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.