Funded Status—The Better Metric for Managing Assets and Spending in Retirement

As
we have indicated many times in prior posts, the future isn’t going to
happen as you (or your financial advisor) assume, and your spending
goals and actual spending are likely to change over time. Therefore,
your retirement plan should include a process for determining when
future adjustments to your plan may be necessary. We believe such a
process is much more important than any model you may use to project the
future.

Monte Carlo models touted by financial advisors are good
one-and-done projection models that can show ranges and probabilities of
future results based on assumptions about the future. However, these
stochastic models don’t predict the future any better than deterministic
models and, more importantly, they generally don’t provide a process
for changing your plan when the future turns out to be different than
assumed.

The Actuarial Approach recommended in this website
provides a robust process for managing your assets and spending
liabilities in retirement and a simple Funded Status metric to help you
adjust your plan to better accomplish your goals. We recommend the
following easy-to-follow guardrails be used to manage your assets and
spending liabilities in retirement.

Asset Management Guardrails

Asset/Liability Comparison	Recommended Action
PV Non-Risky Assets less than PV Essential Expenses	Consider Increasing Non-Risky Assets and/or decreasing expenses classified as Essential
PV Non-Risky Assets greater than PV Essential Expenses	Consider increasing risky assets and/or increasing expenses classified as Essential
Funded Status less than 95%	Consider increasing assets and/or decreasing spending liabilities

Spending Management Guardrails

Asset/Liability Comparison	Recommended Action
Funded Status less than 95%	Consider decreasing spending liabilities and/ or increasing assets
Funded Status greater than 120%	Consider spending increases
Funded Status greater than “Surplus” threshold percentage (e.g., 150%);	A “Nudge” For households who may be “behaviorally resistant” to increasing spending even when warranted: Consider transfer from Upside Portfolio to Surplus Bucket to reduce Funded Status to surplus threshold percentage

You may find the following
two recent Advisor Perspectives articles to be of interest in
illustrating how helpful the Funded Status metric can be in your
planning.

Advising a Retired Client Who Wants to Buy a Second Home (or Other Big-Ticket Item) – Articles – Advisor Perspectives

Use the Funded Status Metric & A ‘Surplus Bucket’ to Increase Spending in Retirement – Articles – Advisor Perspectives