The Real Problems with Using the 4% Rule to FIRE

Shortly after our July 9 post encouraging retirees to consider shoring up their floor portfolios by establishing budget buckets of low-risk investments to fund their future essential expenses, Michael Kitces released “The Problem With FIREing AT 4% And The Need For Flexible Spending Rules” aimed at very early retirees (Financially Independent/Retire Early individuals, or FI’ers).   His post discussed “safe” withdrawal approaches based on the 4% rule.  This rule of thumb anticipates at least 60% investment in equities, and, when assets are equal to 25 times expected annual expenses, may indicate when assets for an individual with a thirty year lifetime planning period are sufficient to retire (1/.04 = 25 times expected expenses).

Ok Retirees, Now May be a Good Time to Shore Up Your Floor Portfolio

This post is a brief follow-up to our post of April 23, 2018, Ok Retirees, What’s Your Plan for Dealing with the Upcoming Bear Stock Market?  In that post we said, “At some point in the future, we are going to experience another bear market.  We don’t know when it will occur, but we feel pretty safe in predicting that it will happen.”  We suggested in that post that you use our five-year projection tab to stress test your spending budget for potential poor investment returns.

Better Budgeting with “Actuarial Budget Buckets”

In this website we encourage you to use the full functionality of the Actuarial Approach and our workbooks to help you develop a better spending budget and a better sustainable spending plan in retirement.  In 2019 alone, our posts on this topic have included:

Establishing Dedicated Asset Reserves to Fund Different Types of Retirement Expenses

In his post of June 12, 2019 entitled “Segmenting Retirement Expenses Into Core Vs. Adaptive To Create Retirement Buckets”, Michael Kitces encourages his readers to consider separating expenses into “core” and “adaptive” expenses and creating separate “buckets” of assets dedicated to funding such types of expenses in the future.   We think this is excellent advice.  While we are not necessarily convinced that the terms “core” and “adaptive” suggested by Mr. Kitces are superior to “essential” and “non-essential” (or other similar terms commonly used), we are in complete agreement with the general reserving/bucket concept advocated in Mr. Kitces’ post, and, in fact, we have been advocating this concept for some time in our posts.  

Will Actuaries Miss the Boat Again on Social Security?

Every year, the Social Security trustees release a new report discussing the financial status of the Social Security system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective” issue brief explaining the new report and the Academy’s recommendations for possible system changes.  In an effort to provide our U.S. readers a slightly different perspective on the system’s finances (so they can attempt to plan for future possible changes to the program), this post will discuss some of the issues with which we agree and disagree with the AAA issue brief.  This post updates our posts of June 27, 2018 and August 3, 2017 on this subject.  Clearly, the comments in our previous posts had very little effect on AAA thinking, as most of the language in their 2019 Actuarial Perspective remains unchanged from the language contained in their prior issue briefs.  For additional discussion of the various points discussed below, we encourage you to revisit our prior posts.

Forecasting Future Investment Returns

To help you develop a reasonable annual spending budget, we provide you with Actuarial Budget Calculators (ABCs) that employ default assumptions for future investment returns, future inflation and your expected lifetime planning period.  These default assumptions are selected to be approximately consistent with assumptions used by insurance company actuaries in pricing current inflation-adjusted life annuities (net of expense loads and profit).  Thus, the Actuarial Budget Benchmark (ABB), which uses the default assumptions, provides you with a lifetime spending plan that could theoretically be fully funded through the purchase of relatively low-risk inflation-adjusted annuities at current market rates (the market value of your future spending liabilities).  The default assumptions currently are:

Yes, Determining How Much You Can Afford to Spend in Retirement is More Difficult than Saving for Retirement

Last week, Thomas Heath, a business reporter for the Washington Post concluded that, “Saving for retirement is hard.  Knowing how to spend it down is harder.”  We agree.  On the other hand, as discussed in our post of August 31, 2014, managing spending in retirement is not rocket science.  In order to get it right, you need to periodically:

Crunching the Numbers on Pension Lump Sums—Part II

This post is a follow-up to our post of February 18, 2015 encouraging individuals who are faced with the decision of electing either a lump sum or a lifetime income form of distribution from a defined benefit pension plan to crunch their numbers in order to make a more-informed decision.  The impetus for this post is the recently released guidance in IRS Notice 2019-18 indicating that the IRS would not issue guidance prohibiting  limited period “windows” offering a lump sum option to retirees who are already receiving their pension benefits, and an excellent article on this subject by fellow actuary, Elizabeth Bauer entitled, “What You Need to Know About Pension Lump Sums.” And, while we don’t necessarily see lots of limited period lump sum windows opening up as a result of this IRS guidance, this post may also be of interest to individuals who are offered a lump sum option from a pension plan on termination of employment or retirement as part of their plan’s normal operations.

Building Your Floor Portfolio with Extra Low-Risk Investments

Our last few posts discussed reasons why individuals may wish to consider building a portfolio of relatively low-risk investments to fund their future expected essential expenses (the floor portfolio) with the remainder of their assets invested in more risky assets to fund their non-essential expenses (the upside portfolio).  While there are a number of investments that can lessen investment risk, there are just few types of investments that can also lessen longevity risk by guaranteeing payment for life.  For purposes of this post, we will focus on these relatively low-risk, lifetime guarantee investments as a way to increase one’s floor portfolio.  These strategies/investments (which we refer to as “Extra Low-Risk Investments”) include:

There Are No Guarantees if You Self-Insure Your Retirement—Part 2

This post is a follow-up to our posts of August 8, 2018 and February 26, 2019 and discusses another way that you can use our Actuarial Budget Calculator (ABC) tools to help you better manage your investment and longevity risks in retirement.  We humbly claim that you are unlikely to obtain this level of sophisticated help elsewhere (at least at this price), and we provide an example to support this claim and to give you a guide to performing your own calculations.