How Much Extra Can Your Client Afford to Spend in 2026?

Understanding the Actuarial Approach

The Actuarial Approach that I advocate, and encourage advisors to use, is a true strategic spending plan. Using this approach will develop a spending plan that addresses client overspending and underspending concerns by focusing on the client’s funded status (FS), which is the ratio of the present value of all household assets to the present value of all household spending liabilities. The $Y spending budget developed under the Actuarial Approach is expected to remain constant from year to year in real dollars if

• all assumptions are realized and unchanged;
• the client spends the previous year’s budget; and
• anticipated non-recurring spending remains unchanged.

Future experience more favorable than assumed will increase the client’s FS, and experience less favorable than assumed will decrease the client’s FS, all things being equal.

The Actuarial Approach:

• Distinguishes between essential spending, discretionary spending, recurring spending and non-recurring spending;
• Uses separate discount rate assumptions to determine the present values of essential expenses/non-risky assets and discretionary expenses/risky assets;
• Provides default assumptions for investment return/discount rate, inflation and lifetime planning periods, but permits such default assumptions to be overridden by assumptions selected by the advisor;
• Provides assumption flexibility for assumed rates of future increases for different types of expenses;
• Permits modeling of decreases in recurring spending upon the first death of one member of a couple;
• Reflects the present value of deferred sources of income (like deferred annuity payments, deferred asset sales, insurance proceeds, loan proceeds, etc.) and possible future reductions in income (like Social Security benefits) in the measurement of the client’s assets;
• Recognizes potential client desires to front-load expenses (such as vacations for only the next 10 years, higher discretionary or essential spending in earlier years, etc.), and reflects the present value of other non-recurring expenses like long-term care expenses in the client’s spending liabilities;
• Utilizes a simple and easy-to-communicate metric (FS) to help clients make better financial decisions in retirement. It also employs similarly easy-to-communicate spending guardrails to inform clients when they should reduce spending (FS less than 95%), consider increasing spending (FS greater than 120%) and actually increase spending (FS greater than 150%);
• Balances client goals for flexible spending during retirement with the goal of not running out of resources; and
• Is available for free on my website.

But wait, there’s more! By employing the Actuarial Approach and the simple process described below, advisors can help relatively well-funded clients who are comfortable with a potentially lower funded status as of January 1, 2027 spend even more than their spending budget for 2026. I call this “extra spending.”

It’s not too early for your clients to start planning their spending for 2026, even though their January 1, 2026 funded status may not have been determined yet. Some of your clients may be considering spending in 2026 on items that weren’t in their 2025 spending budget, such as an extra vacation, purchase of a new car or remodeling their kitchen. However, they don’t know whether they can afford the extra spending involved since their budget for the year is only $X. Advisors may wish to schedule meetings with certain well-funded clients to broach the subject of extra spending for 2026 with them.

The process for determining how much more than their 2026 budget some of your clients may be able to spend in 2026 is fairly simple and is described below. Several examples follow that illustrate the process for retired households with different funded statuses and tolerances for risk.

4-Step Process for Determining Potential “Extra” Spending Amount

Step 1: Using the Actuarial Financial Planner available on my website, determine or estimate the client’s January 1, 2026 funded status. As noted above, their FS is the present value of their assets (A) divided by the present value of their spending liabilities (L). When calculating the client’s January 1, 2026 FS, be sure to revise 2025 input items to try to accurately capture expected spending in 2026 and later years, including effects of inflation on recurring and non-recurring expenses and taxes under the new law. Also, try to capture all current and future household assets and current and future spending liabilities to make the January 1, 2026 FS calculation as much of a “best estimate” as possible.

Step 2: Ascertain the lowest FS as of January 1, 2027 your client would be comfortable with. Let’s call this FS*.

Step 3: Develop an asset adjustment factor (AAF) as of January 1, 2027 based on your expectations for 2026 investment returns and spending versus default assumptions (or other assumptions you may use in the Actuarial Financial Planner). For example, if you think actual investment returns will be the same as the assumptions you use for the January 1, 2026 FS determination and your client will spend their spending budget for 2026 (before any extra spending), then your adjustment factor will be close to 1. If you believe equity returns will be less than assumed, you may use an adjustment factor less than 1, reflecting the proportion of client assets invested in such risky investments.

