Don’t Know How Long You’ll Live in Retirement? Another Good Reason to Build a Robust Floor Portfolio to Fund Your Essential Expenses

This post is a follow-up to our post of September 14, 2021 entitled; “How Long Should You Plan to Live?” In that post, we advocated using our “default” assumption of the 25% probability of survival from the Actuaries Longevity Illustrator for non-smokers in excellent health when planning for your retirement. In this post, we look at the planning implications of using shorter or longer Lifetime Planning Periods (LPPs) than our default assumptions in your retirement planning. Based on our brief analysis, we believe that, for most reasonable LPP assumptions, it still makes sense for you to use the Safety-First InvestmentStrategy to build a robust Floor Portfolio comprised primarily of non-risky investments like Social Security, pensions and life annuities to fund your future expected Essential Expenses. Using this strategy and these types of investments will better enable you to match your non-risky investments with your essential expenses over your remaining lifetime, however long that period may turn out to be.

How Long Should You Plan to Live?

One of the most important assumptions you need to make when planning for your retirement in today’s low-interest rate environment is the expected length of your lifetime.  If you are married, you may also need to make assumptions with respect to how long your spouse may live, how long you both will be alive, and how long just one of you will be alive.  We call these assumptions your Lifetime Planning Periods (LPPs).  Note that an LPP is not how long you (or your spouse) expect to live (life expectancy), but a period, generally longer than life expectancy, to which you conservatively plan to live to avoid outliving your assets (or, alternatively, to reduce the need to significantly cut back essential spending if you live “too long”).  These assumptions can have a significant impact on spending and investment strategies that you may employ in retirement and can affect many of your retirement-related decisions.

“Immunize Then Optimize”—Different Names but Same Planning Concept as Funding Your Floor Portfolio First Then Your Upside Portfolio Second

Thanks again to Christine Benz, Director of Personal Finance at Morningstar for another informative article on retirement planning. In her September 3, 2021 article entitled For Retirement Portfolios, 'Immunize Then Optimize', she and Jeff Ptak interviewed author and investing expert Michael Falk on a number of investment and planning related subjects, including “how retirees and pre-retirees should be operating in this environment and the steps they can take to ensure the success of their plans.”

Preview of Upcoming SECURE Act Lifetime Income SLA Disclosures

In this post, we will deviate slightly from our normal focus of trying to help retirees make better financial decisions to focus on the upcoming lifetime income disclosure requirements imposed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, as implemented in subsequent Department of Labor/Employee Benefit Security Administration (DOL/EBSA) guidance (which has yet to be finalized). This post is a follow-up to our post of November 18, 2020.

Focus on Retirement Spending, Not Retirement Income, Part II

It is always nice when we run across a personal finance expert who speaks the same language that we do. This week, we read an article by Christine Benz entitled “Forget Income Replacement, Focus on Supplying Cash Flow Needs.” Ms. Benz is the Director of Personal Finance at Morningstar. The title of her article reminded us of our post of June 14, 2020, Focus on Retirement Spending, Not Retirement Income. 

What Services Do You Want (or Need) From Your Financial Advisor?

As noted in many of our posts, our mission is to help you make better (or good) financial decisions in or near retirement. Two of the many decisions you will need to make are 1) whether to retain the services of a financial advisor and 2) which services you should use if you do retain one. This post is a follow-up to our post of January 31, 2020 and discusses the question of how much retirement planning you might want to do on your own vs. how much you might want to involve a good financial advisor. The answer may depend on a number of factors, including:

Fortunately, You Don’t Need to Think Like a Nobel Laureate to Make (or Help Your Clients Make) Informed Retirement-Related Financial Decisions

Our primary mission here at How Much Can I Afford to Spend in Retirement is to help people make better financial decisions (usually in or near retirement). To try to accomplish our mission, we promote use of the same basic actuarial principles we applied during our careers as pension actuaries. Our primary audience includes intelligent DIYers and Financial Advisors. As noted in our website, we receive zero compensation from visits to our blog or from any activity associated with the blog. We have, on several occasions, however, received nominal prize awards for essay submissions. 

How Should the Increased Mortality Associated with Covid-19 Affect Your Retirement Plan?

On July 21, 2021, the U.S. Centers for Disease Control and Prevention (CDC) announced in a new report that life expectancy [at birth] in the US “declined by a year and a half during 2020 due in large part to the coronavirus pandemic.” According to USA today, the decrease from 78.8 years to 77.3 years was the largest drop since World War II. Decreases were much larger for Hispanics and non-Hispanic Blacks than for non-Hispanic Whites.

We’ve Added an Actuarial Balance Sheet Tab to our Retiree Workbooks

Inspired by the Dr. David Blanchett article, “Guaranteed Income Belongs on the Retiree Balance Sheet” and discussed in our post of June 9, 2021, we decided to combine the results developed in several separate tabs of our two retiree Actuarial Budget Calculator workbooks (Single Retired and Couple Retired) into the form of a traditional actuarial balance sheet, which compares total household assets with total household spending liabilities. It is our hope that this balance sheet will give you a different perspective on your finances in retirement and will facilitate your retirement planning. 

Worry Less and Spend More in Retirement

Yes. This is another post extolling the benefits of building a Floor Portfolio to fund your future Essential Expenses in retirement. Recently released research shows that households spend more of their assets if they hold a portion of their wealth as guaranteed lifetime income and not as investments. In addition to providing economic benefits, shifting assets from investments to guaranteed lifetime income can also provide psychological benefits that give households a “license to spend” their assets. So, you can worry less, spend more and achieve your financial goals by shifting some of your assets from investments to guaranteed lifetime income.