It’s
not too early to start planning your spending for 2026 even though you
haven’t yet determined your January 1, 2026 Funded Status. You or your
spouse may be considering spending in 2026 on items that weren’t in your
2025 spending budget, such as an extra vacation, purchase of a new car
or remodeling your kitchen, but you don’t know whether you can afford
the “extra” spending involved. Fortunately, you are using the
Actuarial Approach, its Funding Status metric and our suggested
guardrails to manage your spending in retirement rather than a Strategic
Withdrawal Plan (SWP) or Retirement Income Strategy (RIS) that is
designed to slowly release your own money to you over time via something
called a “retirement paycheck.” Therefore, if your Funded Status is
sufficient and you are comfortable with a potentially lower Funded
Status as of January 1, 2027, you may be able to increase your spending
for 2026.In this post, we will show you how easy the process is
for determining how much more than your 2026 budget you may be able to
spend. We will also show several examples illustrating the process for
retired households with different Funded Statuses and tolerances for
risk. 4-Step Process for Determining Potential Extra Spending Amount:Step 1:
Using the Actuarial Financial Planner, determine or estimate your
January 1, 2026 Funded Status (FS). Your FS is the present value of your
assets (A) divided by the present value of your spending liabilities
(L). We will discuss January 1, 2026 FS valuations in more detail in
future posts, but be sure to revise your input items to try to
accurately capture expected spending in 2026, including effects of
inflation on recurring and non-recurring expenses and taxes. Also try to
capture all current and future household assets and current and future
spending liabilities to make the FS calculation as much of a
“best-estimate” as possible.Step 2: Determine the lowest Funded Status as of January 1, 2027 you would be comfortable with. Let’s call this FS*Step 3:
Develop an asset adjustment factor (AAF) as of January 1, 2027 based on
your expectations for 2026 investment returns and spending versus
default assumptions (or other assumptions you use) in the Actuarial
Financial Planner. For example, if you think actual investment returns
will be the same as the default assumptions and you will spend your
spending budget for 2026 (before any extra spending), then your
adjustment factor will be close to 1. If you believe equity returns will
be less than assumed, you may use an adjustment factor less than 1
reflecting the proportion of your assets invested in such risky
investments.Step 4: Determine your potential extra spending for 2026 by solving the following formula:Potential Extra Spending Amount = [A X (AAF)] – [L X FS*]Where
A is your January 1, 2026 Assets, AAF is your investment adjustment
factor for 2026 experience, L is your January 1, 2026 Spending
Liabilities and FS* is the lowest Funded Status you are comfortable with
as of January 1, 2027.ExamplesCouple AStep
1: Using the Actuarial Financial Planner, Couple A estimates their
Funded Status as of January 1, 2026 to be 150%, consisting of Assets of
$3 million and Liabilities of $2 million. Step 2: Couple A is not comfortable with a Funded Status lower than 130% as of January 1, 2027Step
3: Couple A assumes actual investment experience for 2026 will be the
same as assumed, their non-extra spending be equal to the spending
budget and their assumptions won’t change for 2027. Therefore, their
asset adjustment factor is 1.0Step 4: Couple A determines that
they can afford extra spending for 2026 of $400,000 by using the
potential extra spending formula above:[$3M (1.0) – $2M (1.3)] = $400,000Couple
A doesn’t really want to spend an extra $400,000 in 2026, but they
agree it is nice to know that, under these assumptions, they can afford
to do so.Couple B is more conservative than Couple A, but their
assets, liabilities and Funded Status as of January 1, 2026 are the
same. They also selected 130% as their lowest 2027 FS with which they
would be comfortable, but they believe it is quite possible that there
could be a stock market adjustment in 2026, so for the purpose of
determining their potential extra spending in 2026, they chose an asset
adjustment factor of 0.9. Applying the formula above gave them an extra
spending amount for 2026 of $100,000$3M (0.9) – $2M (1.3) = $100,000Couple
C’s January 1, 2026 Funded Status is 133% consisting of assets of $2
million and liabilities of 1.5 million, but they would like to make a
significant purchase during 2026 and would be comfortable if their end
of year Funded Status was above 110%. They also believe that there may
be a correction in equities during 2026, so based on their mix of risky
and non-risky assets, they have chosen an asset adjustment factor of
0.85. Applying the extra spending formula for this couple results in a
potential extra spending amount for 2026 of $50,000.$2M (0.85) – $1.5M (1.1) = $50,000These
couples understand that using this process does not guarantee that they
won’t need to reduce their spending in the future, and that increasing
their spending in 2026 will reduce spending in future years, all things
being equal.SummaryYour spouse has been
thinking about remodeling the family kitchen during 2026. She has
obtained an estimate for the project of about $55,000. Can you afford
it? You can either input this project directly into the Actuarial
Financial Planner and see how it affects your January 1, 2026 Funded
Status, or you can use the formula in this post, which also permits you
to factor in your estimate of investment experience during 2026, to use
as part of your general spending decision-making process.
