Actuaries Release Five New Issue Briefs on Retiree Lifetime Income

As a follow-up to their 2013 Public Policy Discussion Paper, “Risky Business—Living Longer Without Income for Life” (discussed in our post of June 20, 2013), the American Academy of Actuaries’ Lifetime Income Risk Joint Task Force recently released a flurry of Issue Briefs on Retiree Lifetime Income.  The five issue briefs are titled,

1. Retiree Lifetime Income:  Choices and Considerations 
2. Retiree Lifetime Income:  Product Comparisons
3. Risky Business:  Living Longer Without Income for Life—Legislative and Regulatory Issues
4. Risky Business:  Living Longer Without Income for Life—Actuarial Considerations for Financial Advisers, and
5. Risky Business:  Living Longer Without Income for Life—Information for Current and Future Retirees

The Issue briefs can be found on the Task Force’s webpage.  There is a lot of good material contained in the issue briefs, and I encourage you to read some or all of them.  
  
The stated goal of the Academy’s Task Force is to educate the public, financial advisors, employers, the media, lawmakers and regulators on the risk of inadequate guaranteed lifetime income.  As may be expected from a group of actuaries with this goal, the issue briefs tend to stress the advantages of risk sharing (or risk pooling) arrangements (annuities and defined benefit pension benefits).  However, this most recent batch of issue briefs does not focus exclusively on the advantages of annuity products and the disadvantages of structured withdrawal programs.   They do acknowledge that there can be advantages of combining the two approaches.  For example the following guidance is contained in the Actuarial Considerations for Financial Advisers brief:

“A judicious use of pooling-based solutions, integrated with appropriate investment strategies, can often yield a more favorable financial result than one that fails to take pooling into appropriate consideration.”

I was also pleased to see that the Financial Advisers brief included the following recommended task, which is a common theme expressed in my website

“Assuring that recommended systematic withdrawal strategies meet client objectives and also appropriately reflect the existence or absence of pension benefits or insurance-based solutions that incorporate risk-pooling features.”

Sharp-eyed readers who go to the Task Force website may see my name included as a Task Force member.  Yes I did recently join this group, but for the most part, most of these Issue Briefs were drafted prior to my arrival. 

Does New Math Clearly Demonstrate that People Should Delay Commencement of Social Security Benefits When Possible?

Apologies to my non-US readers as I will once again take on the subject of when to commence US Social Security benefits.  This post is in response to the October 23 article in The Wall Street Journal entitled, "The New Math of Delaying Social Security Benefits”, in which Dr. Pfau concludes, “the math is clear:  People should delay claiming when possible.”

As I have discussed in several prior posts (most recently in posts of September 25, 2015, April 16, 2015 and August 9, 2014) and based on the “old math” built into the simple Social Security Bridge spreadsheet on this website, deferring commencement of Social Security benefits can be a reasonably good strategy for many individuals, but it may not be all that it is cracked up to be by the media experts. 

I’m going to use the same example person in this post as Dr. Pfau used in his article (which I suggest that you read because I’m not going to repeat the entire example here).  His example person sets aside assets of $316,800 in a non-interest bearing account to pay herself $39,600 per year (the age 70 Social Security benefit without CPI increases) during the eight year bridge period (from age 62 to age 69) during which no Social Security benefits are paid.  He then determines that the initial withdrawal rate at age 62 from remaining assets necessary plus the withdrawals from this artificial Social Security replacement account to meet a $60,000 annual real dollar total income level is only 4.22% vs. a 4.69% initial withdrawal rate necessary to meet the $60,000 total income level if she commences her Social Security benefits at age 62.  From this comparison of initial age 62 withdrawal rates, Dr. Pfau concludes that it is financially advantages for everyone to defer commencement of Social Security from age 62  until age 70.

If we assume inflation of 2.5% per year and we assume that the example retiree wishes to pay herself the expected age 70 Social Security benefit in real dollars each year during the bridge period, she will need to set aside assets of $345,951.  Under these assumptions, the initial age 62 withdrawal percentage to achieve the $60,000 income target will be 4.49% ($60,000 – $39,600)/ ($800,000 - $345,951) vs. the 4.69% withdrawal rate if she commenced Social Security at age 62.  This example still favors the deferral strategy, but not by quite as much.

