Your spouse wants to remodel your kitchen and several bathrooms in your house. You’ve received a quote for the work for about $100,000. Using a strategic withdrawal approach and a Monte Carlo modeling approach, your financial advisor has previously told you that you can only safely afford to spend about $110,000 per year in retirement, so it looks like paying for your normal annual expenses in addition to the remodeling job your spouse desires is simply out of the question at this time.
If you, or your advisor, use the Actuarial Approach, determining whether you can safely afford to spend on a specific item or project is an easy process. It involves determining what your current Funded Status is and what it would be if you went ahead with the proposed purchase or project. It is as easy as that. To reiterate this important advantage of the Actuarial Approach: Making an informed spending decision simply involves answering the question, “What will happen to our Funded Status if we choose to go ahead with this purchase or project.”
Some spending decisions involve simply a decrease in household cash (or other liquid assets), while other decisions involve not only a decrease in cash but also an increase in the present value of future associated asset sales. For example, making a decision to spend $50,000 on a cruise will generally simply involve a decrease of $50,000 in cash, and may also involve increased taxes if investments are sold to raise the cash. However, if you plan to sell your home in the future, making the decision to remodel will involve a decrease in cash and it will likely also involve an increase the expected future purchase price of the home and may involve increased expected property taxes from now until the anticipated time of sale. The net present value of the increased costs and increased revenue should be estimated and reflected in the spending decision.
Example
Let’s assume that Bill and Susie have a Funded Status as of January 1, 2026 of 125% consisting of the present value of their assets of $2.5 million divided by the present value of their spending liabilities of $2 million. The $2.5 million of assets includes $300,000 as the present value of future sale of their current home as a downsizing gain when they expect to reach age 80. They estimate that remodeling their home this year will decrease their cash assets by $100,000, but the net increase in the present value of their future home sale will be $70,000. Thus, the net present value decrease in their assets associated with the home remodeling would be $30,000 ($100,000 - $70,000) and they re-estimate their funded status to reflect the remodeling to be 123.5% [($2,500,000 - $30,000) / $2,000,000). Based on this analysis, they decide that they can move ahead with the home re-modeling project.
Relying on future asset sales to fund retirement
As noted in our post of January 31, 2026 you can rely on all sorts of future asset sales to fund your retirement. For many reasons, these future sales are often ignored by advisors as sources of retirement funding (especially if the advisor uses a strategic withdrawal strategy). If households are will to use such assets to fund their retirement, we believe that ignoring future asset sales is a financing mistake. Note that while relying on future asset sales will generally decrease portfolio assets (and therefore possibly reduce assets under advisor management), the present value of total assets drives how much the household can afford to spend each year. It is important to note that depleting portfolio assets faster than expected by relying on future asset sales to fund retirement may result in future cash flow issues that can force earlier than the desired sale of assets, so it is important to annually monitor the expected value and marketability of such assets.
For more details regarding how to calculate present values of future asset sales using the Actuarial Financial Planner, see our Advisor Perspectives article, “Advising a Retired Client Who Wants to Buy a Second Home (or Other Big-Ticket Item).”
Summary
Some spending decisions simply involve decreases in cash assets. Other spending decisions may involve decreases in cash assets offset, or partially offset, by increases in the present value of associated future asset sales. Many approaches used by current advisors to determine safe spending in retirement ignore future asset sales to fund household spending liabilities. We believe that ignoring future asset sales is generally a mistake and one that is easily fixed by using the Actuarial Approach and its Funded Status metric.
