Borrowing and Investing Proceeds in a Low-Interest Rate Environment

We’ve seen several articles recently suggesting that it might make financial sense to take out a home mortgage or car loan at current low interest rates and invest some or all of loan proceeds in equities or other risky investments. The expectation of such Leveraged Investing is that the higher expected returns from equities will more than cover the cost of the relatively cheap loan. The same issue also applies to households considering whether they should accelerate and pay-off their mortgages or car loans vs. investing those payments in risky investments. As an example of a recent article on this subject, the February 9, 2021 Squared Away blog from the Center on Retirement Research entitled, Readers See Pros, Cons to Paid-off Mortgage, contains the following quote:

Building Your Floor Portfolio

Sadly, our friend Dirk Cotton passed away on January 28 at age 68.  You can find many of his sage thoughts on retirement planning in his blog, The Retirement Cafe.  While we never met Dirk, we traded many emails and spoke on the phone frequently.  We were big fans of Dirk and his ideas.  If you search our website, you will find 15 of our previous posts that referenced his posts.

How Effective is Your Financial Advisor’s Monte Carlo Analysis as a Retirement Planning Tool?

Thanks to Mark Chamberlain, Co-Founder of The Open Architecture 2020 Group, for pointing us to an interesting Retirement Management Journal paper by James B. Sandidge entitled, “Odds Are Retirees Don’t Care about the Odds.” Mr. Sandidge’s well-expressed reservations about Monte Carlo Analyses typically used by Financial Advisors struck a chord with us as we have expressed our own misgivings in many of our prior posts. In fact, in our most recent post of January 10, 2021, we said,

How Conservative is Your Financial Advisor’s Calculated Spending Budget?

It always fun for us to review budget calculations done by others. In this post we will review example calculations done for Hank and Marie in Michael Kitces’ and Derek Tharp’s January 6 post, Why 50% Probability Of Success Is Actually A Viable Monte Carlo Retirement Projection. We briefly discuss Hank and Marie’s data below, the assumptions we made and compare results using our Actuarial Budget Calculator (ABC) with results from the Kitces’ Monte Carlo model to gauge how conservative their model results are. In summary, their model is less conservative (more aggressive) than the ABC with default assumptions, in that it produces higher initial total spending budgets. 

Time to Perform Your January 1, 2021 Actuarial Valuation

Congratulations.  You made it through 2020!  

In our ongoing effort to turn you all into actuaries, this post will recommend that you perform an “actuarial valuation” based on your personal data as of January 1, 2021.  As part of this process, we will also encourage you to  prepare an “actuarial report” to document your thought-process and any planning decisions you make for this year. 

How Should Future Social Security “Reform” Affect Your 2021 Spending Budget?

In the next few months, we will be encouraging you to perform an actuarial valuation of your assets and future spending liabilities to determine your spending budget for 2021. When you do your January 1, 2021 actuarial valuation, we ask, in this post, that 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. Thus, we are asking our U.S. readers to consider how future uncertain Social Security reform might affect your current spending budget. To help you do this, this post will discuss the estimated size of Social Security’s financial problem and several ways you can use our recently updated Actuarial Budget Calculator workbooks to reflect the potential impact of future system reform in your current financial plan.

Why the Actuarial Approach Blows the Sox off Strategic Withdrawal Plans, Part II

Subsequent to release of our previous post, we received a suggestion from one of our readers that we show Bill and Jim’s spending graphically, since pictures can frequently communicate better than words. We agreed. Therefore, this post will illustrate Bill and Jim’s expected future spending under the Actuarial Approach if all assumptions made in the calculations are realized and will compare the results with spending expected under the 4% Rule under the same assumptions about the future. Amounts are shown in today’s dollars.

Why the Actuarial Approach Blows the Sox off Strategic Withdrawal Plans (SWPs)

(Hint:  The Actuarial Approach focuses on how much you can afford to spend each year, not how much of your invested assets you can safely withdraw each year)

As discussed in our post of October 28, 2020, there is no shortage of recent articles claiming that the 4% Rule or the IRS RMD approach, or the seemingly infinite number of modifications of these SWPs, is the best approach for you to use to develop your spending budget in retirement.  Pardon our French, but we call “BS” on these articles.   If your goal in retirement is to structure annual withdrawals from your invested assets so that they are relatively stable from year to year and unlikely to run out while you are alive, then an SWP approach may be just what you are looking for.  However, if you are looking to structure your spending to meet your financial goals in retirement (including not running out of assets), you will want to check out the Actuarial Approach. 

We’ve Updated Our Two Actuarial Budget Calculators for Retirees

We recently received a suggestion from one of our readers that resulted in changes to our two ABCs for retirees. The suggestion came from Mr. Jerry Kiefer, a retiree with an engineering background. Mr. Kiefer was looking at our post of July 26, 2016 (we are not making this up), and suggested that it would be nice to reflect the expected proceeds from the sale of David’s, (our hypothetical retiree in that post) house in the expected runout of David’s assets in the ABC for Single Retirees. Mr. Kiefer correctly noted that doing so would eliminate the potential cash flow warning that was being produced when he entered the present value of the expected sale in the “PV Other Sources of Income” cell. 

Managing Your Finances in Retirement

Every once in a while, we come across an article in the retirement-focused press that contains what we believe to be reasonably good financial advice for retirees or near-retirees.  And by good retirement financial advice, we mean, of course, advice that is reasonably consistent with what we advocate in this website.   As you can probably guess from our prior posts, these “good advice” articles generally don’t advocate using the 4% Rule or any other SWP to withdraw amounts from your savings.