2018 Year-End Review and 2019 Budget Development - Part II

As part of our ongoing effort to encourage you to think more like an actuary when it comes to your personal finances, this post will recommend that you to perform an actuarial valuation based on your personal data as of January 1, 2019, and prepare an “Actuarial Report” to document your thought process and your planning decisions.  The purposes of this exercise are to:

2018 Year-End Review and 2019 Budget Development-Part I

At the end of every calendar year, we encourage you to take just a little bit of the time that you might otherwise spend watching college football bowl games and devote it to reviewing your financial situation and developing your spending budget for the next year.  This year, we are going to devote two posts to this process.  In Part I, we are going to discuss year-end planning approaches in general.   In Part II, we will once again encourage you to perform an “actuarial valuation” of your assets and spending liabilities to measure how well you did in 2018 and to develop your 2019 spending budget “data points”.

Top 10 Reasons Why the Smoothed Actuarial Budget Benchmark is Superior to IRS RMD for Developing Spending Budgets

Since the name of our website is “How Much Can I Afford to Spend in Retirement,” we frequently receive requests from readers to comment on alternative retirement spending/budget strategies that they read about.  With the release last year of the research report, “Optimizing Retirement Income by Integrating Retirement Plans, IRAs and Home Equity,” there has been much written about using the IRS Required Minimum Distribution (RMD) approach recommended in the report to determine annual amounts to be withdrawn from accumulated savings.  The report was released by the Stanford Center on Longevity (SCL) in collaboration with the Society of Actuaries (SOA) under the direction of Steve Vernon, Joe Tomlinson and Wade Pfau.  Most recently Mr. Vernon discussed the use of the IRS RMD approach in his CBS MoneyWatch article, “An IRS Rule that can aid your retirement income strategy.” 

Optimal Equity Allocation?

Since we are retired actuaries and not financial advisors, we don’t advocate any particular investment strategy in this blog.  For example, we don’t tell you how much of your assets should currently be invested in life annuities, bonds, cash equivalents, real estate or equities (particularly in these somewhat turbulent times for investing).  We do, however, provide several tabs in our Actuarial Budget Calculators (ABCs) that you (or your financial advisor) may find useful in developing your investment strategy.  This post will discuss these tabs and how they might be used. 

Budgeting for Real-World Situations

This post is a follow-up to our post of March 3, 2018 where we discussed the distinction between Systematic Withdrawal Plans (SWPs) and Sustainable Spending Plans (SSPs).  In that post, we discussed why we believe it is important for you (or your financial advisor) to develop a SSP (and not use a SWP), particularly if your situation differs from the frequently overly-simplified situations assumed by many SWP advocates, academics and other retirement experts.  This post will discuss how the Actuarial Budget Benchmark (ABB) can be used together with our recommended smoothing algorithm to help you develop a robust SSP to properly handle most real-world situations.  We will also present an example to demonstrate how this SSP can work over a ten-year projection period and will encourage you (or your financial advisor) to model what your future spending budgets might be under reasonable assumptions so that you can test your financial plan.

Retired Actuary Comments on Proposed Changes to Actuarial Standard of Practice No.32 (ASOP 32) Applicable to Social Security

Because Social Security benefits are, for most people in the U.S., a major component involved in determining how much they can afford to spend in retirement, we periodically focus on Social Security financing issues in this blog (with apologies to our non-U.S. readers).  Most recently, we addressed some of these issues in our post of June 27, 2018, “A Slightly Different Actuarial Perspective on the 2018 Social Security Trustees’ Report”.

It is not “Absurd” to Express Expected Future Healthcare Costs as a Lump Sum Present Value

In his October 17 post, “Getting Real About (Annual) Health Care Costs in Retirement”, Michael Kitces discusses that, while the lump sum present value of expected healthcare costs in retirement may be “scary”, expected healthcare costs can become more manageable (or “plannable”) and less scary, to the average person, when expressed as a stream of annual costs with an equivalent present value.  He states “recognizing that health care costs may be ‘just’ about $5,000/year per person (or $10,000/year for a couple) for 20+ years of retirement is not necessarily as daunting as a $273,000+ lump sum obligation for retiree health care costs!”

ALRIE is a Better Nest Egg to Lifetime Income “Translator”

In his October 10, 2018 article, “Retirement savings:  How to translate your nest egg into monthly income,” Robert Powell suggests two possible ways of expressing accumulated savings as lifetime income.  According to Mr. Powell, the easiest way to do this is to obtain a quote for a single premium immediate annuity (SPIA) as, “Doing so will give you a sense of how much monthly income you would receive for life from an annuity based on the value of your retirement nest egg.” 

What’s the Plan, Betty and Stan?

Periodically in our blogposts we take the time to remind you that in addition to using the Actuarial Approach to help you develop a reasonable spending budget and keep it on track over time, you can also use it to model deviations from assumed future experience.  As discussed in our post of November 26, 2017, modeling deviations from assumed future experience can be valuable in helping you develop a more robust personal financial plan.  It gives you the opportunity to think about what you would do, for example, if:

• Your equity investments suffer a significant loss, 
• Your spouse dies, 
• Your or your spouses’ health deteriorates rapidly, 
• Your children need money, 
• You lose a source of income, or 
• Your house needs significant repairs
  

Will You Really Need to Generate More Lifetime Income in Retirement Than You Think?

Last week, the Wall Street Journal published an article questioning the fairly common rule of thumb recommended by many retirement experts that individuals need to replace about 70% to 80% of their pre-retirement pay in retirement.  The WSJ article, written by Dan Ariely and Aline Holzwarth, was titled, “How Much Money Will You Really Spend in Retirement?  Probably a Lot More Than You Think.”  For those unable to read the WSJ article, you can read a related article in MarketWatch entitled, Retirement is going to cost a lot more than you think—here’s what to do.  The authors of these articles argue that instead of needing to replace 70% to 80% of pre-retirement pay in accordance with the commonly used rule of thumb, you should be looking at funding income replacement of 130% or more of your pre-retirement pay.  This post will respond to these articles.  In summary, even though we are not particularly big fans of using the 70%-80% of pre-retirement pay rule of thumb, we are even less impressed with the authors’ recommended 130% of final pay rule of thumb.