Carlo models that develop probabilities that a household can spend $X per year in real dollars, frequently fail to reflect real-world spending in retirement and are, therefore, likely to miss the mark. Developing and maintaining a robust spending plan in retirement is a classic actuarial problem involving the time-value of money and life contingencies. This problem is easily solved utilizing basic actuarial principles, including periodic comparisons of household assets and spending liabilities.