- Review how well you did in 2019
- Develop 2020 spending budget “data points” and “finalize” your 2020 calendar year spending budget (or spending/savings budget for pre-retirees)
- Review your current asset allocation
- Perform “what if” scenario testing
- Document the assumptions, data and adjustments used to determine your 2020 spending budget, and
- Collect and save information that may be useful for your future actuarial valuations
Measuring How You Did in 2019
We hope that you saved your data as of January 1, 2019 and documentation of your 2019 spending budget calculations. With this data you should be able to determine how you did in 2019, by approximating the items in the following equation:
Solving for these amounts and comparing them with amounts expected, based on your 2019 calculations, will enable you to determine your total actuarial gain/(loss), by subtracting Expected 2020 BOY Accumulated Savings from Actual BOY 2020 Accumulated Savings. If your actual 2020 BOY Accumulated Savings is greater than your Expected BOY 2020 Accumulated Savings, you experienced an “actuarial gain” for 2019.
Similarly, you can determine your gain/(loss) by source by comparing actual amounts experienced in 2019 with expected values (based on the 2019 actuarial valuation) for the following items:
- investment income
- income from other sources
- spending
For pre-retirees, an investment gain will generally translate into a higher projected first year of retirement recurring spending budget than last year.
Developing 2020 Recurring Spending Budget “Data Points” and Finalizing your 2020 Spending Budget
As discussed in our post of April 20, 2017, the process of deciding on your recurring 2020 spending budget involves considering a number of “data points.” The data points may include, but are certainly not limited to, the following:
- Your 2019 recurring Spending Budget increased with inflation or some other percentage increase
- Your 2020 recurring Spending Budget recommended by your financial advisor or someone else
- Your 2020 Actuarial Budget Benchmark (ABB) for recurring expenses
- Your desire to avoid significant fluctuations in spending
- Your desire to be conservative or aggressive
- Your scenario testing (discussed in our post of November 26, 2017)
- Non-recurring spending anticipated for 2020, etc.
Before using the relevant Actuarial Budget Calculator (ABC) this year, you may wish to read our post of December 9, 2019 for some ABC tips.
As discussed in many of our previous posts, we encourage you to develop your Actuarial Budget Benchmark (ABB) as another data point in your budget setting process. The ABB is a recurring spending budget developed using basic financial economic principles by comparing the market value of your assets with the approximate market value of your spending liabilities (i.e., the theoretical cost of purchasing currently available inflation-indexed insurance annuity contracts to cover your future spending). This calculation is accomplished in our ABC spreadsheets by using the default assumptions. The purpose of the ABB is to gauge how conservative or aggressive your current spending strategy is. Armed with this benchmark, you can choose the level of recurring spending with which you are comfortable and, just as important, you can monitor how aggressive your recurring spending is each year by annually comparing it with your annually revised ABB. Default assumptions used to develop your 2020 ABB are summarized in the overview tab of our ABC workbooks and have been changed from last year as discussed in our post of October 20, 2019.
As discussed above, if you invested significantly in equities in 2019, it is likely that you experienced some investment gains last year. In order to avoid undesirable fluctuations in recurring spending, you may wish to consider some or all of the following actions:
- Adding to your Rainy-Day Fund
- Increasing 2020 non-essential non-recurring expenses, or
- Using the Smoothed Actuarial Budget Benchmark (illustrated in our post of November 6, 2018).
Reviewing Your Current Asset Allocation
As discussed in our post of February 26, 2019 and many of our 2019 posts, we encourage retirees to determine how much of their assets they should allocate to their “floor” and “upside” portfolios. We encourage retirees and near retirees to use the new “Asset Reserves by Expense Type” tab for this purpose.
“What if” Scenario Testing
As discussed in our post of November 26, 2017, we believe it is important to periodically model potential deviations from assumed future experience. For example, we believe it is important for married couples to model what would happen if one of partners were to die during 2020.
Documenting Your 2020 Actuarial Valuation
Actuaries generally document their work in what is called an “Actuarial Report.” We encourage you to document your work in sufficient detail that you can figure out next year what you did to develop your final 2020 spending budget. This process can be as simple as printing out the “Input and Results” tab and other relevant tabs of the ABC workbook you used and writing notes on the printed tabs. Or you may save the workbook with your notes in a file on your computer.
Maintaining an Historical Record
In addition to documenting your work in developing your 2020 spending budget, we encourage you to maintain an historical record of your spending budget calculations. This historical information will provide you with additional “data points” that you can use to refine future spending budget determinations. We provide a sample spreadsheet Historical Values of Actuarial Measurements for this purpose that resides in our “Spreadsheets” section. We encourage you to complete the items in the spreadsheet through the beginning of the 2020 year.
We aren’t trying to make you do a bunch of unnecessary busywork, so feel free ignore items in this spreadsheet you don’t feel like maintaining. Also feel free to customize this spreadsheet to make it better fit your personal situation. We started the spreadsheet with 2017 information, but if you have information for earlier years, feel free to add that earlier information to your personal spreadsheet.
As discussed in our post of November 27, 2018, you may wish to calculate how much of your total retirement assets are invested in equities or other risky assets to measure how much investment risk you are assuming in your investment strategy. We have included this ratio in this year’s version of the historical spreadsheet.
Conclusion
Instead of watching some of those college football games this year, we recommend that you take some time to think about your personal financial situation and do some planning. If you invested in equities during 2019, you may have experienced an actuarial gain on your investments during the year. What actions should you take in response?
We recommend that you perform an actuarial valuation of your assets and spending liabilities, and document your thought process in an Actuarial Report that you can revisit at this time next year. We also recommend that you maintain this information so that you can use it to make better spending decisions and better assumptions in future actuarial valuations.
As noted in our post of December 20, 2018, we encourage you to involve your spouse (if you have one) in your year-end review and planning process. It just makes good sense for both of you to be on the same page when it comes to your family’s spending.
Happy New Year and Happy Budgeting from Ken and Bobbie.
