The Actuarial Approach:
- Employs an easy-to-understand and robust financial metric (Household Funded Status)
- Permits adoption of easy-to-implement guardrails that suggest future spending changes
- Uses basic actuarial principles and processes (time value of money, comparison of assets and liabilities, mortality, annual valuation process, etc.) consistent with general principles and processes used by actuaries to measure the financial sustainability of other financial systems
- Uses basic financial economic principles (Liability Driven Investing (LDI), risk-adjusted discounted cash flows (RADCF))
- Can reflect all future spending liabilities and all sources of income/assets.
- Permits matching of the present value of non-risky assets/investments with the present value of essential expenses to guide investment decisions
- Provides flexibility in risk tolerance (through personal selection of assumptions and selection of essential vs. discretionary expenses)
- Provides flexibility in liability measurement by permitting different future increase assumptions for different types of expenses (for example, higher future assumed increases for health expenses or taxes and lower future assumed increases for future discretionary expenses)
- Provides an actuarial model that uses a simple, one-tab input/output Excel spreadsheet
- Is more robust than Strategic Withdrawal Plans or Monte Carlo models frequently used by advisors.
- Provides a reasonable, rational and reliable valuation process (the household funded status is expected to remain constant from year to year if all assumptions, including spending, are realized and unchanged.
- Helps assess and manage risks in retirement through stress-testing of assumptions
- Easily accommodates non-linear spending (front-loading of expenses for example) or non-linear sources of income (future asset sales for example)
- Facilitates superior budgeting
- Helps households make more informed financial decisions (by showing the expected impact on the Funded Status of actually making the decision).
- Quantifies how much you can afford to spend in retirement, not how much you can safely withdraw from your portfolio
- Contains many levers to make your decumulation plan more or less conservative (changing assumptions, varying size of target Rainy-Day Fund or changing mix of essential/discretionary spending)
- Enables more accurate couples planning
- Contains no potentially confusing probabilities of success/failure
- Is free
