In the Overview Tab of each of our ABC workbooks, we provide instructions for using these workbooks. These instructions are also provided in the “Quick Links” section of our home page. However, we are aware that some of our readers may not have memorized these instructions or the many posts we generate to explain the workbooks. Therefore, to prepare you for your 2020 budget calculations, this post will provide some tips for using the ABC, including links to posts which either:
- Highlight 2019 ABC changes, or
- respond to common questions (FAQs) we have received about the workbooks over the past year.
1. Many of our 2019 posts encouraged users to expand their expense categories for better budgeting and planning. To help you do this, we decided to modify our ABCs (for retirees) to include a tab for “Asset Reserves by Expense Type” and included several posts about how to use the revised workbooks to possibly coordinate your spending plan with a “floor” and “upside” portfolio investment strategy designed to fund future essential and discretionary expenses. Several of these posts included:
a. Introduction of the “Asset Reserves by Expense Type” tab on July 5, 2019 Better Budgeting with “Actuarial Budget Buckets”
b. Review of the process on August 25, 2019 Recommended Financial Planning Process for Retirees and Near-Term Retirees
We also included an example of how this process would work for a couple considering whether they had enough assets to retire in our post of August 25, 2019, Is $1 Million of Savings Enough? This example included a table of estimated annual recurring expenses before and after retirement that users may find useful.
c. Discussion of the recommended process in our Advisor Perspectives article An Actuarial Process for Better Decisions in Retirement
2. We added a smoothing tab to our ABCs (for retirees) that incorporates our recommended budget smoothing algorithm on February 21, 2019 300th Post—We’ve Added a Smoothing Tab to the Actuarial Budget Calculators (ABC’s) for Retirees
3. Finally, we made changes in the default assumptions used in the ABCs on October 20, 2019 Good News/Bad News—We Have Changed Our Default Assumptions for 2020 Spending Budget Calculations
ABC FAQs
1. How do I change the default assumptions? In response to our post of November 12, 2019, Do You Want to be More Aggressive with Your Upside Portfolio?, several users asked how to change the default assumptions.
This is accomplished by:
- Clicking on the box in column D of the workbook that says, “default”
- Clicking on the down arrow that appears
- Choosing the override option
- Entering the override assumption in column G
2. What about other recommended assumptions or inputs? Other than the changes in the default assumptions discussed above, we have not changed our recommended assumptions for other expenses you may incur. Our latest post on recommended assumptions is May 8, 2017 Recommended Assumptions & Other Inputs to Develop Your Actuarial Budget Benchmark
3. How do I reflect the present value of benefits that may be payable upon the first death within the couple? The current versions of the ABCs do not directly calculate these present values and you will have to use our Present Value Calculator workbook to estimate the values to be inserted in the Present Value of Other Sources of Income column of the relevant spreadsheet. See our post of November 21, 2017 Survivor Payments Anticipated After First Death Within the Couple for how to do this.
4. What if future experience deviates from the recommended assumptions? It will. If experience is more favorable than assumed, future recurring spending budgets will increase, all things being equal. If experience is less favorable than assumed, future recurring spending budgets will decrease, all things being equal. If you self-ensure your retirement, there are no guarantees. See our post of November 26, 2017 Modeling Deviations from Assumed Future Experience for discussion of how you can use our ABCs to assess your retirement risks.
Conclusion
We encourage you to use the same basic actuarial methods and processes in your personal financial planning that we employed as pension actuaries to help plan sponsors fund their pension plans. The three basic principles (collectively referred to as the Actuarial Approach) we advocate are:
- Matching assets with spending liabilities using the above Basic Actuarial Balance Equation for personal finance
- Performing annual spending budget valuations, and
- Modeling deviations in assumed experience