If we also assume investment return of 4.5% per annum on the example retiree’s assets not set aside for bridge purposes, at age 70, she will have remaining assets of $428,583 to go with her Social Security benefit of $48,249 ($39,600 plus eight years of CPI increases of 2.5% per annum).  By comparison, if she commenced benefits at age 62, she would have $738,560 of remaining assets at age 70 and a Social Security benefit of $27,414.  Thus, under these assumptions, she effectively spends $309,977 ($738,560 - $428,583) of her expected assets at age 70 ($35,974 less than the $345,951 she set aside) to obtain an additional $20,835 ($48,249 - $27,414) of fully CPI-indexed Social Security benefits commencing at age 70. 

As noted in prior posts on this subject, deferring commencement of Social Security can increase total retirement income under most reasonable assumptions.  This strategy also adds inflation protection and can provide larger benefits to your spouse.  If you want to retire and adopt the commencement deferral strategy, you have to be willing to dip into your accumulated savings to make it work (and therefore this strategy may involve loss of some spending flexibility).  The degree of success of the commencement deferral strategy will depend on the investment return you could have earned on the "bridge payments" you withdraw from your accumulated savings, the rate of future inflation, how long you live and how much of your accumulated savings you spend during the bridge period.  Assuming Social Security law remains unchanged, it can be an effective way to mitigate inflation risk, investment risk, and longevity risk.  In a very real sense, the decision to defer is analogous to using your savings to purchase additional longevity insurance/real annuity income.  However, under most reasonable assumption scenarios, you aren’t likely to see the increases in total retirement income that you might have expected from reading articles on this subject by the retirement experts. 

I recommend that retirees who are reasonably comfortable spending a significant portion of their accumulated savings up front during the bridge period consider the commencement deferral strategy.  On the other hand, I am also sensitive to retirees who could have made this decision but didn’t or who are just not comfortable with this strategy.  To them I say, Don’t listen to those experts who say that not deferring until age 70 is one of the biggest mistakes you can make in retirement.  Move on with your life based on the decision you made (or will make).  If it is indeed a mistake not to defer, it is probably not the biggest mistake you will make in retirement. 

As with all my prior posts on this subject, I (and Dr. Pfau in his article) looked at non-married individuals.  The factors involved in a decision to defer can be different for a married individual under current law. 

All About that Budget

If I had to pick a theme song for this website, I guess I would have to consider Meghan Trainor’s popular song with a small modification.  While Meghan sings, “Because you know I’m all about that bass”, this website is all about a different “B” word—“Budget.”   Yes, the primary purpose of this website is to help retirees develop a reasonable spending budget.    Pretty much this entire website is devoted to this task; a task that a lot of retirees don’t even bother with, or if they do bother with it, they frequently ignore it when it comes to making spending decisions.   Does the fact that a lot of retirees don’t develop a budget or ignore their budget bother me?  Not particularly.  Unlike many experts who think that most retirees aren’t smart enough or motivated enough to manage their own money, I believe that most retirees possess the necessary skills to successfully manage their finances in retirement, much like they successfully managed their finances when they were employed.  Of course, for those retirees who can afford one, a financial advisor can be very helpful in this process.   However, when push comes to shove, it is you, Mr. or Ms. Retiree, who are ultimately responsible for making the investment and spending decisions that affect your financial situation during your retirement.  If you are reading this post, I hope it is because you are interested in learning about and taking advantage of the benefits of having a reasonable spending budget. 

You won’t find anything in this website that suggests how much of your accumulated savings or other sources of retirement income you should spend each year.  As noted above, that decision is yours based on your own personal situation.  I’m not going to chastise you for spending more (or less) that the budget amount you may develop using the Actuarial Approach.  In fact, it would be unusual if you did spend exactly the amount that you budgeted each year.  However, one of the primary benefits of developing a spending budget is to help you make your spending decisions. 

You also won’t find anything in this website that suggests that you should develop a spending budget any more frequently than annually.  There may be reasons why you may wish to develop a monthly spending budget (for example if you are trying to reduce your spending), but again, I will leave that decision up to you.

While I think it is worthwhile to track actual spending for the year to compare it with the spending budget, doing so is a fair amount of work that may not provide a lot of value to you.  There are software programs that can help you with this task, but again, tracking actual spending can be time-consuming and it is not necessary to keep your budgeting on track.  Under the Actuarial Approach, simply comparing your actual end of year assets with your expected end of year assets will give you an indication of the total gain or loss for the year resulting from the combination of spending deviations and investment deviations.  As indicated in my September 4, 2015 post, it may make sense during the middle of a year to compare actual assets with expected end-of-year assets to see how you are doing during the year for the purpose of helping you make spending decisions for the rest of the year. 

