The Funded Ratio — Post 10

The One Number That Matters

By J. R. Calder. Institutional fixed income and pension ALM.

This is the capstone of the series. If you've followed along, you know: the 4% rule measures the wrong thing. Monte Carlo simulates the wrong distribution. Most portfolios have a 15-year duration mismatch, unhedged inflation exposure, and bad-beta content that goes unmeasured. And retail retirement reporting is in wealth units when the liability is an income stream. This post puts it all together. One framework. One number. One calculation you can do today, and a free tool that does it in 60 seconds.

The Framework in One Page

Everything in this series reduces to a single balance sheet:

	Your Number	What It Means
A. Portfolio value	$ _____	What you have today
B. Consumption liability PV	$ _____	What retirement costs at today's rates
C. Social Security / state pension PV	$ _____	The hidden asset (Post 3)
D. Net liability (B − C)	$ _____	The part your portfolio has to cover
E. Funded ratio (A ÷ D)	____%	Can you buy the income you need?
F. Sustainable real income	$ _____/yr	What your assets and pension actually buy
G. Target income	$ _____/yr	What you want to spend
H. Gap (F − G)	$ _____/yr	Surplus or shortfall, in income units

Note line D. The state pension is subtracted from the liability, not added to the assets. This matters, and it is the step most people get wrong. Your Social Security entitlement is not capital you can sell, borrow against, or draw down early: it is a stream that discharges part of the obligation. Netting it off the liability is what pension actuaries do with any partially insured promise, and it is what the calculator on this site does. Adding it to the asset side instead will flatter you, because it credits you with capital you can never actually deploy.

That's it. Eight numbers. The FIRE community uses one number: the portfolio balance. An actuary uses all eight. The difference is the difference between knowing how much you've saved and knowing whether you can afford to retire.

Step 1: Calculate Your Consumption Liability

Your retirement spending is a stream of real cash flows. To convert it to a present value, you need three inputs:

Annual real spending (C). What you plan to spend per year in retirement, in today's dollars. Be honest. Include taxes, healthcare, and the things you currently spend that won't stop (insurance, maintenance, food, transport, travel).
Time horizon. Two numbers, not one, and conflating them is the most common arithmetic error in this whole calculation. N is how many years you will be spending: from retirement age to your planning horizon. D is how many years until that spending starts. Our 55-year-old retiring at 60 and planning to 95 has N = 35 years of spending, deferred by D = 5 years. Money you will not spend for five years costs less today than money you spend next year, and if you forget to discount for the deferral you will overstate your liability badly. Use 95 as the horizon; if you have longevity in your family, use 100.
Real discount rate (r). The yield on a TIPS bond with maturity matching your spending: 2.37% as at July 2026. This is the market's price for a guaranteed real dollar at that maturity. Not 7%. Not "expected equity return." The real, no-arbitrage cost of funding a real obligation.

The liability PV, summing over every year you are alive to spend:

P V = \sum_{t = D}^{D + N - 1} \frac{C \times p_{t}}{(1 + r)^{t}}

Where $p_{t}$ is the probability of surviving to year $t$ (from the Social Security actuarial tables for your age).

To do it by hand, take the annuity factor for N years and discount it back over the D years of deferral:

P V \approx C \times \frac{1 - (1 + r)^{- N}}{r} \times (1 + r)^{- D}

Example: $80,000/yr, N = 35 years, D = 5 years, at that 2.37% real rate:

P V \approx 80, 000 \times 23.61 \times 0.8895 = $ 1, 680, 000

That is what this retirement costs before any mortality adjustment. The calculator sums the years individually rather than using the closed form, which puts it at $1,720,000: the ~2% difference is the shortcut, not a disagreement, and it is why you should let the tool do the arithmetic once you understand what it is doing.

Then weight each year by the probability you are alive to spend it. You might not see 95, and roughly a quarter of that stream is spending in years you may never reach. That drops the liability to $1,266,000, a 26% haircut, and the single largest adjustment in the whole calculation. This is the number to use from here, and it is what the calculator returns.

Useful by-product: $1,266,000 buys $80,000/yr, so the price of one dollar per year of lifetime real income is $15.83. Divide any pot by 15.83 and you have the income it can sustain.

One caveat on that price, because it cuts against the number: it is built on population mortality, so it is an expected present value, not a quote. An insurer selling you the same inflation-linked income charges considerably more: annuity buyers live longer than the population average, and the insurer adds a margin. This measures whether you can fund your spending yourself. It is not the price of handing the risk to someone else.

