Thanks again to Christine Benz, Director of Personal Finance at Morningstar for another informative article on retirement planning. In her September 3, 2021 article entitled For Retirement Portfolios, ‘Immunize Then Optimize’, she and Jeff Ptak interviewed author and investing expert Michael Falk on a number of investment and planning related subjects, including “how retirees and pre-retirees should be operating in this environment and the steps they can take to ensure the success of their plans.”

When asked to provide a couple of “examples of how [Mr. Falk] would simplify what passes for conventional wisdom right now when it comes to retirement planning in the industry today”, he said,

“Many years ago, I coined a term, you should immunize before you even try to optimize. And what I’m referencing here is, take your entire spending plan, everything you spend money on every month, and divide it into two pieces: fixed spending that happens no matter what and fun or aspirational spending.”

Conceptually the process described by Mr. Falk is the same “two-bucket” safety-first strategy that we recommend in our website (Recommended Financial Planning Process), where we recommend building a Floor Portfolio to fund future EssentialExpenses and an Upside Portfolio to fund future Discretionary Expenses. We have also previously referred to this strategy as a liability driven investment (LDI) strategy or a cash-flow matching or Actuarial strategy that matches the market value of non-risky assets with the market value of essential spending liabilities.

Of course, not all individuals will consider all monthly fixed spending to be essential and vice versa. To some degree, classification of which future expected expenses should be considered essential and which expenses should be considered discretionary for the purpose of establishing a Floor Portfolio will depend on the household’s tolerance or capacity for risk and personal preferences.

We do agree with Mr. Falk, however, that the two-bucket approach recommended in this website (however it may be named) significantly simplifies the planning process for households by seamlessly integrating the retired household’s investment, risk management and spending strategies. And unlike many other approaches, it considers all household assets and spending liabilities.

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