I also think it can be worthwhile to develop separate budgets for different types of expenses.  In prior posts, I have encouraged you to develop separate budgets for such different types of expenses as essential non-medical expenses, essential medical expenses, bequest motive/end-of-life expenses, other unexpected expenses and non-essential expenses.  The reason for doing this is that you may have different goals and investment strategies for these different types of expenses that may require different approaches.

Prior posts have also indicated why I think it is important to develop a spending budget that reflects the existence of other sources of retirement income that you may have.  Most other withdrawal strategies simply provide a suggested way to “tap your savings” and fail to suggest how to develop a reasonable spending budget (or budgets). 

While not every financial expert believes that budgets are essential (especially monthly budgets), many experts do.  Here are a couple of recent articles touting some of the benefits of developing a budget. 

5 Ways to Save Money During Retirement (US News)

8 Things Not to Do in Retirement (GoBankingRates)

Making Sense Out of Variable Spending Strategies for Retirees?

In his October 2, 2015 blog post, Dr. Wade Pfau, Professor of Retirement Income at The American College, reprinted his article from the Journal of Financial Planning, Making Sense Out of Variable Spending Strategies for Retirees. The stated purpose of this article was to “assist financial planners and their clients in figuring out which sort of variable spending strategy will be most appropriate for their situation [by using] simple metrics to evaluate and compare strategies.” See my post of March 19th of this year for my initial thoughts on this paper.  Today’s post will supplement my earlier post with additional thoughts on this article.

Perhaps the most interesting part of Dr. Pfau’s article is his suggestion that financial advisors use his “XYZ Formula” approach to help clients select a combination budget setting strategy (variable spending strategy) and investment strategy.  Under this approach, the financial advisor uses Monte Carlo modeling and the client’s specific information to help the client select the combination budget setting and investment strategy that has an “X% probability that spending falls below a threshold of $Y (in inflation-adjusted terms) by year Z of retirement”, where the client (with the advisor’s help) chooses the values of X, Y and Z, presumably in accordance with the client’s risk preferences.  The XYZ formula approach assumes that the client’s spending will exactly equal the client’s spending budget so determined each year.  

Even though it is based on the unrealistic assumption that retiree spending will actually equal the spending budget resulting from application of variable spending strategy,  I believe that Dr. Pfau’s approach can provide some value to retirees.  However, rather than providing a broad analysis of various combinations of budget setting strategies and investment strategies for hypothetical clients with different situations, Dr. Pfau instead holds investment allocations constant, fixes values of X,Y and Z and looks at a client that (with one notable exception) has no pension/annuity income.  The purpose of fixing these items was presumably to isolate differences attributable to differences inherent in the variable spending strategies. 

I was pleased to see the Actuarial Approach advocated in this website included in Dr. Pfau’s list of examined variable rate strategies (albeit grouped with other so-called actuarial strategies).  I was also pleased that Dr. Pfau concluded, “The actuarial methods were found to spend down wealth more efficiently.”  However,  I feel compelled in this post to (i) respond to a specific comment made in the article about application of smoothing to my approach and (ii) point out why my approach is superior to the “PMT approach” with which my approach was grouped. 

Smoothing

In his article, Dr. Pfau says, “Steiner (2014) suggested that users may smooth spending adjustments relative to the changes implied by this formula. Not all would agree, as Waring and Siegel (2015) noted that a less volatile asset allocation is a safer way to smooth spending fluctuations.”  While I certainly don’t have a problem with the position that a less volatile asset allocation is a reasonable way to manage volatility in spending budgets,  I believe Waring and Siegel’s suggestion that spending budgets not be smoothed is ridiculous.  For most retirees, a spending budget is simply a suggestion as to how much the retiree may want to spend for the year.  Only retirement academics and other Monte Carlo modelling advocates assume that retirees will actually spend their spending budget each year (and only as a calculation expediency).  It therefore makes no sense to me to require a spending budget to be based on strict (non-smoothed) application of a formula if the retiree can then choose to spend whatever he or she wants.  

