Thursday, June 8, 2017

We Have a New and Improved Actuarial Budget Calculator (ABC) for Retirees

In our continuing effort to make it easier for you to apply the Basic Actuarial Equation discussed in this website to help you develop your Actuarial Spending Budget or Actuarial Budget Benchmark, we (mostly Bobbie) have prepared a new Excel workbook for retirees.  We call this new version the Actuarial Budget Calculator for Retirees V 2.0, and it is now available in our “Spreadsheets” section.  We will maintain the old V 1.0 for a temporary period while you get used to the new version.

What’s New with 2.0?

In general, the new version has a much cleaner look than the old version and provides more guidance on how to use the spreadsheets.  Negative numbers are shown in red.  We discuss the primary changes below by workbook tab.

The Overview Tab

We have moved this tab to be the first tab to encourage you to read it first before jumping into the numbers.

The Input & Results Tab

This is where we have made most of the changes, including:
  • Improving organization of this spreadsheet, including placing inputs on the left-hand side and results on the right-hand side 
  • Providing a warning of potential future cash flow problems, if applicable 
  • Providing a default Lifetime Planning Period (LPP) based on input age and sex.  This default can be changed by the user 
  • Allowing the user to enter either monthly or annual amounts 
  • Providing guidance on input items through hovering the cursor over the red triangle
PV Calcs Tab

We show you all the detail in the calculations used in the workbook.  We try to be as transparent as possible in this regard as we aren’t trying hide anything.

Runout (in nominal or today’s dollars) Tab

We have reorganized this tab to make it easier to follow

Inflation-Adjusted (or real dollar) Runout Tab

We have reorganized this tab similarly to the nominal dollar runout tab

The Budget by Expense and 5-Year Projection tabs have been better organized and negative numbers are shown in red.

We encourage you to kick the tires on our new workbook.  As always, we welcome your feedback on our workbooks or our website and would be happy to have your suggestions for future improvements.

Friday, June 2, 2017

Society of Actuaries Confirms Impact of Continuing to Work on Spending Budget

In our posts of November 14, 2016 and April 28, 2014, we discussed the impact, on a hypothetical retiree’s spending budget, of continuing to work rather than retire.  Using the annuity-based pricing assumptions we recommend in our website to determine your Actuarial Budget Benchmark (ABB), we determined that a typical spending budget may increase by as much as 10% per year because of deferring retirement (assuming annuity purchase rates remain relatively constant throughout the deferral period).

In a recently revised retirement decision brief entitled, “Big Question: When Should I Retire?” the Society of Actuaries (SOA) confirmed our near 10% per year increase calculation for a single female named Joan.  The SOA brief indicates, “Joan would see a 37% increase in monthly income if she delays retirement for four years.”  The SOA reached this conclusion by

  • converting Joan’s expected 401(k) balance, at various retirement ages, to a monthly income, 
  • using recent inflation-adjusted annuity purchase rate quotes obtained from Hueler Investment Services, Inc., and 
  • adding the result to Joan’s projected Social Security benefit payable at the various ages.
Like our analysis, the SOA analysis also assumes that annuity purchase rates will remain relatively constant throughout Joan’s projected period of continued employment.

Not only were we pleased to see confirmation of our previous posts, but we were happy to see that the SOA’s monthly spending budget calculations at Joan’s possible retirement ages were very consistent with our ABB calculations.  For example, if she retirees at age 66 and spends her entire Social Security benefit and annuity at that age, the SOA indicates that her monthly spending would be $2,334, or $28,008 for that first year.  By comparison, our ABB calculation for Joan produces a spending budget at age 66 of $2,327 per month, or $27,924 for that year (or about 99.7% of the SOA estimate).

If you like how the SOA used an annuity-based pricing model to develop a spending budget in this relatively simple example for Joan, you will love it when you use our Actuarial Approach to develop a spending budget or ABB for your more complicated situation.

All of the SOA’s retirement decision briefs, including the one referenced above, may be found here.

Wednesday, May 24, 2017

Are You Being Too Frugal in Retirement? The Actuarial Budget Benchmark Can Help You Decide

You saved for decades for your retirement, and now it is time for you to simultaneously grow and protect your assets, and judiciously spend down your savings.  This process involves making assumptions about how much you will earn on your investments, how long you (and your spouse) will live, and how inflation will affect your future expenses.  Retirement experts tell you to be sure to reserve for long-term expenses, other unexpected expenses, and increasing medical costs.  With all this uncertainty and confusing advice, it is natural for you to be somewhat conservative in your spending.

Overly Cautious?

Now researchers are telling us that many retirees are being “overly cautious” with their investment and spending strategies.  In a recent analysis, “Living Too Frugally?  Economics Sentiment & Spending Among Older Americans,” Matt Fellowes, CEO of United Income, cites data from a University of Michigan study that shows, among other things, “adults become less optimistic about future economic growth and financial health as they age and “perhaps as a reaction to declining financial optimism, the average adult 60 years or older will trim their spending by about 2.5 percent every year, or by about 20 percent over a 10-year period.”

Not only is Mr. Fellowes concerned that this over-cautious behavior could result in retirees missing out on travel, entertainment, and other activities that they could otherwise enjoy, but, according to him, it could also have negative macroeconomic consequences, since “economic negativity among older Americans may limit spending, which would curb economic growth.”  While we won’t go as far as Mr. Fellowes and imply that you might be a “bad American” just because you want to be conservative with your investments or your spending, we will encourage you to try to find the “just right” middle ground between being overly cautious and overly aggressive, if it means being able to do more of the things you want to do in retirement.

How We Can Help

We at How Much Can I Afford to Spend won’t tell you how to invest your assets and, for that matter, we won’t tell you how much of your assets to spend each year, either.   As our name implies, we focus on how much you can afford to spend.   We provide you with Actuarial Budget Calculator (ABC) workbooks and recommended assumptions that you can use to calculate your Actuarial Budget Benchmark (ABB).  The ABB is a conservatively calculated Actuarial Spending Budget, based on your information, that provides a benchmark for determining how aggressive or conservative your spending is.  See our previous two posts for more discussion of the ABB.

If you have adequately reserved for your future non-recurring expenses, such as long-term care costs, unexpected expenses, and bequest motives; and your remaining recurring annual spending budget (or actual annual spending) is significantly less than the ABB, you may just be living too frugally.  And that is just fine with us if it is fine with you.  On the other hand, if you are missing out on trips or other opportunities because you feel you can’t afford them, you should consider increasing your spending budget.  Similarly, if your annual spending budget or your spending significantly exceeds your ABB, you may be spending too aggressively and you may want to cut back somewhat.

We Are Independent and Unbiased

Unlike some others, we aren’t trying to sell you investment services or financial advice.  The focus of our blog is to help individuals, mostly retirees and near-retirees, determine how much they can afford to spend, either before or after retirement.  To do this, we employ basic actuarial and financial economic principles.  We receive no compensation from hits to our website or from any activities associated with the website.  If you like our website, please refer it to your friends.  If you have suggestions for how the website might be improved, please forward your suggestions to us.