A Simpler Way to Plan for Retirement? The Funded Ratio Explained

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Welcome to the One of a Kind Financial Show Daily with your host, Mike Milligan. I want you to be one of a kind, right? Be yourself, be unique. And that's why we put out this little daily podcast, because if you are truly unique, you need some inspiration also to have a one-of-a-kind financial plan. It is Tuesday, September 23rd. Did you know one of the major research projects that changed humans' history was published On this date in 1846. It was a mathematical prediction and subsequent discovery of the planet Neptune. Astronomer Johann Gottfried, using calculations by a mathematician, observed Neptune for the first time, a landmark in astronomy. And it was the first planet discovered by mathematical calculations rather than by a regular observation. The work revealed the power of scientific collaboration and mathematic modeling. Together, guide exploration and discovery beyond the limits of direct observation, transforming the way astronomers search for new planets and marked a monumental advance in planetary science. You know, retirement is almost like the unseen for many people. They can't vision what it's going to be like. And sometimes the only way to help people bridge the gap from working to retirement is through math, mathematical studies. So recently on the One of a Kind Financial Show, Gary and I talked about a ratio put out by Dr. Wade I would love to share that with you today. So enjoy it.

Look forward to talking to you soon.

For years, retirement planning has been dominated by Monte Carlo simulations where success feels like you're hitting the jackpot. But today's guest idea challenges the mindset. Wade Pfau, PhD, CFA, a leading retirement researcher and co-director of American College Retirement Income Center, offers a refreshingly grounded alternative. It's called the funded ratio. So in a world where 57% of Americans are anxious about running out of money in retirement, this approach offers something that feels increasingly rare— clarity. The funded ratio, the quiet power metric. Talk about this, Mike. This is fascinating to me.

Yeah. So, you know, people have heard about the 4% safe withdrawal rule. They've heard about the bucket strategy. They've heard about guaranteed lifetime income. Well, the funded ratio Uh, let's break this one down. It divides your available retirement assets by your total estimated retirement liabilities using a conservative rate of return, often comparable to long-term bond yields. It's not about market predictions. It's about what you have today versus what you'll need. If your ratio is over 100%, you're theoretically in the green, meaning the go zone for retirement. Wade Pfau calls this the most direct measure of retirement readiness. Uh, I, you know, there's— instead of running 1,000 simulations on Monte Carlo, wouldn't it be easy just to run this one simple ratio to see if you're in the green zone and ready to fully head into retirement, never have to worry about it again? It's as if this is a quiet, powerful metric to be able to use.

Absolutely. Aligning assets with needs, Mike.

So, uh, Dr. Pfau's method suggests pairing predictable expenses like food, housing, and healthcare with secure bond-like assets such as annuities or TIPS ladders. So Treasury Inflation Protected Securities ladders. Then the more volatile equity holdings can fund discretionary spending like travel, hobbies and grandkid adventures, and we all want to have those, Gary.

Yeah.

It's like giving every dollar a job and every risk a cushion. And that's one of the things that when we build portfolios in the One of a Kind Financial Plans, we want to do. Where he talks about using different investments for the needs and the wants, we talk about having the income you need in retirement and the income you want. So our philosophies are very well paired with Dr. Pfau's.

And this is a plan that kind of, well, you might say it breathes with you. It's a living, breathing plan, Mike.

It is. This is, we call that dynamic because this is not a one-time calculation. Pfau's 5-step process includes budgeting, estimating liabilities, evaluating assets, calculating your funded ratio, and updating it annually. This is the key. Because that makes retirement planning a living, breathing process. In fact, research from the Stanford Center of Longevity shows that retirement lasts on average 18 to 23 years for most Americans. That's a long time to go without redoing your math, right? So we coach clients not only to— we coach clients to actively engage in the annual review process. See, annual reviews, like, when we build a one-of-a-kind financial plan, we're not building it for 2025. We're building it for 2040 and 2050, right?

Sure.

