Minimum Dignity Floor - Spreadsheet?

[retiredprofessor]

I have been listening to “The Retirement and IRA Show” podcast over the last year. It has influenced my thinking toward retirement spending. Their philosophy is that your basic needs (housing, insurance, food, transportation, healthcare, etc.) in retirement should be covered, preferably by an secure income stream. They called this the “Minimum Dignity Floor".


They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).


Any "excess money" you can spend on "fun". The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years.

I'm thinking of putting a spreadsheet to help me calculate the MDF (and, in turn, my "fun" money).

Has anyone already done such an exercise? If so, can you share it?

 

[Qs Laptop]

I have been listening to “The Retirement and IRA Show” podcast over the last year. It has influenced my thinking toward retirement spending. Their philosophy is that your basic needs (housing, insurance, food, transportation, healthcare, etc.) in retirement should be covered, preferably by an secure income stream. They called this the “Minimum Dignity Floor".


They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).


Any "excess money" you can spend on "fun". The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years.

I'm thinking of putting a spreadsheet to help me calculate the MDF (and, in turn, my "fun" money).

Has anyone already done such an exercise? If so, can you share it?

Welcome to the board.

I've downloaded a couple budgeting spreadsheets off of this site but I don't have the links to the threads where they appeared. I'm sure someone will be along and post links.

 

[Toocold]

I haven't heard of this, but it's a similar philosophy that I use.

I have a certain asset (in this case investment properties) that generates basic income that covers all of our household needs. It's a bucket of money based on our historical spend. I use investment properties because I think they will rise with inflation.

I have another set of assets that generates dividends and interest that pays for our "fun" / variable expenses, which we use for annual holiday trips, emergency funds, medical expenses. For example, we tap into this money if we want to renovate our house.

I have another set of assets, mainly 529, that are being used for college expenses.

I then have a long term assets mainly for my bucket list items (e.g. around the world cruise, extensive travel) and legacy. Over the last 5 years, we still haven't tapped into this bucket. I suspect now that our second child is off to college that we'll spend from here.

Oh, and we have a small charity fund for our annual gifting purposes.

 

[Jerry1]

I did the same thing prior to retiring. I separated my spending between necessary and discretionary. You have to know you can cover your base acceptable lifestyle. It ends up being about 1/2 to 2/3rds of my spend. My total spend is covered about 90% by SS & my pension. My main worry and the purpose of my portfolio is basically to cover inflation and long term care if necessary.

 

[oldtimer]

I have another set of assets that generates dividends and interest that pays for our "fun" / variable expenses, which we use for annual holiday trips, emergency funds, medical expenses. For example, we tap into this money if we want to renovate our house.

I don't consider medical expenses as fun.

 

[tulak]

They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).

I'm not retired yet, but I'm doing something similar using a TIPS ladder for the early years.

For example, let's say I need 80k/year and retire at 60. SSA at 62 is 30k, 67 is 40k, and at 70 is 50k (keeping the numbers easy).

I will have a 2-year TIPS ladder for 60-61 of 80k/year. For 62-66, I will have a 5-year TIPS ladder of 50k/year, figuring I could take SSA early if SHTF, giving me 80k/year. At 67, the TIPS ladder is gone and I will rely on the portfolio for income, between an 80/20 to 90/10 allocation.

On the equity/portfolio side, let's say I have 2 million at 67. This will give about 30k/year in dividends (at 1.5%), which is a crazy low WR rate. I can easily up this to 2%, for 40k/year, to maintain 80k/year income.

That's the general idea of my plan. I've done backtesting with this approach and it does well with dealing with SORR, which is my biggest concern, while still leaving a lot of potential for growth (due to high equity allocation).

But check with me in 20 years to see how it worked out.

 

[youbet]

They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).

What do they specify for the procedure to keep your coverage of the so-called "MDF" up with inflation over decades? If you have 100% coverage at the beginning of retirement from a non-COLA pension + SS, what specifically do they say to do to make up for the deterioration of the pension over time?

Through my first 18 yrs of FIRE, I've made sure my "basics" were conservatively covered by managing my AA. I'm probably doing the same things they suggest without the special name. No purchased annuities though........