Step 2: Net Off Your Hidden Asset

From Post 3: Social Security (and equivalent state pensions) is a real, inflation-indexed, mortality-weighted income stream. Its present value for our 55-year-old, on the mid-range benefit of $25,792/yr from 67, is $267,000, more for higher earners, and Post 3 shows how to price your own.

Subtract it from the liability:

Component	Amount
Consumption liability PV (mortality-weighted)	$1,266,000
Less: Social Security PV	−$267,000
Net liability, what your portfolio must cover	$999,000

Step 3: Compute the Funded Ratio

Funded Ratio = \frac{Portfolio}{Net Liability} = \frac{700, 000}{999, 000} = 70 %

This is the same woman you met in Post 1, and this is where her eight numbers land. She is 70% funded: her portfolio covers 70% of the obligation it actually has to carry, once Social Security has discharged its share. The shortfall is $299,000, about 3.7 years of spending.

In income units, using the $15.83 price from Step 1: Social Security delivers $267,000 ÷ 15.83 = $17,000/yr, and the portfolio delivers $700,000 ÷ 15.83 = $44,000/yr. Total sustainable real income: $61,000/yr against an $80,000 target, a shortfall of $19,000/yr.

That last number is the one to sit with. Not "you need $1.3 million more," which is what the 4% rule says and which is unactionable. $19,000 a year: the part of the life she has planned that is not yet paid for. She can close it by saving more, spending less, working longer, or hedging what she already has so the gap stops moving against her. Those are decisions. A probability of success is not.

Without Social Security, the same portfolio faces the full $1,266,000: $700,000 / $1,266,000 = 55% funded. Counting the state pension is worth 15 percentage points of funded ratio to her. This is why Post 3 matters.

Step 4: Score Your Portfolio Risk

From Posts 4, 6, and 7, compute the three factor betas:

Factor	Your Portfolio	Your Liability	Gap
Bad beta score (1–5 stars)	____	n/a	Are you carrying permanent-loss risk?
Inflation beta (βπ)	____	+1.0	Your spending rises one-for-one with prices. Does your portfolio?
Real-rate beta (βᵣ)	____	+0.9	How much funded ratio do you lose per 1% rate move?
Duration	____ yrs	15–20 yrs	How many years of rate risk are unhedged?

To calculate your portfolio's aggregate betas, weight each holding by its portfolio share and multiply by the factor beta for that asset class (use the tables from Posts 6 and 7).

The gaps tell you exactly where your risk is. A large βπ gap means inflation can destroy your funded ratio. A large βᵣ gap means interest rate moves are unhedged. A high bad-beta concentration means permanent losses are possible.

Step 5: Read the Dashboard

Your complete retirement dashboard:

┌────────────────────────────────────────┐
│           YOUR FUNDED RATIO              │
│                                          │
│  Portfolio:           $700,000           │
│  Liability PV:      $1,266,000           │
│  Social Security PV:  $267,000           │
│  Net liability:       $999,000           │
│                                          │
│  ══════════════════════════════         │
│  FUNDED RATIO:         70%               │
│  ══════════════════════════════         │
│                                          │
│  Sustainable income:  $61,000/yr         │
│  Target income:       $80,000/yr         │
│  Shortfall:          −$19,000/yr         │
│                                          │
│  RISK PROFILE:                           │
│  Bad beta score:      ⭐⭐⭐⭐ (low)        │
│  Inflation beta (βπ): −0.31 vs +1.00     │
│    → gap −1.31 (unhedged)                │
│  Duration gap:        −12.1 years        │
│                                          │
│  DIAGNOSIS:                              │
│  ⚠️ Funded below 100%: gap 2.7 yrs       │
│  ⚠️ Inflation exposure: HIGH             │
│  ⚠️ Rate exposure: VERY HIGH             │
│  ⚠️ Duration mismatch: 12 years          │
│  ℹ️ Low bad-beta content (good)          │
└────────────────────────────────────────┘

This is what a well-run fund sees every month. This is what you should see every quarter. Not the pile. Not the return. The ratio and the risk, in income units.

What the Dashboard Tells You

It measures, and it explains what the measurement means. What follows is what each band is, not what you should buy. Nothing here is a recommendation, and none of it accounts for your circumstances.

Funded ratio below 100%. The assets do not currently cover the liability at today's prices. Three quantities can move that number: how much you hold, how much you intend to spend, and how long you intend to keep earning. Nothing else changes the arithmetic. Note in particular what taking more risk does to it: risk widens the distribution of outcomes, which is not the same as raising the funded ratio, because the ratio is priced off the curve rather than off a hoped-for return. A gap is a measurement, not a verdict on your character.

