Happy New Year! It’s the time of year that we ask you to perform your actuarial valuation to measure your Funded Status. We have updated the Actuarial Financial Planner (AFP) spreadsheets for this purpose and encourage you to use the granular spending budget that we outlined in our previous post together with the updated AFP spreadsheets, to measure your January 1, 2025 Funded Status.
As part of the annual valuation process, we also encourage you to monitor the changes in your Funded Status from year to year and to make changes in your spending budget or your assets if appropriate. This may involve possibly increasing your spending plans this year if your Funded Status is growing too large.
This year, you can also stress-test your plan by changing assumptions used in the AFP to assess and manage risks that the assumptions used in the AFP may not be realized in the future.
In our previous post, we discussed a few tips for using the data from your granular spending budget in the AFP. We have already received one question on item 3 from that post where we said:
- Present values of non-recurring expenses are generally entered into the AFP by entering data into the following cells:
Annual Amount | Deferral Period | Payment Period | Annual Rate of Increase | % Upside (assets) or %Essential (Liabilities) |
Where “annual amount” is increased by inflation (or some other reasonable rate) from the current year until the expected year of first payment.
The reader’s question was, “how is the annual amount increased with inflation for the period of deferral?” We will answer with an example. Let’s assume that you have an expense (e.g., a new car) that you don’t expect to incur for 10 years (deferral period), and you expect this expense to be paid in 1 year. Further, you expect the price of cars to increase by assumed inflation of 3% per year. If the current price of the car you want is $50,000, you will enter $67,196 in the Annual Amount cell above and 1 year in the Payment Period cell to determine the present value of this budgeted expense. Since this expense is anticipated to be paid off in one year, you needn’t bother entering a rate of increase (for future years) once the payment is assumed to commence.
The amount of $67,196 is equal to $50,000 X 1.03 to the 10th power, or $50,000 X (1.03) X (1.03) X (1.03)…(1.03) [total of ten times].
This same calculation approach may apply to determine the present value of some household assets, like Social Security benefits with deferred commencement.
We hope you have a great new year. Happy Budgeting and Planning!
