Plan on Future Adjustments to Your Retirement Plan

Ongoing retirement planning involves making best estimate (or conservative) assumptions about the future and making necessary adjustments to your retirement plan when those assumptions inevitably turn out to be incorrect. At How Much Can I Afford to Spend, we believe using our Actuarial Financial Planner (AFP) model annually to calculate your funded status can best help you with ongoing (or dynamic) retirement planning. 

On the other hand, some financial advisors and academics encourage use of “safe” alternatives (like the 4% Rule or Monte Carlo model results with 90% or greater probability of success) where future retirement plan adjustments are generally not anticipated. This type of planning is referred to as “one-and-done” (or static) retirement planning. We also refer to this second type of retirement planning as “head-in-sand” retirement planning as it is very difficult to predict the future accurately and, as a result, it is very easy to either overspend or underspend relative to your spending goals when using these static approaches. For more discussion of ongoing vs. static planning, see our post of January 15, 2023. 

Systematic Comparison of Assets and Liabilities—It’s How We Actuaries Roll

In our last post, we discussed how Social Security actuaries compare system assets with system liabilities on an annual basis to determine the system’s funded status (long-range actuarial balance). We noted that the process used for this purpose for Social Security is very similar to the process we recommend for developing a spending plan in retirement.

What is Social Security’s Funded Status?

This post is a geeky dive into the primary metric used to measure Social Security’s funded status and how similar this metric is to the Funded Status measure generated by the Actuarial Financial Planner (AFP) that we encourage retired households to use in their financial planning.

What’s Your Funded Status?

While our recent posts suggesting that households focus on their Funded Status are perhaps beginning to sound like a broken record, we can’t help but notice that this general approach (also known as the Funded Ratio] is gaining support in the retirement press. For example, in the March 25-26 Kitces.com Weekend Reading post, the author says:

“Ultimately, the key point is that integrating dynamic rules into a retirement income plan can have significant implications on optimal retirement income decisions. And because it takes a comprehensive look at a client’s assets (incorporating both current portfolio balances and future expected income) and allows for spending flexibility in retirement (though the funded ratio’s sensitivity to assumptions can make it tricky to work with in practice), using the funded ratio to determine adjustments in retirement income could help advisors maximize their clients’ spending in retirement compared to more static approaches!”

And while we disagree with the above assertion that “the funded ratio’s sensitivity to assumptions can make it tricky to work with” (or any trickier to work with than other approaches), we will take this opportunity to once again describe the very simple steps involved in determining your household Funded Status using the Actuarial Financial Planner (with slight modifications from previous descriptions), so that you can put it to use in your planning. 

Focus on Your Spending Budget and Your Funded Status, Not on Withdrawals from Your Accumulated Savings

It seems that every other article we read these days in the retirement media involves someone’s thoughts about how best to withdraw funds from accumulated savings to supplement income from other sources such as Social Security, pensions and annuities in retirement. The most common withdrawal strategy for this purpose, of course, is “the 4% Rule”, but there are literally thousands of alternative withdrawal strategies (and more being developed every day). Advocates of these strategies stress that “converting” accumulated savings to “retirement income” is essential to ensuring that one’s annual retirement income (“I”) exceeds one’s annual expenses (“E”), or (“I > E”). In fact, several authors have proclaimed this “common-sense equation” to be, “The most important rule of personal finance — spend less than you earn.”

Why is the Actuarial Profession Reluctant to Advance Actuarial Solutions to the Decumulation Problem?

As a retired actuary who advocates the use of basic actuarial principles and processes to help retirees and near retirees make better financial decisions, I frequently wonder why my profession is so reluctant to advance actuarial solutions to the problem of decumulation in retirement. In this post, I will discuss:

• Mission and vision statements of the two major actuarial bodies in the U.S. (and how advancing an actuarial approach can be considered entirely consistent with these statements)
• Fundamental concepts of actuarial science that the actuarial bodies appear to ignore when providing planning advice to retired households (and an example), and
• Possible reasons why the actuarial profession in the U.S. is reluctant to advance actuarial solutions

Using the AFP to Develop a More Aggressive Financial Plan in Retirement

In our last post, we indicated that there are several levers in the AFP that more conservative users can employ to reflect their lower tolerance for potential future spending reductions, including:

• Using more conservative (than default) assumptions about the future to determine their household Funded Status,
• Building up a larger Funded Status over time, or
• Classifying more expenses as “essential.”

In this post, we will flip the coin and look at levers available for those with a higher tolerance for potential future spending reductions, or for those with insufficient assets to cover their spending liabilities using the default assumptions (and therefore, have little choice but to assume more risk).

We include an example. 

Improving Retirement Planning by Employing Basic Actuarial and Financial Economic Principles

In our post of July 23, 2020 entitled, “How to Fix Advisor Retirement Planning Models,” we summarized some of the problems with commonly used Monte Carlo approaches used by financial advisors to develop plans for retirees and near retirees. These problems were identified by three retirement thought-leaders (Michael Kitces, Michael Finke and David Blanchett) in a panel discussion at the Engage 2020 virtual conference. 

Check These Five Boxes to See if You Are Financially Ready to Retire

The Actuarial Financial Planner (AFP) is a useful tool to facilitate household decision-making in or near retirement. In this post we will discuss how the AFP (and possibly the Actuarial Budget Calculator for Single Retirees) can be used to determine if you are financially ready to retire. We include an example below to illustrate the process.

Ongoing vs. One-Time Financial Planning in Retirement

The Actuarial Financial Planner (AFP) advocated in this website is a relatively simple, deterministic actuarial model (i.e., it uses deterministic assumptions about the future to determine results).  By comparison, many financial advisors use more complicated Monte Carlo models which involve the use of one or more stochastic assumptions.  In this post, we will once again discuss why we believe the AFP is the more appropriate model for the purpose of ongoing (as opposed to one-time) financial planning in retirement.

This post is a follow-up to our post of December 25, 2022.  We start by providing background on deterministic vs. stochastic models and then discuss one of the main purposes of financial planning--periodically rebalancing household assets and spending liabilities to keep spending on track during retirement.  We conclude that the AFP better accomplishes this purpose than Monte Carlo models commonly used today.