Actuarial Budget Calculator V 1.1—Develop Your Spending Budget by Expense Type
As discussed in prior posts, we recommend developing a total spending budget by building it as the sum of separately calculated budgets for different expense types. We make this recommendation because (i) budgets for some types of expenses (such as unexpected expenses and long-term care expenses) should be established but may not be incurred in the current year, and (ii) future increase assumptions for different expense types may differ. We have added a new tab to the Actuarial Budget Calculator spreadsheet to enable you to do this. The new spreadsheet is called “Actuarial Budget Calculator V 1.1.”
The Actuarial Budget Calculator is based on the following simple equation:
Assets (value of current investments plus present value of income from other retirement sources) = Liabilities (present value of future spending budgets + present value of amounts left to heirs)
The new tab does not change the validity of this basic equation, it just replaces the “present value of future spending budgets” item with the sum of “present value of expense type #1 future budgets” + “present value of expense type #2 future budgets” etc. where the expense types are:
- Long-term care expenses
- Unexpected expenses
- Essential non-health related expenses
- Essential health related expenses, and
- Non-Essential expenses
Where the spending budget shown in the Input tab spreads Assets less the present value of amounts left to heirs (net assets) over the input retirement period based on one input future increase percentage, the spending budget develop in the new tab spreads these same net assets separately by expense type and in accordance with the specific future increase percentage input for each expense type. Therefore, the total spending budget developed by expense type in this new tab will generally differ from the amount developed in the Input tab. This will be especially true if amounts are budgeted for future long-term care expenses or unexpected expenses.
See our post of December 21, 2015 for a discussion of recommended 2016 assumptions for the purpose of developing your budget by expense type. Also see our posts of January 9 and January 12 of this year for additional discussion of assumptions and an estimation approach for adjusting your spending budget for long-term care expenses.