The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years

.How does that work?

 

[MichaelB]

I have been listening to “The Retirement and IRA Show” podcast over the last year. It has influenced my thinking toward retirement spending. Their philosophy is that your basic needs (housing, insurance, food, transportation, healthcare, etc.) in retirement should be covered, preferably by an secure income stream. They called this the “Minimum Dignity Floor".

They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).

Any "excess money" you can spend on "fun". The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years.

I'm thinking of putting a spreadsheet to help me calculate the MDF (and, in turn, my "fun" money).

Has anyone already done such an exercise? If so, can you share it?

Welcome to our forum!

Withdrawal and budgeting strategies are very popular topics here. Searching the archives will bring you a wealth of discussions. Try a search with “withdrawal” in the title.

Your approach sounds reasonable, moreso for someone with not enough pension income to cover the basics. Some here use a variable percentage withdrawal (search for vpw) which may have a bit in common with your approach.

Some members also use a fixed withdrawal percentage, which in good years generates more than the budget calls for, and they bank the difference as a rainy day fund.

4% withdrawal is not a recommendation. Using tools like FIRECalc, it is a calculated amount that you can withdraw while maintaining a very high likelihood that you will not outlive your portfolio.

 

[qwerty3656]

Let's say you want to manage taxable income apart from expenses - would you fund these kind of things (annuities, bond ladder, etc) in a Roth? I am very focused on what my taxable income is (for ACA purposes now and for things like IRMAA when I turn 65).

 

[jazz4cash]

I have been listening to “The Retirement and IRA Show” podcast over the last year.

I know the show. The thread title really got my attention. I listened for several months but I tired of following the main host down rabbit holes. I’m sure you know what I mean! I will be interested in how your spreadsheet works out. I suspect my ‘MDF’ would end up being ~2% so 4% leaves room for fun.

 

[Koolau]

I have been listening to “The Retirement and IRA Show” podcast over the last year. It has influenced my thinking toward retirement spending. Their philosophy is that your basic needs (housing, insurance, food, transportation, healthcare, etc.) in retirement should be covered, preferably by an secure income stream. They called this the “Minimum Dignity Floor".


They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).


Any "excess money" you can spend on "fun". The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years.

I'm thinking of putting a spreadsheet to help me calculate the MDF (and, in turn, my "fun" money).

Has anyone already done such an exercise? If so, can you share it?

I guess in theory, this is a way to look at Early Retirement. We here mostly use FIRE Calc. (see bottom of page.) You can put just about any level of monthly spending in it. FIRE Calc conveniently "evaluates" your numbers in terms of percent of success rate.

Please consider introducing yourself in the "Hi I am..." Forum. Feel free to share as much or as little as you wish about your current situation and your plans and aspirations.

 

[Badger]

I probably did something similar since my basic needs are all taken care of and we have enough from small pensions and SS with a few dividends to see us through. Then we have multiple sources of money after that with RMDs, MF, stocks, and CDs that should last us for the next 30+ with enough left for an inheritance. Too bad we won't last 30 years.

 

[big-papa]

Shades of grey, but I think a lot of people are doing something like this. That is, they want to make sure they have a stable, inflation adjusted, income floor. I don't agree that the floor has to 100% cover minimal spending, though of course that would be nice.

For us, it's a TIPS ladder + SS that provides the stable floor. Stocks then make life worth living.

Cheers.

 

[mrfeh]

Go over to bogleheads.org and search for "liability matching portfolio". It's the same idea.

I'm not a fan for a couple reasons: 1) you don't know exactly what your future expenses will be and 2) it's too conservative for my tastes.

 

[wmc1000]

I have been listening to “The Retirement and IRA Show” podcast over the last year. It has influenced my thinking toward retirement spending. Their philosophy is that your basic needs (housing, insurance, food, transportation, healthcare, etc.) in retirement should be covered, preferably by an secure income stream. They called this the “Minimum Dignity Floor".


They suggest you project the MDF expenditures for, say, a 30+ year retirement, and then confirming you have sufficient secure income to pay for the MDF. If you fall short, you need to set aside money to fund the shortfall (e.g., buy an annuity, purchase a TIPs ladder).


