Using the Actuarial Approach to Avoid Financial Traps in Retirement

Like you, we read many articles on the Internet that dispense financial advice to retirees. This one entitled, “11 Financial Traps Retirees Don’t See Coming”
recently caught our attention. While we hope that most of our readers
are aware of these financial traps and are planning for them, it doesn’t
hurt to revisit them from time.In this post, we will summarize
and briefly discuss the eleven financial traps (or risks) set forth in
the article and how almost all these risks are relatively easily
addressed by applying the Actuarial Approach. We will also add a few to
the author’s list.Financial Traps During RetirementUnderestimating
health-care costs—We encourage users to separate their expected
health-care costs in the Actuarial Financial Planner (AFP) and possibly
assume a higher rate of future increase for these essential recurring
expenses.Relying too heavily on Social Security—The present
value of future Social Security benefits (assuming no future reductions)
based on a non-risky investment return discount rate is included as an
asset in the household’s actuarial balance sheet in the AFP. It may not
be unreasonable to assume that these benefits will be reduced in the
future when the Social Security trust fund is projected to be
exhausted. Failing to adjust spending habits—We recommend
periodically measuring the household’s Funded Status and making
adjustments in spending liabilities or assets when the Funded Status
falls outside our recommended guardrails.Underestimating inflation—We provide default assumptions for inflation, but these default assumptions can be overriddenIgnoring
tax implications—We encourage users to estimate future taxes as
essential expenses and possibly assume a higher rate of future increase
for these expenses if such increases are anticipated.Overcommitting
financial support to family—This risk falls under the general risk
category of overspending and is addressed in the Actuarial Approach by
determining what the impact on the household Funded Status would be if
such support is provided.Failing to plan for long-term-care–We
encourage users to plan for LTC as discussed in our previous post (and
as will be expanded in an upcoming article).Overconfidence in
investments—We encourage users to separately fund the present value of
their essential expenses with non-risky assets/investments like
pensions, Social Security, TIPS and life annuities. Such investment
enables users to invest more aggressively and confidently with their
remaining assets. Falling for scams or fraud—We hope our users
will not be victims of scams or fraud, but these possibilities are not
specifically addressed by the Actuarial ApproachNot updating
estate plans—This is another risk to avoid, but we also do not
specifically address this risk in the Actuarial Approach.Overlooking longevity risks—This is a risk we address with our default lifetime planning period assumptionsOther risks that can be addressed with the Actuarial ApproachThere
are several other risks not included in the article that you may also
wish to model or consider with help from the Actuarial Approach,
including:Failure to adequately insure insurable events (life, property, health, automobile, long-term care, business litigation, etc.)Marital dissolutionPossible decreases in future Social Security benefitsInadequately planning for the expenses of the surviving member of the household after the first deathRisk of insurance premiums or taxes increasing faster than expectedInvesting too conservativelyDifferent rates of future increases in different types of expensesUnderspending (see our post of May 7, 2025)SummaryRetirees
face many financial risks (potential traps) during retirement. The
Actuarial Approach, with its Actuarial Financial Planner model and
annual valuation process, can help you measure and manage these risks to
achieve your (or your client’s) financial goals in retirement.