Inspired by the Dr. David Blanchett article, “Guaranteed Income Belongs on the Retiree Balance Sheet” and discussed in our post of June 9, 2021, we decided to combine the results developed in several separate tabs of our two retiree Actuarial Budget Calculator workbooks (Single Retired and Couple Retired) into the form of a traditional actuarial balance sheet, which compares total household assets with total household spending liabilities. It is our hope that this balance sheet will give you a different perspective on your finances in retirement and will facilitate your retirement planning.
Household Actuarial Balance Sheet Calculation Process
- The assumptions used to develop the balance sheet are input in the Input & Results tab,
- The present values of lifetime income assets are developed in the PV Calcs tab,
- The present values of spending liabilities are developed in the Asset Reserves by Expense Type tab, and
- The results (requiring one entry discussed below) are shown in a balance sheet format in the new Actuarial Balance Sheet
Consistent with our Recommended Financial Planning Process and its Liability-Driven Investing strategy, the Actuarial Balance Sheet tab separates total household assets into Floor Portfolio assets and Upside Portfolio assets, and separately compares those assets with Essential Expense and Discretionary Expense liabilities. In order to facilitate these comparisons, the user is asked to classify their Accumulated Savings and the present values of any other non-lifetime income into non-risky and risky investment categories in the Actuarial Balance Sheet tab, in a manner similar to the classification of expenses (essential and discretionary) in the Asset Reserves by Expense Type Tab. This is the only additional item required in the process outlined above to generate the Actuarial Balance Sheet.
Example
The screen shot below shows the Actuarial Balance Sheet tab for a hypothetical retiree, Gail, a 70-year- old retiree. Gail has accumulated savings of $800,000, of which she identifies $300,000 as assets currently invested in less-risky investments (individual bonds and cash) and $500,000 is therefore invested in risky investments (mostly equities). She also has a Social Security benefit and a lifetime pension benefit as well as specific spending goals.
 |
| (click to enlarge) |
Gail’s Actuarial Balance Sheet shows that Gail’s Floor Portfolio of $925,217 is only $8,220 less than the present value of her essential expenses of $933,437, and her Upside Portfolio of $500,000 is $27,257 more than the present value of her discretionary expenses of $472,743, leaving a positive unallocated (Rainy-Day) reserve of $19,037. If she wanted, Gail could invest $8,220 of her risky assets in non-risky assets to increase her Floor Portfolio assets, but she is not concerned with this relatively small difference.
Instead, Gail decides that she will sell some of her “less-risky” bonds and liquidate some of her cash holdings and purchase a single life annuity. With a single premium of $200,000, she purchases lifetime income of $12,504 per annum (using July 9 rates from ImmediateAnnuities.com). Based on the default assumptions, the present value of this life annuity is $224,266, or $24,266 more than the purchase price of the annuity. We discussed how this can happen in our post of March 11, 2021. So, after the purchase, Gail’s Actuarial Balance Sheet looks like this:
 |
| (click to enlarge) |
As a result of her decision:
- Her accumulated savings has decreased from $800,000 to $600,000
- Her PV Other Non-Risky investments has decreased from $300,000 to $100,000
- Her investments in Risky Assets remains at $500,000
- Her PV fixed lifetime income has increased from $179,355 to $403,621 and
- Her Total Assets and Unallocated (Rainy Day) Reserves has increased by $24,266
As a result of the increase in her total assets and/or because of the “psychological benefits” of owing more lifetime income rather than investments discussed in our post of July 5, 2021, Gail decides that perhaps she can afford to increase her spending.
Summary
We hope this new Actuarial Balance Sheet tab that we added to our Actuarial Budget Calculators will enable you to visualize the Basic ActuarialEquation and the concept of Liability-Driven Investing we recommend in our website, thereby helping you to make better spending and investment decisions in retirement.
