Adjust the 4% Rule Enough and You Might End Up with Something as Good as the Actuarial Approach—Part 3

Despite its obvious flaws, the 4% Rule of thumb for determining “safe” withdrawals from invested assets retains its popularity among many personal financial journalists, financial advisers, academics and bloggers.  While experts acknowledge that the 4% Rule may have certain weaknesses, they claim that these flaws can be addressed with specific modifications.  We at How Much Can I Afford to Spend have never been big fans of the 4% Rule, with or without proposed modifications, and we believe the Actuarial Approach is a far more robust approach for budgeting and personal retirement financial planning.  Some of our posts on the 4% Rule include (in chronological order):

• October 9, 2014—20 Years of Drinking the 4% Rule Kool Aid
• June 24, 2015—Will “Ratcheting” the 4% Rule Make it Less Insane
• May 9, 2016 and June 3, 2016—Adjust the 4% Rule Enough and You Might End Up with Something as Good as the Actuarial Approach, Parts 1 and 2
• July 23, 2019—The Real Problems with Using the 4% Rule to FIRE
• June 14, 2020—Focus on Retirement Spending, Not Retirement Income

Determining Your Asset Mix in Retirement

One of the most important considerations in your retirement plan is how to invest your assets.  As part of our Recommended Retirement Planning Process, we suggest that you consider implementing a Liability Driven Investment (LDI) strategy where:

• investments in low-risk assets (the Floor Portfolio) are anticipated to be sufficient to fund spending on future essential expenses and
• investments in risky assets (the Upside Portfolio) are used to fund spending on future discretionary expenses.

Should I Buy It?

The primary focus of this website is the relatively boring topic of budgeting.   We encourage you to use an “actuarial” process to help you determine how much you can afford to spend each year so that you can make better financial decisions.   We don’t tell you how much you should actually spend or how you should spend your money.  We understand, however, that the actual buying decisions you make constitute the front-lines of your personal financial wellness battlefield.   Further, these decisions can affect your emotional well-being and are therefore much sexier than the prospect of developing an actuarial spending budget.  We get it.  You see something, you want it and you believe that buying it will make you happy (or happier).

Are You Over-Estimating Your Future Retirement Spending Needs, Part II?

This post is a follow-up post to our post of August 22, 2017.   In this post, we will discuss how you can use our Recommended Financial Planning Process to avoid over-saving/under-spending before and after retirement.

How Conservative Are Your Planning Assumptions About the Future Part II

This post is a follow-up to our post of May 19, 2020, where we encouraged you to play with our ABC workbooks to become more comfortable with how your results can vary by employing different assumptions about the future.  We hope that trying out a few “override assumptions” will give you a better sense for how conservative or optimistic your planning assumptions about the future might be.  Subsequent to that post, we made changes to our default assumptions (see our post of August 16, 2020) to make them more consistent with current assumptions used for hypothetical inflation-indexed annuity pricing.  The current default budgeting assumptions are:

• Annual investment return/discount rate: 3%
• Annual rate of inflation/desired future recurring budget increases: 2%
• Lifetime planning period(s): Planning horizon from Actuaries Longevity Illustrator, 25% probability of survival for non-smoker in excellent health

DOL Issues Disappointing LISE Guidance

On August 18, 2020, the Department of Labor issued an interim final rule (IFR) regarding calculation and disclosure of the Lifetime Income Stream Equivalent (LISE) amounts of current account balances for participants in 401(k) and other qualified defined contribution plans. Subsequent to the release of the IFR, there has been significant attention in the financial press regarding the proposed rules and the assumptions specified by the DOL (on an interim basis) for converting (or translating) defined contribution plan account balances into LISE amounts. This post will not repeat the new rules set forth in the IFR and discussed in the many published articles, but will instead focus on what we perceive to be the significant guidance shortcomings, particularly the requirement to disclose fixed dollar (non-inflation indexed) lifetime annuity payments rather than inflation-adjusted payments.

Options for Spending 2020's Forfeited Trip

One of our readers recently asked whether it was good practice to “roll over” unspent budgeted 2020 travel and entertainment expenses to 2021 or later future years, as long as one does not “double dip” by also counting these unspent amounts as accumulated savings when determining recurring spending budgets.  Since this is likely to be a common situation for many of us retirees this year (other than Bobbie, who managed to travel to England early this year), we will address this question in this post.

We’ve Changed the Default Assumptions for the Actuarial Budget Calculators

The Default Assumptions we build into our Actuarial Budget Calculators (ABCs) are intended to be consistent with assumptions used by insurance companies in the pricing of inflation-indexed life annuities.  Since fully inflation-indexed annuities are no longer issued by U.S. insurance companies, selecting these assumptions has become more of a theoretical exercise.  However, we do have data on fixed income single premium life annuities and other sources to guide us to some degree.

Can You Afford to Retire?

In these uncertain times, it is natural (for Baby Boomers anyway) to wonder whether retirement or partial retirement may be financially viable. We have seen several articles discussing how much savings may be necessary to enjoy a “comfortable” retirement. In this post, we remind our readers that with the help of one of our Actuarial Budget Calculators for retirees (Single or Couples), and just a little bit of number crunching, you can derive a pretty good idea of how much you may need. We point you to our post of August 25, 2019, “Is $1 Million of Savings Enough?” for a step-by-step example of the approach we recommend. 

Actuaries Discuss Retirement Budgeting Approaches

On July 13, 2020, the American Academy of Actuaries (AAA) released an Issue Brief entitled, “Actuarial Perspectives on Determining a Retirement Income Budget.”  This post will provide the perspectives of two retired actuaries on this AAA Actuarial Perspectives Issue Brief.