Actuarial Approach vs. PMT Approach

Waring and Siegel’s ARVA (PMT) approach is essentially mathematically equivalent to the simple spreadsheet included in my website if the retiree has no fixed dollar pension or annuity income.  If the retiree has a fixed dollar pension benefit, a fixed dollar immediate annuity or a fixed dollar deferred annuity, the PMT approach can’t properly handle it.

It is ironic to me that the approach that appears to produce the most favorable results in Dr. Pfau’s article (at least in terms of initial spending rates under the given XYZ specifications) is the “Annuitize Floor and Aggressive Discretionary Spending” approach.  This isn’t really a different variable rate spending approach, but rather a combination of a different investment strategy (partial annuitization) with the Guyton decision rules.  As noted in previous posts (most recently my post of April 26, 2015), I’m not a big fan of the Guyton decision rules, but inclusion of this final option does illustrate the potential benefits of partial annuitization for risk averse clients.  It also indirectly points out the importance of using a variable spending strategy that properly coordinates with fixed dollar pension and annuity benefits.  And once again, I will end a post by noting that the Actuarial Approach is the only one of the variable spending strategies listed in Dr. Pfau’s article that does this. 

Fear of Outliving Your Savings vs. Fear of Not Spending Enough—Finding an Appropriate Balance

In his September 29 article for US News, Why You Won’t Run Out of Money in Retirement, David Ning outlines several safeguards that he believes “will prevent you from spending your savings too quickly.”  He indicates that you “aren’t likely to completely run out of money in retirement,” and therefore you shouldn’t “let the fear of outliving your savings prevent you from enjoying retirement.” One of the safeguards recommended by Mr. Ning is to withdraw only 3% or 4% of accumulated savings each year. 

I agree with Mr. Ning that retirees shouldn’t let the fear of outliving their savings prevent them from enjoying retirement.  On the other hand, simply taking steps to make sure that you don’t spend your savings too quickly (by using a conservative 3% or 4% withdrawal rate) is only part of the equation for enjoying retirement.  Another critical part of this equation is spending enough each year to maintain a certain standard of living, including spending on non-essential items.  Therefore, what retirees really need is a Goldilocks-type solution that involves not only not spending too much but also not spending too little.  Unfortunately, since no one knows, for certain, things like how long you will live, what your investments will earn, what future inflation will be, etc., there can be no such Goldilocks solution. 

The Actuarial Approach discussed in this website attempts to help retirees find the appropriate balance between spending too much and spending too little.   If you use our recommended assumptions to develop some or all of your annual spending budget and invest your accumulated savings reasonably well, you will likely end up with more assets than you desire upon your death (even though withdrawal rates for retirees with no pension/annuity income and no amounts to be left to heirs under the Actuarial Approach will exceed 6% at ages above 75, compared with the 3% or 4% withdrawal rate suggested by Mr. Ning.)

More effective safeguards to balancing not spending too much and not spending too little (as well as achieving ancillary goals such as: (i) having relatively predictable and stable inflation adjusted income from year to year, (ii) having spending flexibility to meet unforeseen expenses, (iii) maximizing the general level of spendable income and (iv) not leaving too much unspent upon death) include using the Actuarial Approach to develop separate spending budgets for essential expenses, non-essential expenses, long-term care/other end of life expenses, and unexpected expenses with appropriate investment strategies for the funds dedicated to these separate spending budgets as discussed in recent posts. 

Another Look at Deferral of Commencement of Social Security Benefits

My retired neighbor, Leon, is turning age 62 in the near future.   A couple of days ago, when I was out performing what our dog believes is my primary purpose in life (being his personal bathroom attendant), Leon asked me for my thoughts about whether he should defer commencement of his Social Security benefit.   Like everyone else, he had read many articles from experts who strongly recommend that retirees defer commencement of their Social Security benefits.  Leon pointed me to Michael Kitces’ April 2, 2014 post where Michael said, “the decision to delay Social Security actually represents an astonishingly valuable ‘investment return’.”  Leon had also done his “breakeven” calculations. 

I told Leon that while deferring commencement of Social Security could be financially advantageous, I believed (and my prior posts on this subject have indicated) that deferral is not necessarily a “no-brainer.”  The effectiveness of the deferral strategy depends on a number of considerations, including:  1) how long you will live, 2) how much savings you will use to “bridge” the period of deferral, 3) what investment return you could earn on your savings and 4) the rate of future inflation. 