Funded ratio 100–110%. Funded, on a thin margin. This is the band where the risk profile matters most, because a ten-point move crosses back below 100% — and the three betas are what tell you how likely a ten-point move is. A portfolio whose duration and inflation exposures are far from the liability's can travel ten points on a market week that barely registers as news.

Funded ratio 110–130%. A surplus, in the technical sense: assets in excess of what the priced liability requires. The interesting question stops being "is it enough" and becomes "what is the surplus for" — and that is a question about your intentions, not about the number.

Funded ratio above 130%. The assets substantially exceed the stated consumption target. That is worth interrogating rather than celebrating, because a large surplus usually means one of three things: the spending figure you entered understates what you actually intend, there is a purpose for the excess you have not written down, or you are further from needing to work than you had assumed. Bill Perkins (Die With Zero) argues the optimal plan consumes the endowment. Whether that applies to you is yours to decide; the funded ratio at least gives the argument a denominator. See Post 11: "Die With Zero Is Right, and It Needs Better Math."

What none of these bands do is tell you which instrument to hold. The essays explain what a duration gap is (Post 5), what inflation exposure does to a liability (Post 6), and why some risk is uncompensated against a spending stream (Post 4). Turning any of that into a portfolio is a decision about your circumstances, and if you want that written down, take the measurement to someone licensed to write it.

The funded ratio answers the retirement question in a single number: can I afford to stop working? The three betas tell you how fragile that answer is: if inflation surprises, if rates move, if markets crash, does my answer change?

The Tool

I built a free calculator that computes everything in this post:

Your consumption liability PV (with mortality weighting)
Your Social Security / state pension PV
Your funded ratio
Your sustainable real income
Your three-factor risk profile (bad beta, βπ, βᵣ)
Your duration gap
A plain-English diagnosis

amifunded.com/calculator

Enter five numbers (age, target retirement age, annual spending, portfolio balance, and annual Social Security benefit) and the tool returns your complete funded-ratio dashboard in under 60 seconds, using the same methodology an actuary would.

It is free. It requires no account, no email, no personal data beyond the five inputs: your figures are used to compute the answer and then discarded, and nothing you enter is stored. Your ratio travels nowhere unless you choose to share it, in which case the link carries the ratio and nothing else. The real discount rate is pulled from current TIPS yields daily. The mortality tables are from the Social Security Administration (US), with equivalent national tables for the UK and Australia.

A note on country coverage. The United States is fully modelled. Australia and the UK are in beta: they use their own mortality tables and state pension rules, but the UK curve is refreshed by hand and Australia is still priced off the US real yield curve, because a local index-linked curve is not yet wired into the daily parameter feed. Real yields differ across those markets, sometimes materially, so treat a non-US ratio as a well-founded estimate rather than a market price. The tool flags this on the result. Australia's Age Pension means test is not yet modelled either: if your Age Pension would be reduced by the assets or income test, enter the reduced figure yourself.

What Comes Next

This is Post 10 of the series. The framework is complete:

The 4% rule measures the wrong thing. The funded ratio measures the right thing.
Monte Carlo simulates the wrong distribution. Liability matching replaces probability cones with certainty.
Social Security is a six-figure asset most people ignore.
Not all losses recover. Bad beta is permanent; good beta is self-correcting.
Your portfolio's duration doesn't match your liability's. The 15-year gap is the largest unhedged risk.
Inflation erodes silently. Most portfolios have negative inflation beta.
Interest rate moves can improve or destroy your funded ratio, and 2022 proved this in real time.
Property feels safe but scores badly on all three liability-matching factors.
Wealth is the wrong unit. Income is the right one.
The funded ratio is the one number. Calculator → dashboard → decision.
Die With Zero is right, and it needs better math. Perkins has the destination. The funded ratio is the map.

If you want to go deeper: a personalised measurement report is coming later: every holding scored against your specific consumption liability (bad beta, inflation beta, real-rate beta, duration match), with the size of each gap in income units. It uses the same Campbell-Viceira (2002) framework that institutional investors pay consultants six figures to implement. Subscribe to hear when it lands.

You now have everything you need. The framework. The three risk factors. The conversion from wealth to income. The dashboard that shows where you stand. And a free tool that computes it all. The actuarial profession has used this for a century. Now you can too. Calculate your funded ratio. Know your number.

This is Post 10 of The Funded Ratio — a series on amifunded.com applying actuarial principles to individual retirement portfolios. Built on the Campbell-Viceira (2002) intertemporal asset allocation framework, the bad-beta decomposition (Campbell & Vuolteenaho, 2004), the lifecycle consumption theory (Merton, 1969; 1971), and the liability-driven investing practices used by pension funds, endowments, and other long-horizon institutional investors. No financial advice is given. All methods use publicly available academic research and market data.