Better Budgeting with “Actuarial Budget Buckets”

In this website we encourage you to use the full functionality of the Actuarial Approach and our workbooks to help you develop a better spending budget and a better sustainable spending plan in retirement.  In 2019 alone, our posts on this topic have included:

• January 16:  Expand Your Spending Categories in 2019 for Better Personal Retirement Budgeting & Planning
• February 7:  If You Aren’t Separately Budgeting for Non-Recurring Expenses, You Probably Don’t Have a Robust Retirement Spending Budget
• February 26:  How Much of Your Retirement Assets Should Be Allocated to Your “Floor” and “Upside” Portfolios?
• April 10:  Building Your Floor Portfolio with Extra Low-Risk Investments, and
• June 15:  Establishing Dedicated Asset Reserves to Fund Different Types of Expenses. 

To help you expand your budget spending categories and estimate the assets you will need to fund the different types of expenses you can expect in retirement, we have recently added a new tab called “Asset Reserves by Expense Type” to our Actuarial Budget Calculators (ABCs) for single retirees and retired couples.   This new tab uses the data, assumptions and results from the Input/Results tab, so you need to complete the Input/Results tab first before using the new tab.  The new tab divides the total present value of your assets developed in the Input/Results tab into separate spending buckets for your budgeting and planning purposes. 
 
We think you will enjoy playing with the new tab and seeing the effect on your actuarial budget bucket pie chart of changing amounts you input for:

• Current recurring essential non-health expenses (and expected future rate of growth of these expenses)
• Current recurring essential health expenses (and expected future rate of growth of these expenses)
• Current recurring discretionary expense (and expected future rate of growth of these expenses)
• Percentages of the present values of non-recurring expenses developed in the Input/Results tab (and therefore also percentages that are discretionary)

Recurring expenses are expenses that you expect to incur for the rest of your life.  Non-recurring expenses are expenses that you don’t expect to incur for the rest of your life.  To develop a more robust spending budget, we believe you should distinguish between these two general types of expenses.  As discussed above, non-recurring expenses are developed or input in the Input/Results tab. 
 
Recurring and discretionary expenses can be further categorized as “essential” and “discretionary.”  Essential expenses are those you believe to be essential to preserving your standard of living in retirement, while discretionary expenses are those that may be cut or reduced if necessary. 
 
When selecting assumptions for future increases in your recurring expenses, it may be reasonable to assume, for example, that:

• your current recurring essential non-health expenses will increase by assumed inflation in the future
• your current recurring essential health expenses will increase by a rate greater than assumed inflation, and
• your current recurring discretionary expenses will increase by a rate lower than assumed inflation.

As discussed above, the new tab can be used to estimate the size of the actuarial budget buckets necessary to fund the different categories of expenses you expect to incur in the future.  These buckets are discussed in our blogpost of June 15, 2019.  Negative present values in the new tab indicate that some of your actuarial budget buckets may be insufficient to fund the expected expenses you input in the new tab. 
 
Categorizing your estimated recurring and non-recurring expenses as “essential” and “discretionary” can also be useful in helping you to decide how much of your assets to allocate to your “upside” and “floor” portfolios as discussed in our post of February 26, 2019.
 
Summary
 
We’ve updated the ABC workbooks for retirees (single and couples) to help you develop actuarial budget buckets (asset reserves) for various categories of your expected future expenses.  This tab may also be helpful to you in deciding how much of your assets to allocate to your upside and floor portfolios.  We are happy to have your feedback on the new tab, and we welcome any suggestions you may have for improvement of the spreadsheets that we provide to help you perform your annual spending budget “actuarial valuations.”