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How I prepare my budget & forecast - what about you?
Old 10-15-2008, 12:20 PM   #1
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How I prepare my budget & forecast - what about you?

With the turn down in the market and a broken shoulder; I have been working on my budget and financial projections. (So far it shows I'm OK.)

It might be helpful to others to see how I prepare a budget and forecast.
Let me know if you see any holes in my assumptions.
Objective of budget and financial projections – to see if I will have enough money to live the life I want - until death -85
Basics: 53, retired, single, no debt, House paid for – value not in any of the following calculations
All “From – to” below means 2009 to 2040
Budgeting:
I have a line item budget (includes taxes) for 2009 – I grow it at 4% per year after that and adjust it for known items – e.g. I have a no interest loan that expires in 2009; so I take that amount out in 2010.
I don’t use the 4% withdrawal rate because my budget is less.
Withdrawal rate from Non Deflated Base - From 2.3 to 3.7%
Withdrawal rate from Deflated Base - From 2.4 to 9.0%

Forecast:
The below might sound complicated but it really isn’t – I have a spread sheet set up for it.
Steps:
1.Compute current weighted returns (interest, dividends, etc - not estimated growth) for various investments in two categories – taxable accounts and tax deferred accounts.
e.g.for taxable account current interest/dividend = 4.4%; cash 2.5%; weighted average 3.63%

2.Add expected growth rates per year to the two accounts. So far I’m using 2009 10%; 20010 6%; 2011 4%; 2012 2%, 2013 forward only the weighted returns #1 above.
Compute the weighted average including the growth rate
So the total growth rate for 2009 is 9.8%

3.Yearly Projecting = Previous year total, less estimated spending budget, multiplied by weighted average (step 2)

4.Social Security – starting at 62 – growing at 2.5% per year


+++

Growth rates – 4.2% to 1.6% Before applying a deflation percentage
++++

Deflator 3%/year starting in 2007 = 100 to 265.5%

Growth rates after deflator 2009 1.2% to 2040 (1.4%)

I know one flaw is that there are no years with a negative growth rate.

++++++
I would be curious to know how others prepare their projections.


Other Info.

My view of the stock markets & how I keep my sanity
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Old 10-15-2008, 12:37 PM   #2
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I posted this to the wrong forum - s/b in money forum
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Old 10-15-2008, 01:20 PM   #3
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Very interesting!

Maybe your spending increase of 4%/year would be better approached using the real CPI-U factor as a yearly weighting, like a COLA'd pension?

Your investment projections are something that I have not even done, beyond examining past performance (which as we know, is no guarantee...!). Instead of doing that, I am trying to invest in a sound, yet conservative porfolio and assuming that I can get a 2-3% SWR out of it with no problems.

My budgeting is a matter of habit at this point, I suppose, as I finish up my working years. First priority are the utilities and food, and if more is left over then I let myself spend some of it and save the rest. If I didn't have enough for food and utilities then I would cut back (for example, I would drop my cable TV and cell phone, buy cheaper food, etc.).

Basically, when I retire at the end of 2009 I am planning to give myself a "paycheck" each month, consisting of 1/12th of 3% of my nestegg. Then I will live on that just like I do now. If I don't feel a need for it, I will spend less and save the excess just as I do now. And, in a bear market I will very likely cut back to 2% or less.

The "paychecks" will be derived mainly from dividends, I suspect, but any other cash that is removed will be compensated for during yearly rebalancing.
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Old 10-15-2008, 02:54 PM   #4
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Want2Retire,
I'll look into the CPI-U.
Just so you don't think I'm extream in my calculations; I do have a chart that is much simpler:
End of year balance (plus SS when it kicks in with the 2.5% growth rate), less next year expense budget, multiplied by a fixed growth rate. It works out to be very close to the first calculation at 2040.

All this helps with the comfort factor.
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Old 10-15-2008, 03:26 PM   #5
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Quote:
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Want2Retire,
I'll look into the CPI-U.
Just so you don't think I'm extream in my calculations; I do have a chart that is much simpler:
End of year balance (plus SS when it kicks in with the 2.5% growth rate), less next year expense budget, multiplied by a fixed growth rate. It works out to be very close to the first calculation at 2040.

All this helps with the comfort factor.
Your simpler method is very similar in its lack of complexity to what I am planning to do. I know what you mean about the comfort factor. I suspect that I will be doing more LBYM'ing than I really need to do during bear markets, simply for peace of mind.
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Old 10-15-2008, 06:03 PM   #6
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Originally Posted by Want2retire View Post
Basically, when I retire at the end of 2009 I am planning to give myself a "paycheck" each month, consisting of 1/12th of 3% of my nestegg. Then I will live on that just like I do now. If I don't feel a need for it, I will spend less and save the excess just as I do now. And, in a bear market I will very likely cut back to 2% or less.
I'm sure you've thought of it, but it's not entirely clear how you will adjust for cost of living during retirement. Unless with your conservative withdrawal rate you're planning to grow your nest egg to grow throughout retirement and therefore inflate your "paycheck" for you. Could work and lead to very happy heirs...
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Old 10-15-2008, 06:37 PM   #7
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I'm sure you've thought of it, but it's not entirely clear how you will adjust for cost of living during retirement. Unless with your conservative withdrawal rate you're planning to grow your nest egg to grow throughout retirement and therefore inflate your "paycheck" for you. Could work and lead to very happy heirs...
I am still thinking about this, and have one more year to figure it out. Well, two more years since the first year's 3% is pretty straightforward.

