Finding Financial Peace of Mind in Retirement—5 Easy Steps

In the recently released Stanford Center on Longevity report entitled, “Disconnected: Reality vs. Perception in retirement planning” which we briefly discussed in our post of October 7, 2022, the authors noted,

“While retirement planning is highly personal and dependent on many different factors, there is an almost universal desire for ‘peace of mind’ in retirement.”

Given this near universal desire, we thought it might be helpful to outline the five relatively straight-forward steps we think you should follow to help you find financial peace of mind in your retirement with the assistance of the Actuarial Financial Planner (AFP). 

The Most Important Retirement Planning Decision for Baby Boomers

In this short post, we will once again repeat what we believe to be essential retirement planning guidance from our late friend, Dirk Cotton. In two of his early 2019 Retirement Café blogposts, Dirk said,

“The most important decision you will make in retirement planning is how much of your resources to allocate to the upside and floor portfolios” and “The correct balance [between the upside and floor portfolios] will depend on how willing you are to risk losing your standard of living for the chance of having an even higher one.”

Hey Retirees and Near Retirees: How is Your Current Retirement Plan Planning Process Working Out for You These Days?

In light of lower-than-expected investment returns and higher-than-expected inflation this year, retiree and near retiree households are facing difficult financial decisions. These decisions may include;

• Can I afford to retire when I had planned?
• Can my spouse retire at the same time as I?
• Should our plan assume higher rates of inflation, and if so, for how long?
• Should one of us continue to work or plan to work part-time for a while?
• Should one or both of us postpone commencing our Social Security benefits?
• Should we reduce or defer our planned discretionary spending?
• Should we change our investment strategy, and if so, how? Should we make it more or less risky?
• Should we take our pension plan distribution in the form of a lump sum?
• Should we somehow tap into our home equity to supplement our retirement spending?
• Have we budgeted enough for future long-term care, future healthcare, future household repairs, etc.?
• Should we somehow reflect a possible future reduction in our Social Security benefits in our current spending budget?

So, how are retired and near-retired households making decisions like these?

Society of Actuaries/Financial Finesse Present a Dynamic Retirement Planning Calculator

The Society of Actuaries (SOA) recently released a retirement planning guide for older retirees entitled, “Late-in-Life Decisions Guide.” According to the Society’s website, the guide was written by Financial Finesse (a financial wellness consulting firm), but the guide itself states, “In collaboration with Financial Finesse, the SOA Aging and Retirement Strategic Research Program prepared this guide as a resource to help older retirees and those who assist them.” Irrespective of who was responsible for writing this guide, we found the retirement planning calculator prepared by Financial Finesse and included in the guide to be of interest. We will discuss the calculator in this post

We Call BS Again on Investment Allocation Rules of Thumb for Retirees

Most investment allocation rules of thumb ignore the existence of non-financial household assets such as Social Security, pension benefits and life annuities in the calculation of a portfolio’s target investment allocation. As a result, such allocations frequently fail to properly measure the amount of risk being assumed by the retired household in its overall retirement asset allocation.

The Two Basic Equations Underlying the Actuarial Financial Planner

In this post, we will once again set forth and discuss the two basic equations that form the foundation of the AFP. Application of household demographic and financial data and reasonable assumptions to these two equations turns the AFP into a relatively simple but very robust planning tool for financial planners with retired or near-retired clients and for retired or near-retired DIYers.

Yes, the AFP Even Does LDI

This post is a follow-up to our shameless Ginzu-Knife themed commercial for the Actuarial Financial Planner (AFP) in our post of July 21, 2022. Since that post, the AFP has received admittedly-indirect endorsements from two frequent financial writers. We describe these “endorsements” below.

How Should Purchasing an Annuity Affect Your Retirement Portfolio Investment Mix?

As discussed most recently in our post of July 27, 2022, annuity purchase rates for single premium immediate life annuities have become more favorable over the past five months. As a result, you may be considering purchase of a single premium life annuity in the near future to strengthen the Floor Portfolio you use to fund your Essential Expenses. In this post, we will once again discuss how changes in your

• Present value of Essential Expenses,
• Present value of Non-Financial Floor Portfolio assets, or
• Accumulated savings

can affect the optimal investment mix in your financial asset portfolio (accumulated savings) under the Safety-First investment strategy.

The Retirement Researcher Constructs a Household Balance Sheet Using Basic Actuarial and Economic Principles

In Episode 25 and Episode 26 of their “Retire With Style” podcasts, Dr. Wade Pfau and the Retirement Researcher team discuss the benefits of constructing a household balance sheet to measure the adequacy of household assets vs spending goal liabilities. They call the ratio of household liabilities to household assets “the Funded Ratio.” The information contained in the balance sheet, including the Funded Ratio, combined with results of their Retirement Income Style Awareness (RISA) Profile (discussed in our post of October 6, 2021) serves as the basis for their recommended household retirement plan.

Updated Implied Discount Rates for Single Premium Life Annuities as of July 25, 2022

In our post of April 2, 2022, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs).  In that post, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com based on two different mortality assumptions (one based on life expectancy and the other based on a 25% probability of survival, which is the basis we recommend in our website for planning purposes).  In our post of May 18, 2022, we updated these implied interest rates consistent with SPIA quotes available on that date.   

In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of July 25, 2022 and compare the quotes and the implied interest rates with the results of the similar exercise we performed as of May 18.  You may wish to revisit our prior posts for more general discussion of annuity pricing assumptions.