Continuing our “Back to Budget Basics” theme from our last post on February 2, we have revised our clunky “Excluding Social Security V 3.1” Spreadsheet to help you (or your Financial Advisor) develop a reasonable spending budget. We will keep the “Excluding Social Security V3.1” spreadsheet on our website for a while for those who like using it, but it is our hope that the new Actuarial Budget Calculator V 1.0 will quickly make the older spreadsheet obsolete.
The new spreadsheet has all the functionality of the old one and more. It enables you to input your Social Security benefit and a future year of commencement if it hasn’t already started. It also enables you to enter a separate indexed annuity if you have one. Both of these benefits are assumed to increase with input inflation each year.
As with the old spreadsheet, you can enter fixed dollar pension/annuities that are either immediately payable or commence sometime in the future. You can also enter the present value of income (or outgo) you expect to receive (or pay) in the future from other sources. This additional present value from other sources will be added to your accumulated savings for calculation purposes.
Perhaps the most important thing that this new spreadsheet will do is to determine your Assets (current assets plus the present value of future income) based on the assumptions you input. As discussed in our last post, once you have determined your Assets and how much you want to leave to your heirs upon death, the balancing item is the present value of your future spending budgets. All that remains is to determine how you want to allocate the present value of your future spending budgets to your current and future years of retirement. The new spreadsheet does this final calculation for you based on an assumption you input for future desired increases in your total spending budget. It is likely, however, that you are going to want to use different future increase assumptions for the various components of your total budget (such as for essential health related expenses, essential non-health related expenses, non-essential expenses, etc.). See our post of December 26, 2015 for an example. The new spreadsheet does not do this for you (at least not yet). But, at this time you can use the simple present value calculator spreadsheet on this website to determine the present values of the various components of your total budget such that the sum for the various component categories equals the present value of the total spending budget developed by the new spreadsheet.
As with the old clunky Excluding Social Security spreadsheet, we have two runout tabs that show how accumulated savings (including the present value of other sources of income) runs down over the period of retirement input in the input tab. This is not meant to be a projection of future experience as much as it is to be a demonstration that if future experience actually follows assumptions and no changes are made in the assumptions over the expected retirement period (including no change in the assumed date of death), the accumulated savings will run-down to the amount input as “amount desired to be left to heirs” at the end of the expected period of retirement (in the Runout tab) or an inflation-adjusted amount (in the inflation-adjusted Runout tab). Note that for purposes of these runouts, we have assumed that the retiree will actually spend the calculated budget amount for the year and withdrawals from accumulated savings will equal the calculated budget amount reduced by income from other sources expected during that year. In some situations, this will result in what appears to be a negative withdrawal from accumulated savings. This can occur, for example, when income from other sources exceeds the spending budget for the year. If this occurs, it simply implies that such excess income from other sources will be saved and will serve to increase accumulated savings. Such “negative” withdrawals should not be a cause for concern. On the other hand, there may be some situations where the runout tabs show negative accumulated savings balances. These situations typically involve significant amounts of deferred income and may indicate future cash flow problems. If your (or your client’s) retirement portfolio includes significant amounts of deferred income (including situations where the present value of other income involves deferred payments or the retiree has significant inflation-indexed future payments and desires to have future spending budgets that do not keep up with inflation), you will probably want to look very closely at the expected future cash flows to make sure that accumulated savings can actually support retirement income objectives throughout the entire expected retirement period.
As with the Excluding Social Security spreadsheet, we also have a 5-year projection tab to enable you to see the effect on accumulated savings and the total actuarial budget (determined by spreading future budgets using the assumption for this purpose in the input tab) resulting from differences between actual and assumed investment returns and spending.
Limitations and Caveats
The Actuarial Approach used in the new (and old) spreadsheets is described in the one-page “back to the budget basic” explanation discussed in my last post. That post also discusses some of the potential limitations of this approach. Remember that the total spending budget produced using the actuarial approach is “before taxes” and must cover your taxes as well as other expenses.
From the beginning of this blog, I have tried to make it clear that my purpose is to provide readers with tools and an actuarial process that can be used to determine “how much you can afford to spend in retirement.” Here is a copy of the caveat that appeared in the first item that I posted, and it still applies today:
“As discussed in the March 2010 article contained in this website, there are many risks associated with self-insuring your own retirement. The general process described in the article and sample spending calculators in this website are made available to you as self-help tools for your independent use and are not intended to provide investment or financial advice. As with all planning tools, the reasonableness of the results (in this case, your “annual spendable amount”) [or spending budget] is a function of the accuracy of the data and assumptions that you input. Since you control these items as well as investment of your accumulated savings, we can make no claims or guarantees that you will not outlive your accumulated savings or experience significant decreases in amounts that may be spent in a future year if you follow the process described in this website. We assume no responsibility for those individuals who may outlive their accumulated savings or who may otherwise become dissatisfied in any way (or believe that they have suffered financially) by following the process described in this website as compared with some other strategy. All articles and sample spending calculators on this website are provided purely for your educational purposes. You are encouraged to seek professional advice from qualified investment/financial professionals before committing to any retirement spending plan and should not simply rely on the results you may obtain with the process and sample spending calculators described in this website.”
Always happy to have feedback on the tools provided in this website and any suggestions for improvement to facilitate the ongoing mission of this site.