There’s a Much Simpler and More Robust Financial Planning Tool for Retirees Than a “Risk-Based Guardrails Model”

In their November 24, 2021 Kitces.com post, Dr. Derek Tharp and Justin Fitzpatrick once again tout their risk-based guardrails financial planning model for financial advisors to use with their retired clients. In their post, they state,

“a risk-based guardrails model can provide clients with a more accurate picture of how much they can sustainably spend than can models based on static withdrawal rates or withdrawal-rate guardrails” and

“movement from withdrawal-rate guardrails to risk-based guardrails represents a significant improvement in planning quality for retirees!”

Feel free to read their post if you are interested in a risk-based guardrails planning concept. 

Growing, Protecting and Spending Your Assets in Retirement—Finding the Right Balance with The Actuarial Financial Planner

How much you can afford to spend in retirement (or leave to your heirs) is a function of how much assets you possess. Generally, the more assets you have, the more you can afford to spend. Most retirees need to invest (grow) their assets in order to maintain or increase their desired standard of living in retirement. At the same time, however, retirees need to protect their assets and watch their spending to ensure that:

1. sufficient amounts remain throughout the entire period of their retirement to fund at least a minimum (essential) standard of living, and
2. other spending goals are achieved.

Using the Actuaries Longevity Illustrator in Your Retirement Planning

The Actuaries Longevity Illustrator (ALI) has recently been updated to reflect mortality changes made in the 2021 Trustees’ Report for Social Security. We have therefore also updated our actuarial workbooks to reflect these changes. Like prior year changes, the changes in this year’s version were not major (no more than one year increases or decreases in lifetime planning horizons from the prior year) even though the 2021 Trustees report reflected the increased pandemic mortality experience in 2020.

Using the Actuarial Financial Planner for Retirees

In our last post, we introduced our new Actuarial Financial Planner (AFP) workbooks for Single Retirees and Retired Couples. Several of our readers had questions about the new workbooks, so we decided to address these questions with an example in this post. We will also take this opportunity to discuss a related topic--investment in bonds vs. purchasing lifetime annuities.

Our Favorite One-Tab Actuarial Financial Planner for Retirees and Near Retirees

We are happy to add two more Excel Spreadsheets to our toolbox of MS Excel actuarial spreadsheet tools—The Actuarial Financial Planner (AFP) for Single Retirees and the Actuarial Financial Planner for Retired Couples. These spreadsheets are very similar to our Actuarial Budget Calculators (ABCs), but differ in the following ways:

Planning on Social Security

This post is a follow-up to our post of December 6, 2020 in which we suggested that, when developing your current year spending budget, “you consider the possibility that future Social Security reform may decrease the future benefits you receive from the system and/or increase your future taxes in some manner.” In response to that post, we received several comments questioning the premise that Congress would even consider the possibility of reducing Social Security benefits for beneficiaries in pay status. We fully understand that most people would prefer that someone else be required to pay the higher taxes and/ or have their benefits reduced in order to bring the system back into financial balance. In general, however, unless your means are very modest or you are very old, we believe it is more prudent for you to plan on some level of future benefit reduction or increase in taxes instead of simply assuming that the entire burden of achieving Social Security’s future financial balance will be borne by someone else.

Aligning Your Strategic Plan in Retirement with Your Spending Goals, Your Tolerance for Risk and Your Other Preferences Doesn’t Have to be That Complicated

Dr. Wade Pfau Response Subsequent to publishing this post, we received an email from Dr. Wade Pfau. Dr. Pfau indicated that he believed our post contained several misunderstandings about the Retirement Income Style Awareness (RISA), including: The core RISA is just twelve questions and not complicated. The RISA is used as a first step to get people started and is not used to develop a full financial plan, and It is simply about how to fund (what we call) the Floor Portfolio Dr. Pfau indicated that our readers who would like to know more about the RISA are invited to attend an upcoming Retirement Income Challenge that is not available to the public. This special invite can be reached by clicking this link.  We thank Dr. Pfau for his feedback and look forward to learning more about the RISA and its applications.

As retired actuaries, we understand that perhaps not everyone thinks the same way we do. No, don’t worry, we will not be talking in this post about politics, masks or vaccinations. We will, however, once again offer our thoughts on why we believe our Recommended Financial Planning Process is a relatively simple process that can be used to align your strategic retirement plan with your spending goals, your tolerance for risk, and your other preferences without requiring a lot of complex regression analyses or risk tolerance questionnaires.

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.”