As discussed in previous posts, your Funded Status is an easily
calculated, robust metric used to measure your financial health in
retirement. Measuring and monitoring your Funded Status annually can
help you make countless financial decisions. In this post, we encourage
you to think about how your Funded Status will be affected before making
a significant financial decision.
And it can be so easy to
estimate how a financial decision will affect your Funded Status. Your
financial advisor doesn’t need to run 1,000 or 10,000 simulations in her
Monte Carlo model to estimate the effect. Let’s look at a simple
example.
Bill and Susie have recently entered their data into the
Actuarial Financial Planner for Retired Couples (AFP) and determined
that their Funded Status as of January 1, 2025 is 133%, determined by
dividing the present value of their assets of $1,600,000 by the present
value of their spending liabilities of $1,200,000.
Their financial
advisor has told them that they have an 85% probability of success of
being able to spend $90,000 each year in real dollars, and Bill has
determined that they can withdraw $30,000 per year from their savings
using the 4% Rule.
They would like to go on an around-the-world
cruise that they estimate will cost them $60,000. Neither the Monte
Carlo model or the 4% Rule is particularly helpful informing them of
whether or not they can afford to spend an additional $60,000 this year
on their dream vacation.
Susie suggests to Bill that they add a
non-recurring expense of $60,000 to this year’s AFP. Bill says that it
won’t even be necessary to revisit the AFP workbook because a $60,000
trip this year would simply add $60,000 to their calculated spending
liabilities, bringing the present value of their spending liabilities to
$1,260,000 and their recalculated Funded Status to 127% ($1,600,000 /
$1,260,000). Based on this simple arithmetic, they decide that they can
afford to go on their dream vacation this year.
Not all financial
decisions are so easily quantified. For example, you may want to buy a
new automobile this year or renovate your kitchen. While the upfront
cost of these items may be knowable (or estimable), they can also affect
the present value of your assets if your plan involves selling the
automobile or your improved home in the future. However, the present
value of these future sales can also be estimated in the AFP and
reflected in the Funded Status.
Summary
The
Funded Status metric is a powerful tool for managing your assets,
spending and risks in retirement. It can help you spend more confidently
in retirement than other metrics generally employed today. We encourage
you (or your financial advisor) to use it.
