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This article hones in on utilizing actuarial methodology when it comes to determining how much you can afford to spend in retirement – specifically, through the floor-and-upside approach.READ THE ARTICLE
How might an actuary approach retirement planning?
Floor-and-upside: This article hones in on utilizing actuarial methodology when it comes to determining how much you can afford to spend in retirement – specifically, through the floor-and-upside approach. In a “floor” portfolio, your funding comes from non-risky assets, such as Social Security or a pension, which is meant to provide a lifetime income that covers essential expenses. Then, any remaining assets are placed in the “upside” portfolio, which is funded by risky assets dedicated to future discretionary expenses.
In utilizing this strategy, the main question at hand becomes how to estimate the amount needed to fund both your essential and discretionary recurring/non-recurring expenses. The process in pinpointing those numbers is reviewed here:
📌Step 1: Estimate your future annual recurring expenses
📌Step 2: Estimate your future non-recurring expenses
📌Step 3: Categorize each expense in steps 1 and 2 as essential or discretionary
📌Step 4: Utilize an Actuarial Budget Calculator workbook to pinpoint actuarial reserves needed to cover expected recurring and non-recurring essential expenses, and expected recurring and non-recurring discretionary expenses
📌Step 5: Compare the current total value of your assets versus the total actuarial reserves required, and shift spending budgets as needed
📌Step 6: Utilize the calculation in step 4 as a guide for developing your investment strategy
The power of planning: In the end, taking the time to compare your current value in assets against the amounts needed to fund each category of expenses can help you make better spending and investment decisions, thus enabling you to make better overall retirement timing decisions. If there’s ultimately one thing you to take away from this, it should be just how complex retirement income projections can be, and why you should leverage financial planning software to reduce the risk of user error.