I have read about several ways to handle this, for example:

(1) take the last year's withdrawal and increase it by a COLA derived from the CPI-U, or

(2) make each year's withdrawal 3% of the nestegg size at that time.

What I am thinking of right now is to follow (1) above, with one exception. During bear markets I would compute the COLA'd amount as usual, and then withdraw no more than 2/3 of it for that year's living expenses. I would also do that at any time when I felt nervous about the size of my nestegg. And any year when I just didn't get around to spending that much I would spend less. The 3% of the original amount with yearly COLAs is just an upper limit.

Hopefully with the low withdrawal rate and cutting back during bear markets, my nest egg could grow faster than inflation. I would like that, not only for my daughter (one day) but also to be able to pay for a nice assisted living facility or more care than that if/when I eventually need it.
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Old 10-15-2008, 06:41 PM   #8
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Your situation/plan is more bulletproof than most of us can probably manage, but good for you (really)...
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Old 10-15-2008, 06:55 PM   #9
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my budget/forecast method: withdraw 4% in good & fair times. cut back in bad times. get a job in terrible times. at best (worst?) my heirs will receive a very well equipped cruising sailboat and enough cash to continue the journey.
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Old 10-15-2008, 07:00 PM   #10
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I don't budget, though I do record everything.

I have a small partly-COLAd pension, and as long as my outgo is less than my income I don't worry about it.
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Old 10-15-2008, 07:11 PM   #11
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Your situation/plan is more bulletproof than most of us can probably manage, but good for you (really)...
Thanks. I really hope it is bulletproof.

It remains to be seen how much my wants might increase to meet the upper limit of money available. Right now I don't want much, but I expect that may change after ER when I have more time to shop and enjoy my purchases.
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Old 10-15-2008, 07:30 PM   #12
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I calculate my 4% on Jan.1 . I stick with a straight 4% for simplicity reasons . Also I feel more comfortable with that amount in bad times . I have a detailed budget so I know how much I need monthly. I also have a lot of padding for travel or emergency repairs . I've only worked the plan for two years but so far so good .
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Old 10-15-2008, 07:38 PM   #13
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I also have a line by line monthly income and expense budget (which includes federal and state taxes) that I forecast annually for 30 years in an excel spreadsheet - one spreadsheet per year with a summary.

I inflate expenses by 2.3% per year and assume 4.0% interest income on my porfolio. My draw rate is about 4.25% in the first year, inflates at 2.3% per year and then drops considerably when social security starts at age 70, consequently, my porfolio balance drops until age 70 and then stabilizes. At age 75, I sell the boat, and relieve the budget of a large annual expenditure for boating costs, my portfolio then grows until age 90 where I stop forecasting.

I have a portfolio dollar target that I must always hit at age 85. If I don't hit it due to not realizing the 4% interst income target and/or adverse equity market fluctuation, I back off descretionary spending until my target is once again acheived. This is all done in an excel spreadsheet with a graph of my portfolio balances over the years and a dollar target box that the graph line must hit.

I will be 60 in February and hope to retire, God willing and the creek don't rise. I am teetering on delaying retirement just because the cushion that I had in my plan has been reduced by the bear market and US financial crisis and I am not confortable with forecasting a market comeback...I am conservative in that respect.
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Old 10-15-2008, 09:23 PM   #14
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I don't budget, though I do record everything.
Same here. We consider big recurring costs or capital expenses but not so much the budget.

We look at the previous year's spending, usually on New Year's Eve while I'm waiting for the fireworks to settle down and our kid to return home. But we rarely see the need for a change.
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Old 10-15-2008, 09:59 PM   #15
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I have three budgets:

1. My current pre-retirement budget.

2. My post-retirement budget.

3. My worst-case scenario budget.

I tweak my current budget as needed based on any new information I have. For example, if my 12-month rolling average for gas goes up, I change my budget to reflect that item and either look for ways to pay for it with new money, and/or cut something in my discretionary spending.

My post-retirement budget includes items that I believe may increase in cost (like travel) and decrease in cost (like income taxes).

My worst-case scenario budget is almost bare bones. Very little for travel entertainment, less gas money, etc.

These budgets help define my range of strategies and have helped me to make the decision of when to retire. I do not want to ever go bare bones, but I know how much I would need for a minimum to even make the bare bones situation work.
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Old 10-15-2008, 10:08 PM   #16
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Quote:
Originally Posted by dex View Post
With the turn down in the market and a broken shoulder; I have been working on my budget and financial projections. (So far it shows I'm OK.)

It might be helpful to others to see how I prepare a budget and forecast.
Let me know if you see any holes in my assumptions.
Objective of budget and financial projections – to see if I will have enough money to live the life I want - until death -85
Basics: 53, retired, single, no debt, House paid for – value not in any of the following calculations
All “From – to” below means 2009 to 2040 (snip)
My only question is why 85?

We're about the same age—I'll be 53 in January. The possibility that I will live well past 85 seems relatively high (both parents and two aunts still living in their mid-80's) and the consequences of running out of money at an advanced age are so dire that I'm using age 100 for my planning number.
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Old 10-15-2008, 10:34 PM   #17
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My only question is why 85?

We're about the same age—I'll be 53 in January. The possibility that I will live well past 85 seems relatively high (both parents and two aunts still living in their mid-80's) and the consequences of running out of money at an advanced age are so dire that I'm using age 100 for my planning number.
I looked at the ages people died in my family died and also an on line calculator - I used the calculator. I omitted my parents because my father died of cancer and my mother is still alive but, not in great shape.

Men

62 Paternal GF 73 Maternal GF 67.5




Woman

64 Paternal GM 100 Maternal GM 82.0
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