The Funded Ratio — Post 10

The One Number That Matters

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 no one measures. And the entire retirement industry reports 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. Social Security / state pension PV	$ _____	The hidden asset (Post 3)
C. Total assets (A + B)	$ _____	Everything that funds retirement
D. Consumption liability PV	$ _____	What retirement costs at today's rates
E. Funded ratio (C ÷ D)	____%	Can you buy the income you need?
F. Sustainable real income	$ _____/yr	What your assets actually buy
G. Target income	$ _____/yr	What you want to spend
H. Gap (F − G)	$ _____/yr	Surplus or shortfall, in income units

That's it. Eight numbers. The FIRE community uses one number — the portfolio balance. Pension funds use 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 (T). From retirement age to planning horizon. A 55-year-old retiring at 65, planning to age 95: T = 30 years. Conservatively, use age 95. If you have longevity in your family, use 100.
Real discount rate (r). The yield on a TIPS bond with maturity matching your spending. As of this writing, the 20-year TIPS real yield is approximately 2.3%. 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:

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

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

For a simplified calculation without mortality weighting:

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

Example: $50,000/yr, 30 years, 2.3% real rate:

P V = 50, 000 \times \frac{1 - (1.023)^{- 30}}{0.023} = 50, 000 \times 21.5 = $ 1, 075, 000

That is what your retirement costs, at today's rates, without mortality adjustment. With mortality weighting (which reduces the PV because you might not live to 95), the number drops to approximately $950,000.

Step 2: Add Your Hidden Assets

From Post 3: Social Security (and equivalent state pensions) is a real, inflation-indexed, mortality-weighted income stream. Its present value for a 55-year-old US worker with an average earnings history is approximately $300,000–$400,000.

Your total assets = portfolio value + Social Security PV.

Component	Amount
Portfolio	$800,000
Social Security PV	$350,000
Total assets	$1,150,000

Step 3: Compute the Funded Ratio

Funded Ratio = \frac{Total Assets}{Liability PV} = \frac{1, 150, 000}{1, 075, 000} = 107 %

This investor is 107% funded. They can buy 107% of the income they need. The surplus — 7%, or about $3,500/yr in real income — is their margin of safety.

Without Social Security: $800,000 / $1,075,000 = 74%. The same portfolio, measured without the hidden asset, appears 33 percentage points worse. This is why Post 3 matters — ignoring Social Security understates the funded ratio by a third.

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)	____	0.0	How much purchasing power do you lose per 1% inflation surprise?
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:           $800,000           │
│  Social Security PV:  $350,000           │
│  Total Assets:        $1,150,000         │
│  Liability PV:        $1,075,000         │
│                                          │
│  ══════════════════════════════         │
│  FUNDED RATIO:        107%               │
│  ══════════════════════════════         │
│                                          │
│  Sustainable income:  $53,500/yr         │
│  Target income:       $50,000/yr         │
│  Surplus:             +$3,500/yr         │
│                                          │
│  RISK PROFILE:                           │
│  Bad beta score:      ⭐⭐⭐⭐ (low)        │
│  Inflation gap (βπ):  −0.48 (unhedged)   │
│  Rate gap (βᵣ):       −0.86 (unhedged)   │
│  Duration gap:        −14.3 years        │
│                                          │
│  DIAGNOSIS:                              │
│  ✅ Funded above 100%                    │
│  ⚠️ Inflation exposure: HIGH             │
│  ⚠️ Rate exposure: VERY HIGH             │
│  ⚠️ Duration mismatch: 14 years          │
│  ℹ️ Low bad-beta content (good)          │
└────────────────────────────────────────┘

This is what pension funds see 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 to Do

The dashboard doesn't just diagnose. It orients — with the same logic pension consultants use:

If funded ratio < 100%:

You need more assets, lower spending, or a longer work horizon
Do NOT take additional risk to "close the gap" — that is gambling with the shortfall
Prioritise: save more, then match duration, then hedge inflation

If funded ratio 100–110%:

Fully funded but thin margin
Close the duration gap first (shift bond allocation from BND to long TIPS)
Close the inflation gap (replace nominal bonds with TIPS)
Keep bad-beta content low
This is the zone where the risk profile matters most: a 10-point funded ratio drop pushes you below 100%

If funded ratio 110–130%:

Comfortable surplus
Core liability is fundable with TIPS ladder
Surplus can be invested in equities (growth) or used for discretionary spending
Monitor quarterly; rebalance if surplus drops below 110%

If funded ratio > 130%:

You are oversaving relative to your stated consumption target
Consider: is the excess for legacy? For a higher spending level? For a safety margin?
If none of the above: you may be working longer than you need to
Bill Perkins (Die With Zero) is right: the optimal plan consumes the endowment. But "spend it down" needs a map — the funded ratio provides one. See Post 11: "Die With Zero Is Right — and It Needs Better Math."

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 pension funds use.

It is free. It requires no account, no email, no personal data beyond the five inputs. The real discount rate is pulled from current TIPS yields daily. The mortality tables are from the Social Security Administration (US) or equivalent national tables for UK, AU, NZ, and Canadian users.

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. Mr. Darcy knew this.
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 — 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 — is coming later. 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 pension fund industry has used this for decades. 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 pension fund mathematics 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 sovereign wealth funds worldwide. No financial advice is given. All methods use publicly available academic research and market data.