Thursday, February 7, 2019

If You Aren’t Separately Budgeting for Non-Recurring Expenses, You Probably Don’t Have a Robust Retirement Spending Budget

We here at “How Much Can I Afford to Spend” are all about the annual spending budget.  But we don’t tell you:
  • how to invest your assets;  
  • how much of your assets you should actually spend each year, or 
  • how you should spend your assets.

These are decisions we leave up to you (with possible guidance from your financial advisor).  We do believe, however, that the Actuarial Approach we recommend in this website is a powerful tool that can help you make these spending and investment decisions.  In fact, at the risk of sounding boastful, we believe that the Actuarial Approach is a superior budgeting tool compared with many other approaches recommended by “retirement experts,” academics and financial advisors.   And yes, those other approaches include Strategic Withdrawal Plans (SWPs) designed to “tap your savings” and Monte Carlo models designed to provide you with probabilities of success for various spending/investment strategies.

One of the significant differences between the Actuarial Approach and these other approaches is that it develops separate budgets for your recurring and your non-recurring future expenses.  Many of our prior posts discuss why we believe segregating recurring and non-recurring expenses is important in developing a reasonable total spending budget.  Most recently, we illustrated the benefits of doing so in our post of January 16, 2019 for an example couple, Bill and Betty.  In that post, Bill and Betty used our Present Value Calculator spreadsheet to determine the present values of three of their expected non-recurring expenses and added the sum of those present values into the Actuarial Budget Calculator (ABC) for Retired Couples to see how those non-recurring expenses affected their current recurring spending budget and their total spending budget. 

Subsequent to that post, we received feedback from our friend and fellow actuary, Richard Junker, who nicely suggested that perhaps we should modify our ABC workbooks for retirees so that users would not be required to separately use our PV Calculator spreadsheet to calculate the present values of expected non-recurring expenses and then transfer those values to our ABC workbook.  We agreed with Richard’s suggestion and made changes to our two retiree ABC workbooks (for retired singles and retired couples).  These new revised workbooks now permit you to input up to three expected non-recurring expenses and will now calculate a recurring spending budget, a non-recurring spending budget and a total spending budget for the current year based on the input items.  

The screen shot below shows Bill and Betty’s 2018 total spending budget calculation described in our January 16, 2019 post using the new revised workbook for retired couples.

(click to enlarge)

Thanks to Richard for his suggestion.  If you have suggestions for improvement of our ABC’s, we would be happy to receive them.