The table below shows the increase/(decrease) in the present value of a retiree’s spendable income associated with deferring a $750 per month Social Security benefit payable at age 62 until age 70 vs. commencing the benefit at age 62 assuming various ages of death.  The table uses the same assumptions and hypothetical retiree as used in Mr. Kitces’ article.  The calculations were performed using the Social Security Bridge spreadsheet from this website.  

(click to enlarge)

The table shows that under these assumptions, individuals who live longer will benefit financially by deferring commencement of the benefit until age 70 vs. commencing at age 62, while those with shorter lives will benefit financially by commencing the benefit at age 62.   It also shows that even those individuals who choose to defer commencement until age 70 and live until age 97 are not expected to be huge winners under the assumptions used to develop this table. 

The table also provides survival probabilities to the various ages based on the Society of Actuaries’ 2012 Individual Annuitant Mortality Table with 1% mortality improvement.  This mortality table (and the probabilities of survival) is available in our website in the “other calculators and tools” section.  It should be noted that this table represents mortality experience of individuals who purchased annuities and as such is more conservative (longer life expectancy) than general population mortality.   The probabilities of survival to age 97 for both males and females were not available from the tool on our website and have been estimated by me. 

One of the big differences between Mr. Kitces calculations and mine has to do with the amount of money spent by the hypothetical retiree from his accumulated savings during the eight year deferral period.  Mr. Kitces assumes the retiree will spend $750 per month in the first year of deferral and $922 in the seventh year ($750 increased with 7 years of inflation at 3% per year), whereas I have assumed that the retiree does not want to have a big jump in spendable income in year 8 and will spend the same real dollar amount of $1,672 the retiree expects to receive at age 70 during each year of the deferral ($1,320 per month in the first year and $1,624 per month in the 7th year).  The cost of deferrals (the present value of withdrawals from savings) under Mr. Kitces methodology is $65,258 while under my methodology, it is $114,853.  This is why deferring commencement looks so much more favorable in Mr. Kitces article (if you spend less today, you can spend more later all things being equal).  Of course, it would look even more favorable if the hypothetical retiree decided not to withdraw any amounts during the deferral period. 

As I told Leon, I’m not going to make a recommendation one way or another on whether retirees should defer commencement of Social Security.  It is an individual decision that involves many factors.   If you are willing to defer and don’t spend too much of your accumulated savings during the bridge period, you can generally increase your spendable income in your later years. 

Retirement Planning in an Uncertain World--Part 2

This is a follow-up to our post of August 11, 2013.  In that post, I included what I considered to be one of the most helpful (and most succinct) pieces of advice I have ever read regarding managing the risks involved in financial planning for retirement in today’s world.  In his MoneyWatch article of August 7, 2013, my friend and fellow actuary, Steve Vernon said,

"Step 1: Plan to support the life you want, using your best estimate of the future regarding the economy, capital markets, your life expectancy and so on.

Step 2: Be prepared in the event that your forecasts are wrong."

While the simple spending budget calculation spreadsheets (Excluding Social Security and Social Security Bridge) included in this website include a Runout tab (and an inflation adjusted Runout tab) that shows future year’s expected results based on exact realization of all the input assumptions, no changes in assumptions and spending each year exactly equal to the total spendable amount, retirees who use these spreadsheets should have absolutely no expectation that these projected future year’s results will actually occur.  They are primarily provided to show the user that the math works, and that under these totally unrealistic conditions, the amount left to heirs at the end of the expected payout period will equal the amount the user inputted on the input page. 

The fact that the future numbers in the Runout tabs will be wrong, however, does not invalidate the approach recommended in this website to determine a retiree’s spending budget.  The Actuarial Approach anticipates that a retiree’s assets and liabilities will be re-measured at least once a year to adjust the retiree’s budget for differences between actual and assumed experience, for differences between actual and assumed spending and for changes in assumptions.  This re-measurement process is essential for keeping the retiree on track.  I view this as part of Step 2 in the process Steve Vernon outlined above. 

There are lots of possible reasons why forecasts made today will be wrong (deviate from expected results) in the future.  These reasons include:

• Differences between actual and assumed investment returns 
• Changes in assumed future investment returns
• Differences in actual or assumed spending
• Differences in desired amounts to be left to heirs
• Differences in actual or assumed rates of inflation/desired increases in budgets to keep up with inflation
• Differences in actual or assumed longevity
• Differences in sources of income

Each of these differences can increase or decrease the retiree’s spending budget under the Actuarial Approach.  It is important for a retiree to realize that their spending budget can and will go up and down in future years depending on these changes.  As indicated in previous posts, the spending budget determined under the Actuarial Approach (with or without applying the recommended smoothing algorithm) is simply one of several decision factors that a retiree can use in the process of determining his or her actual spending for the year. 

