Thanks to Rivan Stinson for teeing up the Actuarial Approach in Stinson’s recent Washington Post article titled, “Retiring soon? Plot a detailed budget first before tapping your 401(k).” In her article, Stinson writes,
“Once you make this granular budget, it’s time to crunch the numbers on how much your savings and investments, along with Social Security and a pension (if you have one), would cover.”
Creating a granular budget and comparing the present value of expected spending under the budget with the present value of household assets (including future payments from Social Security, annuities, pensions or other sources of income) to determine the household Funded Status are essential steps in the Actuarial Approach Recommended financial planning process.
In addition to granularly budgeting for recurring and non-recurring expenses or expenses that are expected to increase at different rates in the future, we encourage users to classify these expenses as either “essential” or “discretionary” and their investments/assets as “risky” (upside) or “non-risky (floor) to facilitate liability driven investment matching of household assets and liabilities.
And while the Actuarial Financial Planning workbooks are robust budgeting tools (and also good tools to use to calculate present values and to assess risks by stress-testing certain assumptions), they are not intended to be used just once at or near retirement. As Robin Williams said in response to the question, “so you just play this one hole?” in his famous routine about golf: “F NO”, you should granularly redetermine your household Funded Status periodically (we suggest at least once per year) throughout your retirement. This annual valuation step to redetermine your Funded Status and to monitor it from year to year is the key to keeping your spending plan on track throughout retirement.
The Washington Post article was originally titled, “The 4% Rule for Retirement Still Works, but Experts Urge Flexibility.” We believe granular budgeting and going through our Recommended Financial Planning Process annually is way better (and much more flexible) planning approach than using the 4% Rule.
