Friday, November 4, 2016

You Want Software that Models the Effect on Your Retirement Spending Budget of Assuming Different Rates of Future Increases for Multiple Expense Categories? We’ve Got It!

I like to read the financial planning strategy posts from Michael Kitces.  I especially enjoy his weekly “Weekend Reading for Financial Planners.”  Michael is a good writer and is very prolific.  I don’t always agree with everything he says, but I give him big-time kudos for the expertise and energy he brings to financial planning discussions.

In his post of November 2, Michael summarizes much of the latest research on spending patterns in retirement.  I won’t summarize the research here again as you can simply read Michael’s post, and we have previously discussed much of this research in our posts of March 31 and August 20 of this year, entitled “Planning for Constant Real-Dollar Spending in Retirement – Is It Setting the Bar Too High (Parts I & II).”

  
At the end of his post, Michael says, “In practice, doing this kind of projected retirement spending may also be more difficult in today’s financial planning software, simply because most of the tools aren’t built to handle multiple different spending categories, each with their own inflation rates and age-banded spending cuts.”  Well, our Actuarial Budget Calculator (ABC) is not “most of the tools,” and it is built to handle 3 different spending categories:

  • essential health-related expenses 
  • essential non-health related expenses 
  • and non-essential expenses,
each with its own assumed future increase rates.  You will find this useful feature in the Budget by Expense-Type tab of the ABC.  And it wouldn’t be all that difficult to modify the results of this tab to look at more than 3 spending categories, if desired.

After you have used the Budget by Expense-Type tab to develop a current spending budget utilizing different assumptions for future increases in the 3 expense categories, you can go back to the Input tab of the ABC spreadsheet to see what single rate “desired increase in future budget amounts” produces an equivalent current spending budget (if you are curious).  For example, in the Budget by Expense-Type tab you might assume future increases equal to assumed inflation for essential non-health related expenses, inflation plus 2% for essential health-related expenses and 0% increases for non-essential expenses.  Depending on the relative mix of these expected expenses, the resulting current spending budget may be equivalent to that produced in the Input tab by assuming inflation minus 0.5% increases (or some other value) in your total recurring future spending budgets.

Happy Budgeting!