Depending on the proportion of a retiree’s spending budget that is derived from accumulated savings invested in risky assets, differences between actual and assumed investment returns can have a significant effect on the retiree’s spending budget.  In order to give retiree’s a sense of how such deviations from the assumed investment return can affect accumulated savings and spending budgets, we have added a new tab to the “Excluding Social Security” spreadsheet (now called “Excluding Social Security V 3.0”).  The new tab is called “5-year forecast” and the only difference between the results shown in this tab and the results shown in the Runout tab are attributable to different investment returns inputted by the user for years 1-5 at the top of this tab.  If the same assumed investment return is input for each of the 5 years as is input for the assumed investment return in the input tab, the results shown in the 5-year projection will be the same as those shown in the Runout tab.  We have also provided two graphs which highlight the differences in beginning of year account balances and total spendable amounts (excluding Social Security and other inflation indexed annuities) resulting from investment experience different from assumed.  No smoothing algorithm was applied to the results in the 5-year projection. 

We encourage you play with the “actual” investment inputs in the 5-year projection to provide yourself a better sense of the investment risk you are assuming with your current investment strategy (or strategies).  As discussed in recent posts, if you have separate budgets for essential expenses, non-essential expenses, emergency expenses, etc. and different investment strategies for these different categories of expenses, you can “kick the tires” on these separate investment strategies to see if you are comfortable with the risk you are assuming for each expense category.  

Inspiration for this post and the resulting modification of the “Excluding Social Security” spreadsheet came from discussions with John D. Craig and from work by the Pension Committee of the Actuarial Standards Board on exposure drafts of a standard of actuarial practice regarding assessment and measurement of risk associated with measuring pension obligations.  Thanks to both John and the ASB Pension Committee.  Readers who are interested in John’s thoughts on Retirement Planning may find this website to be of interest.

Time for a Mid-Year Spending Adjustment?

While I encourage retirees who use the Actuarial Approach to revisit their spending budgets at least once a year, this doesn’t mean that they can’t be revisited more frequently.  In light of recent equity market volatility, it may make sense to check the status of your accounts to see whether mid-year adjustments to your 2015 spending might be appropriate.  This post will outline a simple way to do this and will illustrate the process with an example.

In addition to showing spendable amounts payable from accumulated savings, both of the spending spreadsheets contained in this website show the amount of accumulated savings expected at the end of the year if the investment return assumption for the year is exactly realized and actual spending exactly equals the spendable amount determined for the year (which is assumed to be withdrawn from accumulated savings at the beginning of the year).  Therefore, any difference between actual and expected end-of-year accumulated savings will result from these two sources:  deviations from expected investment return and/or deviations from expected spending.  If you want to get “back on track”, you need to manage your spending or investments (or transfer money into or out of this account) so that your end-of-year assets in this account approximately equals the expected end-of-year value. 

Example

Mary, from our June 7, 2015 post, had assets equal to $298,871 in her non-essential expenses account with a non-essential spending budget for 2015 of $19,730.  Her expected end-of-year assets in this account equaled $291,702.   As of September 4, Mary notes that the amount of assets in this account is only $260,000.  Some of the decrease in assets in this account resulted from spending a little bit more than 2/3rds of her annual spending budget and the rest resulted from decreases in the investments in her account.  As a practical matter, it doesn’t really matter the exact sources of the decrease.   Her current account balance dedicated to non-essential expenses is lower than her expected end-of-year account.

What can/should Mary do about this situation?

She has a number of alternatives:

1. She can make no changes in her non-essential spending for the rest of the year.  She will face the issue of a potential lower spending budget next year.   She can hope her investments will rebound by year end.  
2. She can reduce her non-essential spending budget as best she can for the remainder of the year. 
3. She can transfer some of her assets in other spending accounts (such as her emergency account) to her essential spending account.
4. She can pursue a combination of the above actions.

Mary knows that she can spend her retirement money now or she can spend it later (or provide more money to her heirs).  By virtue of going through this exercise, however, she knows that as of September 4, 2015 she was a little bit more than $30,000 under her target level of assets in this account with about a third of 2015 still remaining (including her spending for the holidays).  She can use this knowledge to help her make non-essential spending decisions for the remainder of the year. 

