How Much Can I Afford to Spend in Retirement?: All About That Process

The future isn’t going
to happen as you (or your financial advisor) assume, and your spending
goals and actual spending are likely to change over time. Therefore, as
previously discussed in our posts of April 16, 2023 and October 24, 2023, your retirement plan should include how you will determine when
future adjustments to your plan may be necessary. We believe it is
important for a good retirement plan to implement a robust process
for making necessary future adjustments, and this process is likely to
be even more important than the projection tool, or metric, used to
measure the financial status of your plan.We at How Much Can I Afford to Spend in Retirement recommend the following process for determining when future adjustments to your plan may be necessary:Actuarial Approach–Three Key Planning StepsMeasure your Funded Status (assets/liabilities) at the beginning of each yearMonitor your Funded Status from year to year, andManage your spending, assets and risks in retirement as necessary With respect to managing your spending in the third bullet above, we suggest using the following guardrails:Spending Guardrails: If
your Funded Status falls below 95%, you should consider decreasing
discretionary spending, and if your Funded Status exceeds 120%, you may
consider increasing discretionary spending. We
believe the Funded Status metric used in the Actuarial Financial Planner
is a straight-forward and robust metric and, when used with the process
above, can help households (and their financial advisors) determine
when plan changes may be necessary. In our opinion, it is a much better
metric for this purpose than the probability of success metric typically
used by financial advisors in Monte Carlo projections. As discussed in
our previous post, it is also a much better metric for helping
households make financial decisions by providing a quick and
understandable answer to the question, “How will my Funded Status be
affected by this decision?”SummaryDetermining
when your plan needs to be adjusted in the future is just part of good
planning. To manage future adjustments, you need a good process and good
metric or two. If you (or your financial advisor) don’t already use it,
we recommend trying the Actuarial Approach.