Despite being omitted from Mr. Kirkpatrick’s list, we believe that using our ABC spreadsheets with our recommended assumptions (or using the Basic Actuarial Equation directly) can provide you (or if you are a financial advisor, your clients) with important data points to help with personal financial planning. Since we have not compared our spreadsheets with every other calculator in the universe, we can’t say for sure that our spreadsheets are better than every other free calculator available on the Internet for every conceivable purpose. In this post, we will outline some of the common criticisms of our spreadsheets and respond to them, as well as discuss some of the things our spreadsheets can do that we don’t generally see in other calculators, and other reasons why we prefer our approach.
Common Criticisms of the ABC Spreadsheets and Responses
Deterministic Assumptions. The most common criticism of our spreadsheets we hear is that they utilize a deterministic (or average) investment return assumption that ignores the individual’s actual or desired asset mix. Many retirement calculators incorporate Monte Carlo modeling and require input of the individual’s asset allocation information. This enables these calculators to provide a measure of volatility of the proposed asset mix and a probability of success of meeting specific retirement goals based on the assumptions used for the model.
By comparison, the recommended assumptions used to calculate the Actuarial Budget Benchmark (ABB), using either our spreadsheets or the Basic Actuarial Equation, are consistent with the financial economics principle that the cost of retirement (in this instance) is not a function of individual’s asset mix, but rather is determined by the “defeasance cost” of the individual’s spending liability. For this purpose, we recommend assumptions approximately consistent with those used to price immediate life annuities (annuity based pricing). And while we don’t provide users with probabilities of success (or failure), we stress that the Actuarial Approach requires periodic adjustments, at least annually, to keep spending plans on track to meet retirement goals.
Since our focus is determining how much one can afford to spend each year, and not how to invest one’s assets, and we subscribe to the financial economics theory that spending levels should not necessarily be a function of how assets are invested, our spreadsheets are indeed silent with respect to asset mix. We understand that this may be heretical to some financial advisors. For this reason, we suggest that financial advisors or others may wish to consider supplementing whatever they are currently doing with the Actuarial Budget Benchmark (ABB) to provide clients with a relatively low risk “data point” to help them with their spending decisions as discussed in our post of May 10, 2017. It is also important to note here that we don’t advocate any specific investment strategy, and while we use annuity based pricing to determine the cost of retirement, we don’t necessarily advocate investment in annuities.
Pre-tax Calculations. Our spreadsheets develop a pre-tax spending budget that considers taxes to be just another expense to be covered by the spending budget. This bothers some people who point out that assets have potentially different tax treatment when they are distributed, and this difference should be considered in an “accurate” model. For pre-retirement planning, it will be necessary for individuals to manually reflect adjust their target spending after retirement to reflect these differences. We don’t see this as a big issue.
Longevity and Social Security Information. We ask users to gather relevant data on expected lifetime planning periods (LPP) from the Actuaries Longevity Illustrator (http://www.longevityillustrator.org/) and expected Social Security benefits from the Social Security Quick Calculator (https://www.ssa.gov/oact/quickcalc/), rather than building these calculations into the spreadsheet. Unfortunately, it is just not practical to build these calculations into our spreadsheets.
Positive Aspects of Our Spreadsheets That We Don’t Generally Find in Other Calculators:
- Our spreadsheets are reasonably transparent and user-friendly and don’t involve black-box assumptions relative to asset returns
- We have a 5 Year Projection tab that enables users to model different experience with respect to investment returns and actual spending
- Our ABC for Retirees has a Budget by Expense Type tab that enables the user to make different assumptions for various types of expenses
- Our spreadsheet permits users to shape spending by making different assumptions about future increases in spending budgets or by treating certain expenses as “non-recurring” vs. “recurring”
- Our spreadsheets are Excel spreadsheets which you download so that information you input safely resides on your computer, not on the web, and
- We utilize basic actuarial principles
Are our ABC spreadsheets the best free retirement calculators available on the internet? Probably not for everyone and not for every purpose, but we believe they are quite robust and can be useful tools for those we call “Intelligent Numbers People” (INPs). If our readers have suggestions for improving our spreadsheets please forward them to us. We are currently in the process of developing an ABC for Retired Couples that will more accurately calculate spending budgets for couples. We hope to have this spreadsheet available in the next few months in time for 2018 calendar year budgeting, although it is unlikely to have all the tabs included in our ABC for Retirees workbook.
We note that some of the perceived limitations of our spreadsheets don’t necessarily apply if you are not using our spreadsheets but are using the Basic Actuarial Equation instead. If you are using the Basic Actuarial Equation, you can use Monte Carlo modeling and you can make your calculations as complicated and sophisticated as you desire. It is important to keep in mind, however, that it may not be worth your time and considerable effort to develop a more sophisticated model just to determine a spending budget that you may consult only once a year.