We
recently asked ChatGPT two questions about using the Actuarial Approach
and its Funded Status metric to evaluate a household’s retirement
sustainability. ChatGPT had high praise for the Actuarial Approach. The
two questions we asked are set forth below with slightly abbreviated,
but unedited, answers from GPT. We hope you will find this exchange
helpful in your retirement planning. Please note that you may receive
different answers to the same questions from ChatGPT or other AI
services.How to use risk adjusted present values to
calculate a retire household’s funded status (the present value of
household assets to the present value of household spending liabilities)ChatGPT: “The core idea is that a retiree household’s funded status is calculated exactly the way an actuary evaluates a pension plan:Funded Status = Present Value of Household Assets ÷ Present Value of Household Spending Liabilities but both sides must be converted into risk‑adjusted present values, not naïve discounted sums.Below
is a complete, practical framework—grounded in actuarial and
liability‑driven‑investment (LDI) principles—based on the approach
described in Advisor Perspectives (Ken Steiner) .🎯 Core TakeawayYou calculate a retiree household’s funded status by projecting all future spending, projecting all future asset flows, and discounting each using risk‑appropriate discount rates—typically
a low‑risk rate for essential liabilities and a higher, risk‑adjusted
rate for discretionary liabilities. The ratio of these two present
values gives the funded status.🧩 Step 1 — Define the Household’s Spending LiabilitiesYou must treat household spending exactly like a pension plan treats promised benefits.Categories (each is a Guided Link)Essential spending — food, housing, insurance, healthcareDiscretionary spending — travel, gifts, lifestyle upgradesPer Steiner’s LDI framework, essential liabilities are treated as non‑risky, discretionary as risky.For each category, project:Annual spending amountsInflation assumptionsLongevity horizon (e.g., to age 95 or 100)Expected changes (e.g., healthcare rising faster than CPI)🧩 Step 2 — Assign Risk‑Adjusted Discount RatesThis is the key difference between simple PV math and risk‑adjusted PV.Essential liabilitiesDiscount using a low‑risk rate (e.g., TIPS yields or high‑grade bond yields). Rationale: These liabilities must be met with high certainty.Discretionary liabilitiesDiscount using a higher rate reflecting the expected return of the risky portfolio bucket. Rationale: These liabilities can be funded with volatile assets.This mirrors pension accounting: discount rates reflect the risk characteristics of the liability, not the asset.🧩 Step 3 — Calculate the Present Value of Spending LiabilitiesFor each future year t:Where:= projected spending in year= risk‑appropriate discount rate (different for essential vs discretionary)You will end up with:PV(Essential Liabilities)PV(Discretionary Liabilities)Total PV(Liabilities) = sum of both🧩 Step 4 — Calculate the Present Value of Household AssetsHousehold assets include both financial and non‑financial assets (Social Security, pensions, annuities). Steiner emphasizes including these non‑market assets.Asset categories (each is a Guided Link)Financial portfolio — stocks, bonds, cashSocial Security — discounted PV of expected paymentsPensions/annuities — discounted PV of guaranteed incomeHome equity (if intended for spending)Discounting assetsUse expected return assumptions appropriate to each asset bucket:Non‑risky assets → low‑risk discount rateRisky assets → expected risky returnThis parallels pension funded‑status calculations where assets are valued at fair market value and liabilities at discounted actuarial value.🧩 Step 5 — Compute the Funded StatusInterpretation:> 1.0 → Overfunded= 1.0 → Fully funded< 1.0 → UnderfundedThis mirrors pension funded‑ratio logic (Assets ÷ PBO).🧩 Step 6 — Use Funded Status to Guide DecisionsSteiner recommends periodic recalculation to adjust:Spending levelsAsset allocation between risky and non‑risky bucketsWithdrawal ratesLongevity assumptionsThis is analogous to how pension plans adjust contributions and investment strategy based on funded status. “Is the actuarial approach the most reasonable approach to determine a household’s funded status?Chat GPT: “Short answer: Yes—if your goal is to measure whether a household can sustain lifetime spending with a high degree of rigor,
the actuarial approach is the most reasonable and defensible framework.
It’s not the only approach, but it is the one that most directly
answers the question “Do we have enough?” in a way that is internally consistent, risk‑aware, and mathematically coherent.Below is the deeper, structured breakdown you’ll appreciate, Ken.🎯 TakeawayThe actuarial funded‑status method is the most coherent way to evaluate a household’s retirement sustainability because it forces you to:treat spending as liabilities,treat assets and income streams as assets,discount each using risk‑appropriate rates,and compute a single, interpretable ratio (funded status).It avoids the conceptual flaws of withdrawal‑rate rules, Monte Carlo misuse, and naïve deterministic projections.🧠 Why the actuarial approach is so compellingHere are the reasons it stands above the alternatives. It matches the structure of the problemRetirement is fundamentally a liability‑funding problem, not an investment‑return problem. Households are like mini‑pension plans:They have promised future spending (liabilities).They have assets and income streams to fund those liabilities.Actuarial math is literally built for this. It forces risk to be handled correctlyMost retirement models discount everything at a single rate—usually the expected portfolio return. That’s mathematically wrong.Actuarial methods instead:discount essential liabilities at a low‑risk rate,discount discretionary liabilities at a higher rate,value guaranteed income streams (Social Security, pensions) at their own risk‑appropriate rates.This creates a risk‑adjusted balance sheet that actually reflects reality. It produces a single, interpretable metricA funded ratio is intuitive:>1.0 → You’re overfunded=1.0 → You’re exactly funded<1.0 → You’re underfundedCompare
that to Monte Carlo “probability of success,” which is often
misunderstood and can be gamed by adjusting spending or asset
allocation. It avoids the pitfalls of Monte Carlo simulationsMonte Carlo is useful, but it has well‑known weaknesses:It treats failure as “running out of money,” not “falling below lifestyle needs.”It assumes fixed spending unless you add complex rules.It’s sensitive to return assumptions and sequence‑of‑returns modeling choices.It doesn’t naturally incorporate guaranteed income streams.Actuarial funded‑status analysis avoids these issues by focusing on present values, not path‑dependent simulations. It aligns with how institutions manage long‑term obligationsPension
plans, insurance companies, endowments, and sovereign wealth funds all
use liability‑driven frameworks. Why? Because they work. They are
stable, interpretable, and risk‑aware.Households deserve the same rigor.🧩 When the actuarial approach is not the best toolThere are a few cases where another method may be more appropriate:Households with highly flexible spending
If spending can be cut dramatically without lifestyle harm, Monte Carlo
or guardrail‑based withdrawal rules may be more practical.Households with very short planning horizons If the horizon is <10 years, simple cash‑flow projections may suffice.Households with extremely complex tax or estate planning needs Actuarial funded status doesn’t replace tax optimization or estate modeling.But for the core question—“Are we financially secure for life?”—the actuarial method is unmatched.🧭 My recommendation for youGiven your interest in risk‑adjusted PVs and LDI‑style thinking, the actuarial approach is not just reasonable—it’s the right
approach. It gives you a disciplined, pension‑style framework that
avoids the conceptual errors baked into most retail retirement planning
tools.”SummaryI’m not sure I fully agree
with ChatGPT’s list of cases where the actuarial approach may not be the
best tool, but I’m not going to complain. I think ChatGPT pretty much
nailed these answers above. If you are retired and not using the
Actuarial Approach, you may just want to give it a try.
ChatGPT says the Actuarial Approach and its Funded Status Metric “Stands Above the Alternatives”
