Applying the Actuarial Process to Retirement Planning

Ken SteinerAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This article is a follow-up to my September 2015 article, Think Like an Actuary to Become a Better Advisor. I will describe the general process used by actuaries to maintain financial sustainability, to encourage advisors to employ this same process to their client’s retirement planning. For illustrative purposes, I will briefly outline how this process is applied by the Social Security system.

General actuarial process

The general process utilized by actuaries to maintain a financial system’s sustainability over time has six basic steps:

  1. Make reasonable assumptions about the future (generally deterministic, not stochastic).
  2. Calculate present values of assets (including future sources of income) and liabilities (balance sheet) based on relevant demographic information, system provisions and assumptions made.
  3. Periodically (generally annually) compare estimated present values of assets to liabilities to determine the system’s funded status (snapshot comparison).
  4. Maintain a history of the system’s funded status over time and note trends.
  5. When warranted or required, make changes to assets or liabilities (or both) to restore desired funded status (and/or to address possible cash flow issues).
  6. Periodically evaluate/stress test assumptions to see if they need to be changed or to assess risk.