We're building it for every year in between that. Because when we revisit it, we just make sure that there's nothing blinking yellow, which, which, you know, a yellow light means caution, caution, caution. And we don't ever want you to feel like you are ever going to run out of money. That's why we revisit these throughout the process.

We want, we want green lights all the way. The show is the One of a Kind Financial Show with Mike Milligan. Mike is with Ideas by Mike. Let's get you on the calendar, all set up with that comprehensive plan, that one of a kind financial plan that Mike talks about. 800-748-1838, 800-748-1838, or text the word IDEAS to 600-700. The psychology of safety first. What do we mean by that?

So Val makes an important point. Not every client wants to chase probabilities. For risk-averse folks, seeing a clear math-based projection can relieve anxiety more than a model with 90% confidence but 10% ministry— mystery. It's like this, Gary. If you walked onto— into the airport tomorrow and the pilot gets on the airline and says, guys, welcome to your flight today. We have a 90% probability to make it to our destination. Would you like to stay on or would you like to get off?

I'm getting off.

Everybody's getting off, right? And unfortunately, what happens in retirement is a lot of people have a 90%, a 92%, a 94% probability. And what we're looking for is a clear, safe journey to the destination.

All right. 1 minute left, Mike. What about if you're under 100% funded?

Well, here's the elephant in the room. What if you run the numbers and you're only 80, 85% there? Pfau actually sees this as a useful wake-up call, not a death sentence. You might reduce discretionary spending, work part-time, or shift more funds into guaranteed income streams. It's an opportunity to adjust before there's a problem.

All right, Mike, tell us about the One of a Kind Financial Plan that you put together for our listeners.

So one of the great things about the One of a Kind Financial Plan is it was— this is not some just made-up offer in the, you know, that was designed 3 months ago. This is from my 26 years of experience working with clients, plus all of my academic research with a lot of people like Wade Pfau and Tom Hegna and David McKnight and some legends of Wall Street coming to bear for you. When we build this plan, we build it because taxes are the biggest expense you're ever going to have in your life. And we calculate that into your retirement income because retirement income is something that alleviates fear and anxiety. Then we build an investment portfolio that aligns with the income, with the allocation of the income you want and the income you need in retirement, along with your long-term care and your legacy. That's a real retirement allocation leading up to legacy and long-term care planning. See, we build one-of-a-kind financial plans, Gary. to reduce expenses, but also to increase the probability that you can live your one-of-a-kind life.

Folks, advice like this shows you how important it is to meet with Mike, uh, Mike Milligan, to meet with a financial coach who understands the ins and outs of the financial world. Take advantage of this opportunity. Make sure you're on the right path, the path that's based on your risk preferences, your budget, and your goals. Here's that phone number: 800-748-1838. 800-748-1838, or text the word ideas to 600-700. You deserve a more confident plan to retire. Want to be stress-free, peace of mind? Well, nothing changes till you pick up the phone and dial that number. Mike and his team cannot help you unless you do that. It's the one-of-a-kind financial plan that Mike and his team will put together for you. Again, there's no cost, there's no obligation. 800-748-1838, or text the word ideas to 600-700. Do it right now.

One last message from our compliance team. As a reminder, Mike Milligan, Certified Financial Planner, is an investment advisor representative of Advisory Alpha LLC, an SEC-registered investment advisor. All opinions expressed by me, Mike, or any podcast guests are solely our opinions and do not reflect the opinions of Advisory Alpha. This recording is for informational purposes only, should not be relied on solely for investment tax or legal decisions, and it's in no way intended to communicate or guarantee specific performance or suitability of any security instrument or product as we may have discussed. Investment advisory and financial planning services offered through Advisory Alpha LLC, a registered investment advisor. Insurance products are provided by Ideas by Mike, a licensed agency located in Norfolk, Virginia, and licensed to do business in all 50 states. While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal services. Please consult with your tax or legal professional prior to making decisions related to these issues. If you want us an appointment with Ideas by Mike or One Oak Financial, please reach out via our website. This podcast is produced in conjunction with Mike Milligan LLC.

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