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.

Don’t Forget Your Taxes

Taxes (federal, state, local, real-estate, Social Security, Medicare, etc.) are essential expenses that, unfortunately, must be planned for in retirement. As is the case with other expenses expected in retirement, we must make assumptions about how current tax expenses will change in the future to develop a reasonable estimate of the total present value of future household expenses (i.e., household spending liabilities), against which the total present value of household assets is compared. This post will address assumptions for projecting tax expenses using the Actuarial Financial Planner (AFP) and will include an example.

Would You Trade Your Pension for What is Behind Door #2?

Every so often we read something in the retirement-advice media with which we simply cannot agree. Recently, we ran across a video from Kiplinger entitled, “Why A Pension Lump Sum is Better than An Annuity Payment.” This video appears to be based on the May 5, 2022 article by Brian Skrobonja, CHFC, (updated on January 27, 2023) entitled, “Pension Lum Sum vs. Annuity Option, Which Is Better?” When the article was first released last year, we took issue with it and discussed its shortcomings in our post of May 5, 2022. If you are interested in this subject, we encourage you to re-read our post of May 5, 2022.

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