Retirement Planning is Not an Event; It’s a Process

I recently received an email from the folks at Retirement Researcher inviting me to attend their latest Retirement Challenge. The preamble to their invitation said,

“Retirement planning isn’t an event… it’s a process, Ken.”

We couldn’t agree more, and although we have tried many times in this website to do so, we can’t say it any better. Successful ongoing planning in retirement depends less on the planning model employed and the accuracy of the assumptions used in the model and more on the process used to address deviations of actual and assumed experience as they occur.

American Academy of Actuaries New Social Security Tool is Also Deficient in Alerting the Public to Potential Cash Flow Issues

This post is a follow-up to our post of July 29, 2023 where we took the Academy to task for removing three important caveats about the Social Security Challenge tool and, therefore, potentially misleading the public about the long-term effectiveness of possible system “fixes.” In this post, we will discuss yet another feature of the tool that may also mislead the public about the effectiveness of these possible “fixes.” This feature ignores the potential negative impact on system assets of overly deferring the revenue increases or benefit reductions necessary to restore system’s actuarial balance. Thus, while certain changes may achieve actuarial balance (and even earn a “You’ve Solved It” pat on the back from the tool), these changes aren’t expected to keep the OASDI Trust fund from running out of money during the entire 75-year projection period, and therefore, should not be considered as viable, much less as a “fix.” After providing some background, we will discuss an example.

Why Did the American Academy of Actuaries Remove Important Caveats from its Social Security Reform Menu Tool?

Almost seven years ago, the American Academy of Actuaries added the following language to its Social Security Game to avoid misleading the public regarding changes that may be required to bring the system back into actuarial balance:

“The following should be noted when interpreting results from the Social Security Game:

• The 75-year actuarial balance calculation used in the game does not consider significant revenue shortfalls expected to occur after the end of the 75-year projection period, and thus possible solutions illustrated in this game are generally not sufficient to achieve “sustainable solvency,” a concept discussed in the Trustees Report.
• The possible solutions assume immediate adoption of System changes, rather than gradual implementation. If changes to the System are gradually implemented, the required increases in tax revenue or benefit decreases will need to be larger than noted in the game to achieve actuarial balance.
• The success of reforms will depend on how well actual future experience compares with the assumptions made by the trustees and the Social Security actuaries. There is no mechanism in current Social Security law to maintain the program’s actuarial balance once it has been achieved. Thus, there can be no guarantee that the System’s long-term problem will be “solved” for any specific length of time by enacting various system changes. “

Critical Planning Lesson Learned from Social Security

This post is a follow-up to my post of June 11, 2023, where I outlined the general actuarial process that we recommend for ongoing planning in retirement and my Advisor Perspectives article of July 3, 2023, where I illustrated how this same process is applied to Social Security. Several readers questioned why I illustrated the application of the general actuarial process using Social Security since, according to them, it clearly hasn’t worked very well for our primary U.S. retirement system. In this post, I will respectfully disagree with those readers and point out that not only is this proven actuarial process exceptionally robust, but it has actually worked quite well for Social Security and other financial systems. Notwithstanding, there is, an important lesson involving Steps 4 and 5 of the process that we can learn from Social Security when planning our own retirements. 

Life Expectancy vs. Lifetime Planning Period

The inspiration for this post was a recent conversation I had with my buddies at our weekly R.O.M.E.O (Rossmoor Old Men Eating Out) lunch and gab session. The exciting topics we discussed included:

• How much longer can we expect to live?
• How much longer should we plan on living? and
• What is the likelihood that the President of the United States will die in office during the term starting January 20, 2025 given the two likely candidates at this time.

American Academy of Actuaries Doubles Down on Misleading Answer to Cause of Social Security Funding Deterioration

In my Letter to the Editor in the May/June edition of Contingencies (a publication of the American Academy of Actuaries), I took the Academy’s Senior Pension Fellow, Linda Stone, to task for claiming that Social Security’s financial challenges were primarily the result of demographics. I disagreed with Ms. Stone’ claim in my letter and noted that a breakdown of the sources of Social Security’s funding status deterioration since 1983 is shown in Table 1 of Social Security Administration Actuarial Note (Year).8. In the letter, I said,

“This table shows that out of the total 2022 long-range actuarial balance of -3.43% of taxable payroll, 0.14, or -4%, was attributable to “Demographic Data and Assumptions.” Therefore, I conclude that the demographic assumptions used in the 1983 Trustees Report were pretty darned good, and demographics doesn’t appear to be the primary source of the growth in the system’s long-range actuarial deficit since 1983.”

Systematic Comparison of Assets and Liabilities, Part 2

This post is a follow-up to our post of April 11, 2023 entitled, “Systematic Comparison of Assets and Liabilities—Its How We Actuaries Roll.” In this post we will describe the general process actuaries use to systematically compare assets and liabilities for many financial systems such as pension plans, Social Security and, as recommended in this website, personal financial retirement plans. We believe this general actuarial process is just as important, if not more important, in the management of a system’s finances than the models or assumptions actually used to project or calculate a system’s assets and liabilities.

Wade Pfau Touts Use of Basic Actuarial and Financial Principles for Retirement Planning

Thanks to Dr. Wade Pfau,

• Founder of Retirement Researcher,
• Principal and Director of Retirement Research for McLean Asset Management,
• Research Fellow with the Alliance for Lifetime Income and Retirement Income Institute,
• Professor at the American College of Financial Services, and
• Widely recognized retirement thought leader,

for once again advocating the use of essentially the same basic actuarial and financial economics principles for retirement planning for retirees and near retirees that we have advocated in this website for years.

You can read Dr. Pfau’s thoughts on comparing household assets and spending liabilities and assumptions to use for this purpose in this May 26, 2023 Financial Advisor article.

Ken Steiner Interviewed on Money Mountaineering Podcast

Check out my interview with Pete Neuwirth on his 9th episode of Money Mountaineering.   You will quickly discover why I made my living as an actuary rather than as a tv personality. 

Unfortunately, Congress Did Not Adopt a Better Financing Approach for Social Security in 1983

In 1982, I wrote a paper for the Transactions of the Society of Actuaries entitled, “A Better Financing Approach for Social Security¹”. At the time, the National Commission on Social Security Reform was studying ways to solve the system’s impending short-term funding crisis and long-term funding imbalance, which eventually led to adoption of the 1983 Amendments to the system.

My proposed approach was relatively simple and anticipated:

• Making reasonable deterministic assumptions about the future
• Annual valuations to systematically compare the present values of system assets and liabilities
• A level tax rate if all assumptions about the future were realized (and no future changes in assumptions or benefits),
• Significant trust fund accumulation,
• Automatic adjustments of future tax rates to amortize:
  • Gains and losses from experience more or less favorable than assumed
  • Changes in actuarial assumptions
  • Changes in system benefits

I also discussed in the paper that if Congress did not want to implement the automatic tax rate changes (or didn’t like the expected trust fund accumulation), it could always decide to adjust benefits accordingly.