Step 4: Determine the client’s potential extra spending for 2026 by solving the following formula:

Potential Extra Spending Amount = [A X (AAF)] – [L X FS*]

Where A is the client’s January 1, 2026 assets, AAF is your investment adjustment factor for 2026 experience, L is the client’s January 1, 2026 spending liabilities and FS* is the lowest funded status your client is comfortable with as of January 1, 2027.

Examples

Couple A

Step 1: Using the Actuarial Financial Planner, Couple A’s advisor estimates Couple A’s FS as of January 1, 2026 to be 150%, consisting of assets of $3 million and liabilities of $2 million.

Step 2: Couple A is not comfortable with a FS lower than 130% as of January 1, 2027

Step 3: As the advisor assumes actual investment experience for 2026 will be the same as assumed for the 2006 Funded Status determination, the client’s non-extra spending will be equal to the 2026 spending budget and assumptions won’t change for 2027. Therefore, their asset adjustment factor is 1.0

Step 4: Couple A’s advisor determines that client can afford extra (above budget) spending for 2026 of $400,000 by using the potential extra spending formula above:

[$3M (1.0) - $2M (1.3)] = $400,000

Couple A doesn’t really want to spend an extra $400,000 in 2026, but they agree it is nice to know that, under these assumptions, they can afford to do so in 2026 or spend the same present value in future years. Couple A’s advisor tells them that some of this potential increased spending may involve increased taxes on withdrawn portfolio assets.

Couple B

Couple B is more conservative than Couple A, but their assets, liabilities and FS as of January 1, 2026 are the same. They also selected 130% as the lowest 2027 FS with which they would be comfortable, but Couple B’s advisor and Couple B believe it is quite possible that there could be a stock market adjustment in 2026, so for the purpose of determining their potential extra spending in 2026, they chose an asset adjustment factor of 0.9. Applying the formula above gave them an extra spending amount for 2026 of $100,000

$3M (0.9) - $2M (1.3) = $100,000

Couple C

Couple C’s January 1, 2026 Funded Status is 133% consisting of assets of $2 million and liabilities of 1.5 million, but they would like to make a significant purchase during 2026 and would be comfortable if their end of year FS was above 110%. They and their advisor also believe that there may be a correction in equities during 2026, so based on their mix of risky and non-risky assets, they have chosen an asset adjustment factor of 0.85. Applying the extra spending formula for this couple results in a potential extra spending amount for 2026 of $50,000.

$2M (0.85) – $1.5M (1.1) = $50,000

Through discussions with their advisors, these couples understand that using this process does not guarantee that they won’t need to reduce their spending in the future, and that “extra” spending in 2026 will reduce spending in future years, all things being equal.

Summary

Clients with funded statuses in excess of 120% have several spending choices under the Actuarial Approach. They can:

• Increase recurring spending over their lifetime planning period;
• Increase non-recurring spending for a limited period of years;
• Increase spending next year (extra spending); or
• Defer spending increases until a future year.

Quantification of the extra spending amount for the current year using the formula discussed in this article helps clients make these choices. I believe this increased spending flexibility is superior to simply telling the client that this year they have a 95% probability of success of spending $X real dollars for the rest of their lifetime planning period, but this probability of success percentage may be different next year.

The Actuarial Approach can help advisors develop true spending plans for their clients that will help them make spending choices that achieve more of their spending goals. It will also increase advisor perceived value by addressing client overspending and underspending concerns through the use of the simple and easy-to-communicate funded status metric. The Actuarial Financial Planner is a simple (but powerful) one-tab Excel spreadsheet that utilizes the same basic actuarial principles employed in the U.S. by pension actuaries and Social Security actuaries for measuring the funded statuses of those programs. I encourage advisors to visit the website, download the Actuarial Financial Planner and kick the tires on it using actual or hypothetical client data and spending goals. I’m happy to assist advisors who may have questions.

Ken Steiner is a retired actuary with a website titled, "How Much Can I Afford to Spend in Retirement?"

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