Expand Your Spending Categories in 2019 for Better Personal Retirement Budgeting & Planning

To help you develop a more robust spending budget and facilitate your retirement planning, we encourage you, in this post, to consider allocating your spending in retirement to a minimum of the following four categories:

• Essential Recurring 
• Non-Essential Recurring 
• Essential Non-Recurring 
• Non-Essential Non-Recurring
  

2018 Year-End Review and 2019 Budget Development - Part II

As part of our ongoing effort to encourage you to think more like an actuary when it comes to your personal finances, this post will recommend that you to perform an actuarial valuation based on your personal data as of January 1, 2019, and prepare an “Actuarial Report” to document your thought process and your planning decisions.  The purposes of this exercise are to:

2018 Year-End Review and 2019 Budget Development-Part I

At the end of every calendar year, we encourage you to take just a little bit of the time that you might otherwise spend watching college football bowl games and devote it to reviewing your financial situation and developing your spending budget for the next year.  This year, we are going to devote two posts to this process.  In Part I, we are going to discuss year-end planning approaches in general.   In Part II, we will once again encourage you to perform an “actuarial valuation” of your assets and spending liabilities to measure how well you did in 2018 and to develop your 2019 spending budget “data points”.

What Should You Be Doing at Year End?

To read the common sense and very low-key thoughts of a Retirement Income Industry Association (RIIA) Thought Leadership award winner on year-end planning, we suggest that you read Dirk Cotton’s recent excellent post, “My Year-End Review and Planning Regime.”  

In his post, Dirk outlines his annual review of:

1. His investments 
2. This year’s expenses 
3. Next year’s spending budget, and 
4. Tax planning
   

With respect to budgeting, Dirk concludes:

• “I have learned to expect significant unplanned expenses. Those who think they can predict retirement spending are, again, overconfident.”  
• “This annual recalculation of spending risk is a basic concept. Regardless of what the 4% Rule suggests that you can spend every year of retirement, the actual "safe-spending" amount varies up and down, often significantly, depending on your market returns, unexpected expenses, marital status, and age. There is no reasonable fixed amount that you can safely spend throughout retirement from a volatile portfolio.”
  

We agree with Dirk.  We believe it is important to separately plan for non-recurring and recurring expenses.  As discussed in our post of February 4, 2018, our personal budgeting “regime” includes establishment of a “Rainy-Day” fund to be used to mitigate future financial shocks.    And of course, annual recalculation of spending budgets is what this website is all about.

We will add two additional items to Dirk’s list regarding budgeting:

• We believe it is important to involve your spouse (if you have one) in the year-end process, and  
• We believe it is important to perform some “what if” scenario testing to assess your risks in the event your budgeting assumptions turn out to be inaccurate.
  

We discussed both of these items in our post of September 16, 2018.

Top 10 Reasons Why the Smoothed Actuarial Budget Benchmark is Superior to IRS RMD for Developing Spending Budgets

Since the name of our website is “How Much Can I Afford to Spend in Retirement,” we frequently receive requests from readers to comment on alternative retirement spending/budget strategies that they read about.  With the release last year of the research report, “Optimizing Retirement Income by Integrating Retirement Plans, IRAs and Home Equity,” there has been much written about using the IRS Required Minimum Distribution (RMD) approach recommended in the report to determine annual amounts to be withdrawn from accumulated savings.  The report was released by the Stanford Center on Longevity (SCL) in collaboration with the Society of Actuaries (SOA) under the direction of Steve Vernon, Joe Tomlinson and Wade Pfau.  Most recently Mr. Vernon discussed the use of the IRS RMD approach in his CBS MoneyWatch article, “An IRS Rule that can aid your retirement income strategy.” 

Optimal Equity Allocation?

Since we are retired actuaries and not financial advisors, we don’t advocate any particular investment strategy in this blog.  For example, we don’t tell you how much of your assets should currently be invested in life annuities, bonds, cash equivalents, real estate or equities (particularly in these somewhat turbulent times for investing).  We do, however, provide several tabs in our Actuarial Budget Calculators (ABCs) that you (or your financial advisor) may find useful in developing your investment strategy.  This post will discuss these tabs and how they might be used. 

Budgeting for Real-World Situations

This post is a follow-up to our post of March 3, 2018 where we discussed the distinction between Systematic Withdrawal Plans (SWPs) and Sustainable Spending Plans (SSPs).  In that post, we discussed why we believe it is important for you (or your financial advisor) to develop a SSP (and not use a SWP), particularly if your situation differs from the frequently overly-simplified situations assumed by many SWP advocates, academics and other retirement experts.  This post will discuss how the Actuarial Budget Benchmark (ABB) can be used together with our recommended smoothing algorithm to help you develop a robust SSP to properly handle most real-world situations.  We will also present an example to demonstrate how this SSP can work over a ten-year projection period and will encourage you (or your financial advisor) to model what your future spending budgets might be under reasonable assumptions so that you can test your financial plan.