Friday, September 4, 2015

Time for a Mid-Year Spending Adjustment?

While I encourage retirees who use the Actuarial Approach to revisit their spending budgets at least once a year, this doesn’t mean that they can’t be revisited more frequently.  In light of recent equity market volatility, it may make sense to check the status of your accounts to see whether mid-year adjustments to your 2015 spending might be appropriate.  This post will outline a simple way to do this and will illustrate the process with an example.

In addition to showing spendable amounts payable from accumulated savings, both of the spending spreadsheets contained in this website show the amount of accumulated savings expected at the end of the year if the investment return assumption for the year is exactly realized and actual spending exactly equals the spendable amount determined for the year (which is assumed to be withdrawn from accumulated savings at the beginning of the year).  Therefore, any difference between actual and expected end-of-year accumulated savings will result from these two sources:  deviations from expected investment return and/or deviations from expected spending.  If you want to get “back on track”, you need to manage your spending or investments (or transfer money into or out of this account) so that your end-of-year assets in this account approximately equals the expected end-of-year value. 


Mary, from our June 7, 2015 post, had assets equal to $298,871 in her non-essential expenses account with a non-essential spending budget for 2015 of $19,730.  Her expected end-of-year assets in this account equaled $291,702.   As of September 4, Mary notes that the amount of assets in this account is only $260,000.  Some of the decrease in assets in this account resulted from spending a little bit more than 2/3rds of her annual spending budget and the rest resulted from decreases in the investments in her account.  As a practical matter, it doesn’t really matter the exact sources of the decrease.   Her current account balance dedicated to non-essential expenses is lower than her expected end-of-year account.

What can/should Mary do about this situation?

She has a number of alternatives:

  1. She can make no changes in her non-essential spending for the rest of the year.  She will face the issue of a potential lower spending budget next year.   She can hope her investments will rebound by year end.  
  2. She can reduce her non-essential spending budget as best she can for the remainder of the year. 
  3. She can transfer some of her assets in other spending accounts (such as her emergency account) to her essential spending account.
  4. She can pursue a combination of the above actions.
Mary knows that she can spend her retirement money now or she can spend it later (or provide more money to her heirs).  By virtue of going through this exercise, however, she knows that as of September 4, 2015 she was a little bit more than $30,000 under her target level of assets in this account with about a third of 2015 still remaining (including her spending for the holidays).  She can use this knowledge to help her make non-essential spending decisions for the remainder of the year. 

Note that Mary can use same process for years when investment return is more favorable than assumed.   In those years, “excess” assets can be transferred out of her essential spending account to her emergency fund account or some other budget account.