How Much Can I Afford to Spend in Retirement?: Thank You, Mr. President

As of the close of
stock markets on April 8, 2025, the S&P 500 index was down about 15%
from its close at the beginning of the year. It seems pretty clear that
this decrease is primarily attributable to implementation of President
Trump’s tariff policies. Whether the market’s decline will worsen or
recover this year is uncertain. It is also uncertain what the impact of
these policies will have on short-term or long-term inflation.Generally,
we encourage our readers to remeasure their Funded Status once a year
at the beginning of the year. However, it may make sense to remeasure
(or estimate) the household Funded Status during a year in which
investment performance is significantly higher or lower than expected or
in which a significant purchase or other financial decision is being
considered by the household.In this post, we will discuss how you
can easily estimate the impact of the recent stock market decline on
your beginning of year Funded Status and provide an example. Knowing the
impact can possibly help you make better financial decisions during
2025. Estimating your mid-year Funded StatusTo
estimate your mid-year Funded Status, you could simply go back to the
Actuarial Financial Planner (AFP) spreadsheet and revise relevant input
items that you entered at the beginning of the year. No need, however,
to run 10,000 simulations to redetermine what your revised “probability
of success” is.To estimate the effect of recent stock market
declines on your beginning-of-year calculated Funded Status without
using the AFP, the process is even easier—simply estimate the loss on
your equities incurred since the beginning of the year, subtract that
amount from your beginning-of-year balance sheet assets and divide the
result by your beginning-of-year balance sheet liabilities.Estimated
Mid-Year Funded Status = (Beginning of year total Assets – investment
loss to date) / (Beginning of year total Liabilities)For example,
Bill and Susie’s household Funded Status at the beginning of 2025 was
120%, determined by dividing the total present value of their assets of
$1,800,000 by the total present value of their spending liabilities of
$1,500,000. As of April 8, they estimate their equity investments are
about $60,000 lower than they were at the beginning of the year. To estimate their April 8th
Funded Status, they subtract $60,000 from their beginning of year
assets of $1,800,000 and divide the result ($1,740,000) by their
beginning of year spending liabilities of $1,500,000 to obtain an
estimated April 8, 2025 Funded Status of 116%. Bill and Susie are
also worried about the short and long-term impact of the President’s
tariff policy on general price inflation. To estimate this impact, they
can change the current 3% per annum default assumption used in the
spreadsheet and/or increase the assumed future increases of inputted
expenses.As time passes and the effects of significant tariffs on
prices become clearer, we will likely change the default inflation
assumption. In the meantime, households would be wise to stress test
their plans for higher levels of inflation or other risks such as
possible reductions in Social Security benefits.