How Much Can I Afford to Spend in Retirement?: Top 20 Reasons Why I Recommend the Actuarial Approach for Managing Spending and Investing in Retirement
Top 20 Reasons Why I Recommend the Actuarial Approach for Managing Spending and Investing in Retirement
The Actuarial Approach:Employs an easy-to-understand and robust financial metric (Household Funded Status)Permits adoption of easy-to-implement guardrails that suggest future spending changesUses
basic actuarial principles and processes (time value of money,
comparison of assets and liabilities, mortality, annual valuation
process, etc.) consistent with general principles and processes used by
actuaries to measure the financial sustainability of other financial
systemsUses basic financial economic principles (Liability Driven Investing (LDI), risk-adjusted discounted cash flows (RADCF))Can reflect all future spending liabilities and all sources of income/assets.Permits
matching of the present value of non-risky assets/investments with the
present value of essential expenses to guide investment decisionsProvides
flexibility in risk tolerance (through personal selection of
assumptions and selection of essential vs. discretionary expenses)Provides
flexibility in liability measurement by permitting different future
increase assumptions for different types of expenses (for example,
higher future assumed increases for health expenses or taxes and lower
future assumed increases for future discretionary expenses)Provides an actuarial model that uses a simple, one-tab input/output Excel spreadsheetIs more robust than Strategic Withdrawal Plans or Monte Carlo models frequently used by advisors.Provides
a reasonable, rational and reliable valuation process (the household
funded status is expected to remain constant from year to year if all
assumptions, including spending, are realized and unchanged.Helps assess and manage risks in retirement through stress-testing of assumptionsEasily
accommodates non-linear spending (front-loading of expenses for
example) or non-linear sources of income (future asset sales for
example)Facilitates superior budgetingHelps households
make more informed financial decisions (by showing the expected impact
on the Funded Status of actually making the decision).Quantifies how much you can afford to spend in retirement, not how much you can safely withdraw from your portfolioContains
many levers to make your decumulation plan more or less conservative
(changing assumptions, varying size of target Rainy-Day Fund or changing
mix of essential/discretionary spending)Enables more accurate couples planningContains no potentially confusing probabilities of success/failureIs free
