I use Google Sheets to track my portfolio, which has the benefit of letting me easily update things automatically and track them over time.
Almost exactly a year ago I started tracking two numbers — the Funded Ratio of my portfolio and the current withdrawal amount of my chosen systematic withdrawal program.
I wanted to see how these things varied over time with a real world portfolio. Partly just for my own curiosity but also because they are things that get talked about in very theoretical ways but you almost never see actual numbers from real world portfolios and I wanted to rectify that.
First, what are these two numbers? And why do they change all the damn time?
Funded Ratio
Over on Bogleheads, bobcat2 has a nice three-part series on the Funded Ratio. The ratio is just your assets divided by your liabilities. If the number is greater than 1, then you have enough assets to pay for all your liabilities. If it is under 1, then you do not.
Calculating your assets & liabilities for retirement planning isn’t 100% straightforward because you also need to take into account future assets (like Social Security) and future liabilities (like next year’s living expenses). But once you’ve done that, you can retire as soon as your Funded Ratio is greater than 1. If it is less than 1…keep working.
There are four things that can make your Funded Ratio change:
- The value of your assets can go up or down; that’s just what happens when the market goes up or down. If your Funded Ratio is 1.0 but then the stock market crashes 50%…maybe your Funded Ratio is now 0.7.
- The discount rate can change. When that happens the value of those future assets and liabilities can go up and down. There is no universal agreement on what the correct discount rate is but I’m convinced by arguments that it should be real TIPS yield. If the real TIPS yield goes up then it is easier to pay for future liabilities.
- You can add or remove money from the portfolio. Adding money via working longer & saving more. Or inheriting money. Or perhaps selling your house & downgrading to something smaller. Removing money via withdrawals for living expenses or paying taxes or sudden medical problems.
- Finally, you can adjust your lifestyle. Every once in a while check your actual spending against your planned spending and update the model. Maybe you thought you’d be spending $42,000 a year but you’re actually spending $44,000 a year.
You can see all 4 factors at work in my changing Funded Ratio.
You can see that my Funded Ratio has changed dramatically over the course of a year. From a high of 2.29 to a low or 1.67, a variance of 0.62 over just 12 months. Discount rates changed; stocks plunged and then recovered; I made withdrawals; and I updated how much we’re actually spending.
Discount rate changes
The most interesting, simply because it is the one people never think about, of these are changes to discount rates.
The US Treasury publishes TIPS yields on a daily basis and we can pull that into our Google Sheet. We can also look at how rates on the 30-year TIPS have changed over the past year.
We can see that between November 2018 and today rates have fallen by 40%.
That means the cost of my retirement — the amount of my liabilities — has increased by 17% in just over 6 months. Ouch! Back in November, using the discount rate at that time, my future liabilities were $1,575,000. Today, with a lower discount rate they are now $1,845,000. The cost of my retirement has gone up because rates have gone down.
This is (one reason) why many people recommend you don’t actually retire the moment your Funded Ratio reaches 1.0…instead aim for 1.1 or even 1.2 so you have a bit of buffer when the discount rate collapses like it has.
There is no One Single Number that people should be looking at but I like the Funded Ratio because it combines, in a straightforward and easily digested way, four separate pieces of information that are crucial to our retirements.