Note that Mary can use same process for years when investment return is more favorable than assumed.   In those years, “excess” assets can be transferred out of her essential spending account to her emergency fund account or some other budget account. 

A Good Idea—Developing a Spending Budget That Meets Your (or Your Client’s) Unique Needs

As one who frequently advocates developing a spending budget that best meets your (or if you are a financial advisor, your client’s) needs, I was pleasantly surprised to read the August 29 article by Kenn Tacchino entitled, “Are your retirement drawdown strategies meeting your needs?”

I generally agreed with Mr. Tacchino when he said,
 
“Rather than just accept the financial planning decumulation strategies as gospel, you will need to customize them to your specific goals (e.g. your desire to travel or take up a new hobby), your individual need to protect against unwanted retirement shocks (e.g., the need to pay for extraordinary health care), and your unique level of tolerance for risk.”
 
and
 
“Your chosen strategy needs to be personalized so that it meets your idea of the proper balance between unnecessarily restricting current consumption and hoarding assets for future needs.”
 
Of course I think it is easier and more effective to use the Actuarial Approach set forth in this website rather than customize some or all of the decumulation strategies discussed by Mr. Tacchino.  See my post of June 7 of this year for an example.

Wait, What? No 2016 Cost of Living Increase for Social Security Means My Medicare Part B Premium Could Increase by Over $650 Next Year?

Michael Kitces has recently blessed us with two fine blog posts (August 19 and August 26) describing how interaction of Medicare’s “Hold-Harmless” provision and a projected 0% cost of living increase for Social Security benefits for 2016 could increase 2016 Medicare Part B premiums by over $650 for some individuals.  I encourage readers of this website who do not fall into one of the three categories described below to read Michael’s posts for a very thorough discussion of how this situation developed, its implications and potential strategies.  I will attempt to provide below a very brief summary of the implications.  

Assuming there is no cost-of-living increase for Social Security, the current law remains unchanged and the Health and Human Secretary does not set a lower Part B premium for affected individuals, for everyone who is subject to the Hold Harmless provision, the 2016 Part B monthly premium will be the same as the 2015 Part B monthly premium ($104.90).  For individuals not subject to the Hold Harmless provision, their monthly 2016 Part B premium is estimated to increase by approximately $55 per month to pay for freezing the 2016 Part B premium for individuals subject to the Hold Harmless provision.  This extra premium is in addition to the extra premiums that may be required for individuals with relatively higher incomes under the Income-Related Monthly Adjustment Amount provisions of the law (IRMAA).

There are generally three types of individuals who are not subject to the Hold Harmless provisions of the law for 2016 (and therefore potentially subject to this additional $55 per month premium):

1. Individuals subject to extra premiums because of higher income (IRMAA):  You can fall into this category if your modified adjusted gross income for 2014 as reported on your tax return exceeded $85,000 for an individual filer or $170,000 for a married filer.  For this purpose, adjusted gross income is “modified” by adding any tax exempt interest.  Note that you can fall into this category for 2016 even though your income is not normally this high as a result of unusual realized capital gains, conversion of an IRA to a Roth IRA, etc. 
2. Individuals who are eligible for and participate in Medicare but do not receive a Social Security benefit.  For example, an individual who has decided to defer commencement of her Social Security benefits but has commenced participation in Medicare.  Note that this category would apply even if you could have commenced your Social Security benefit in an earlier year and you would otherwise have been eligible for the Hold Harmless provision for 2016. 
3. Individuals who commence participation in Medicare in 2016 with or without a Social Security benefit.

Of the three categories of individuals potentially being socked to pay for the costs not paid by the individuals benefiting from the Hold Harmless provision, perhaps the most surprising (to me) is category 2.  These are the good folk who listened to all the financial experts who told them that it was a “no-brainer” financially to defer commencement of their Social Security benefit to age 70.  If you fall into this category, you should read Michael Kitces’ analysis concluding that if you are planning to commence your Social Security benefit at the beginning of 2016 (and you otherwise meet the Hold Harmless requirements), you might want to consider accelerating commencement of your Social Security benefits so they start this November.  Note that relatively quick action would be required to commence Social Security benefits in November of this year in order to avoid this extra $650-ish premium for 2016.