Thanks to Rivan Stinson for teeing up the Actuarial Approach in Stinson’s recent Washington Post article titled, “Retiring soon? Plot a detailed budget first before tapping your 401(k).” In her article, Stinson writes,
“Once
you make this granular budget, it’s time to crunch the numbers on how
much your savings and investments, along with Social Security and a
pension (if you have one), would cover.”
Creating a granular
budget and comparing the present value of expected spending under the
budget with the present value of household assets (including future
payments from Social Security, annuities, pensions or other sources of
income) to determine the household Funded Status are essential steps in
the Actuarial Approach Recommended financial planning process.
In
addition to granularly budgeting for recurring and non-recurring
expenses or expenses that are expected to increase at different rates in
the future, we encourage users to classify these expenses as either
“essential” or “discretionary” and their investments/assets as “risky”
(upside) or “non-risky (floor) to facilitate liability driven investment
matching of household assets and liabilities.
And while the
Actuarial Financial Planning workbooks are robust budgeting tools (and
also good tools to use to calculate present values and to assess risks
by stress-testing certain assumptions), they are not intended to be used
just once at or near retirement. As Robin Williams said in response to
the question, “so you just play this one hole?” in his famous routine
about golf: “F NO”, you should granularly redetermine your household
Funded Status periodically (we suggest at least once per year)
throughout your retirement. This annual valuation step to redetermine
your Funded Status and to monitor it from year to year is the key to
keeping your spending plan on track throughout retirement.
The
Washington Post article was originally titled, “The 4% Rule for
Retirement Still Works, but Experts Urge Flexibility.” We believe
granular budgeting and going through our Recommended Financial Planning
Process annually is way better (and much more flexible) planning
approach than using the 4% Rule.
