How Much Can I Afford?

How Much Can I Afford?

Periodically, in our blog posts we take the time to remind you that. In addition to using the Actuarial Approach to help you develop a reasonable spending budget and keep it updated over time. You can also use it to model deviations from the future experience assumed.

As discussed in our modeling deviations from future assumed experience can be valuable in helping you develop a stronger personal financial plan. It gives you the opportunity to think about what you would do, for example, if:

Your capital investments suffer a significant loss,
If your spouse dies,
Your or your spouse’s health deteriorates rapidly,
If Your children need money,
You lose a source of income, or
If Your house needs significant repairs

How Much Can I Afford?

How Much Can I Afford

How Much Can I Afford

The impetus to periodically remind you to “test” your financial plan is a recent article by our friend and fellow actuary. Steve Vernon, entitled: “A mandatory retirement plan for married couples.” The contingency that Steve focuses on is earlier than expected death within marriage.

In his article Steve cites a recent study by Merrill Lynch and Age Wave that states that “53% of widows / widowers say that neither they nor their spouse had a plan for what would happen if one of them died.”

In light of this statistic, Steve warns us, “find the courage to take action now to protect your spouse, while both are still alive.”

Then, when the inevitable happens, the surviving spouse can focus on curing the emotional disturbance without The additional stress of worrying about money Planning together is a great way to say “I love you.” We agree.

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It is usually a relatively easy process to see how the death of a spouse will affect the survivor’s financial status. All that is required is to assume that you or your spouse dies today and re-run the ABC for single (or early retirement) retirees with revised data. Doing this will allow you to see how assets. Spending liabilities and spending budgets could be affected by premature death. If the resulting expense budget for the surviving spouse is considered insufficient. Then the couple must decide whether they should buy additional life insurance or take some other action to address the possible insufficiency.

In addition to having an idea of ​​the financial impact of a premature death within marriage. Couples will want to make sure that they have the proper designations and testaments of the beneficiaries. The Merrill Lynch / Age Wave study provides some useful checklists for this purpose.

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We also agree with Steve that couples should plan together. It is important that both members of the marriage are more or less on the same page in terms of their financial objectives. Spending budgets, actual spending and the actions they could take in the event that future experience deviates from their planning assumptions.

Self-insured retirement

Periodically, we believe it is important to remind our readers that self-insured retirement is a risky business and the only real way to guarantee the amount of retirement income. That one can expect from accumulated savings is through the purchase of annuities. We are not necessarily recommending that you should do this (we do not make investment recommendations). We simply point out that there are risks associated with self-insuring that must be taken into account when developing your retirement investment / spending strategies.

One of the main purposes of our website is to provide tools that help you achieve your spending goals at the time of retirement. Typical spending objectives include:

Maximize spending while you live
Do not run out of accumulated savings
Avoid the volatility of spending from one year to another
Have some certainty of being able to cover essential expenses
Have flexibility of spending
Do not leave the heirs too much

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Depending on your personal financial situation, your wishes and your risk tolerance. Some of these goals may be more important to you than others and may affect the way you invest your accumulated savings and your spending strategy.

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Retirement Insurance for Seniors

We understand why you may not want to completely insure your retirement by purchasing (or investing in) lifetime annuities. For example, you may believe that you can maximize your expenses (or do better) by retiring by investing part. All of your accumulated savings in more risky investments.

In fact, many of our readers believe that the assumptions we recommend to help individuals and couples develop a budget of expenses. Which are more or less consistent with the assumptions used by the actuaries of the insurance companies to fix. They are too conservative for the budget. And they can be. However, we recommend using these low-risk assumptions to develop an expenditure budget benchmark that can be compared to spending budgets developed using more aggressive investment / spending strategies.

Also, if you do not think you can maximize your expenses (or otherwise make it better) with your investment strategy. If you want to avoid the volatility expense and you think it’s important to always be able to cover your essential expenses. You may want to consider the strategy less risky to buy annuities to meet some or all of your spending needs.

Personal financial planning

In this publication, we will compare the risks and possible rewards of self-insuring your retirement against the purchase of annuities. Keep in mind that although the discussion below compares these two alternatives. There is nothing that prevents you from combining these approaches into your personal financial planning. In fact, many retirement experts recommend using both approaches instead of one or the other. Instant payday loans finance available for seniors. 

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For the self-insurance alternative, we will assume that you will use the Actuarial Approach / ABB to develop your annual expense budget. While the actuarial approach is a dynamic spending approach and not a static approach, the static and dynamic spending approaches, for the most part, share the same potential advantages and carry similar risks compared to the annuity purchase strategy. See the appendix below for a discussion of static and dynamic spending approaches.