Quantifying Spending Needs Versus Spending Wants – Example

This post will present and discuss another example of our Recommended Financial Planning Process. As a follow-up to our last few posts, we will compare results for an example couple under the Actuarial Approach with less satisfactory results obtained using two alternative approaches.

Focus on Retirement Spending, Not Retirement Income

We’ve recently come across a fair number of articles encouraging individuals and couples to cobble together Retirement Income Generators, or sources of retirement income, to meet their spending needs in retirement.  These sources of income are generally expected to commence at retirement and are also expected to last for the life of the person or couple.  The theory behind this approach is that the sum of these income sources will replace the paychecks individuals and couples received while working, and make it easier for them to manage their finances in retirement.  And while this approach can work in fairly simplistic situations, and in fact is promoted as a simple alternative to other approaches, it falls short in many real-world situations.

Comparison of Retirement Spending Budget Calculation Approaches

Since our blog is all about helping people develop a robust spending budget, in this post we are going to do a deeper dive into the approaches generally used today by retirees (or for retirees) to develop their spending budgets.  We acknowledge up-front that not everyone actually feels the need to calculate a spending budget, so this post is focused on comparing the approaches generally used by those who do.

Actuaries Release New Essay Collections of Effective Retirement Planning Ideas

The Society of Actuaries has released two new essay collections containing ideas to improve retirement planning.  We encourage you to read these collections (or, at least the ones we wrote).  The two essay collections are:

Retired Actuaries Submit Comments to the Department of Labor Regarding Disclosure of Lifetime Income Stream Equivalents

Here are our comments to the Department of Labor regarding disclosure of Lifetime Income Stream Equivalent (LISE) amounts in defined contribution plan benefit statements. In summary, we made the following recommendations:

Changes Suggested by Actuaries Unlikely to Ensure Sustainable Solvency For Social Security

Every year, the Social Security trustees release a new OASDI Trustees report discussing the financial status of the Social Security system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective on the new OASDI Trustees Report (AP)”explaining the results in the new Trustees report and the Academy’s recommendations for possible system changes.  In an effort to provide our U.S. readers a slightly different actuarial 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 AP issue brief.  This post updates our posts of June 8, 2019, June 27, 2018 and August 3, 2017 on this subject.

How Conservative Are Your Planning Assumptions About the Future?

This post is a follow-up to our posts of April 11, 2020 and March 9, 2020.  In those posts, we discussed the default assumptions used in our Actuarial Budget Calculators (ABCs) and potential factors to consider if you believe our default assumptions are either too conservative or too optimistic, and you want to “override” them in your budget or essential expenses/Floor Portfolio present value calculations.

A Simpler Alternative to Our Recommended Financial Planning Process?

In this post, we will compare our Recommended Financial Planning Process with a retirement income strategy recently suggested by Steve Vernon, a fellow Fellow of the Society of Actuaries, in his April 6 Forbes article, Retirees May Want to Revisit Their Savings Withdrawal Strategy.  Thanks goes to Ken’s buddy, Kyle Brown, pre-eminent ERISA attorney, for recently suggesting that comparing our strategy with Steve’s might make a good post.  As background, Kyle, Steve and Ken all worked together at The Wyatt Company (and its successor firms) as consulting pension actuaries (and primary legal resource) for many years when we were younger.

Yes, Retirees and Near Retirees Can, and Should, Plan for Stock Market Crashes

From time to time we come across an article in the personal retirement planning media that we have significant problems with.  Kristen McKenna’s April 16, 2020 Forbes article, Can You Plan For A Stock Market Crash? is the most recent to push our buttons.  Although she makes several good points, we have problems with Ms. McKenna’s article, such as:

Retirees -- Should You Defer Commencement of Your Social Security Benefits?

In our last post, we briefly mentioned that recent decreases in interest rates favored deferring commencement of U.S. Social Security benefits until age 70 versus starting them earlier.  The subject of when to commence Social Security benefits if you have retired has received attention in the media recently as a result of the Coronavirus pandemic and associated layoffs.  For example, in her April 11 Washington Post column, Michele Singletary asks the question, “Should you take Social Security early?” She indicates that at least for some, the Coronavirus has changed the math on waiting until age 70.