Any "excess money" you can spend on "fun". The advantage of the MDF (relative to something like the 4% recommendation) is that you can spend more fun money early in retirement, during your go-go years.

I'm thinking of putting a spreadsheet to help me calculate the MDF (and, in turn, my "fun" money).

Has anyone already done such an exercise? If so, can you share it?

Welcome to the site! We did this starting about 6 years prior to retirement although for us it was just seeing what our required monthly expenses were going to be and using a 4% inflation rate and 1% return on investments for 30 years.

As we were always a "LBYM" family, we saw we didn't need more than what SS would provide us at FRA. Given our strong savings habits over the last 30+ years before retirement we find that no need to draw from our retirement funds in the first 7 years after retiring.

Our 3 kids, their spouses and 6 GK's will end up being the beneficiaries of our "pile" for college expenses and more. We are gifting them smaller amounts now as they are all doing well on their own, (thank goodness!), from our "leftover" SS income as everything we own is fully paid off.

 

[RetireBy90]

Over the years I've started something like this a couple times, wanting to make sure our expenses were covered before even thinking of retiring. Turns out we have been blessed with our MDF mostly covered with Pensions and SS. I have 3 more years to 70 and SS which will give us COLA adjusted more than MDF. To cover the difference between used CD ladder and some small draws from TIRA.

I finally gave up trying to budget as any budget we came up with was busted with an unexpected and unbudgeted expense or an expense that exceeded our budget. Sigh. I use our last year of spending to get any draws from TIRA for the current year. Worked for me so far. Found no need to get all technical for a problem that doesn't exist. YMMV

 

[jollystomper]

One of my criteria for retiring was for my pension to grow enough to cover our "MDF", or I as called them, "basic", expenses. It is one reason I waited to retire until age 60, to allow the accelerated pension growth to occur and meet this need.

Using Quicken for many years, calculating and forecasting our basic expenses was easy, though I only predicted out 10 years. I planned to reassess after that. Five years later, things continue to track much better than I predicted. With the addition of DW's SS, and me not yet taking SS, covering those basic expenses are not a concern.

 

[Out-to-Lunch]

Welcome to E-R (from another retired professor ).

We do something like this, too. I refer to it by the LMP/RP nomenclature that @mrfeh described, which stands for liability matching portfolio/risk portfolio.

In our case, a pension covers most of our required spending. I supplemented with a TIPS ladder to bridge to SS. The RP is invested more aggressively. For the RP, I chose 70/30, or 75/25 on a tax-adjusted basis. If you include the TIPS ladder, our overall AA is about 62/38, (or 67/33 tax-adjusted).

 

[Midpack]

Just another way of retirement income planning, no better or worse than others. Reminds me of Otar’s 2009 book. Whatever you’re comfortable with.

Estimating “your basic needs (housing, insurance, food, transportation, healthcare, etc.) for, say, a 30+ year retirement” isn’t easy to begin with. For the next few years you could get pretty close, but not 30+. You could easily be off by 2-3X short or long over that long a time period, and individual bias would factor in. When should you use the scalpel or the axe?

I’m all for estimating your spending, identifying what essential and not, and building in the safety factor I’m comfortable with on top of that. And revisiting my assumptions/progress annually.

 

[marko]

I think it's a good exercise that everyone should do occasionally. As Midpack notes, it's almost impossible to predict 30 years out though.

But we do see some new arrivals here and when asked about their spending, there's this deer in the headlights reply.

There is a certain comfort in knowing that if ever the SHTF, one will still be able to keep body and soul together.

 

[LateToFIRE]

I think it's a good exercise that everyone should do occasionally. As Midpack notes, it's almost impossible to predict 30 years out though.

But we do see some new arrivals here and when asked about their spending, there's this deer in the headlights reply.

There is a certain comfort in knowing that if ever the SHTF, one will still be able to keep body and soul together.

No idea who you're talking about. Not a clue.

 

[brett]

There are numerous ways at calculating forward finances in retirement. We have used a few of them. Once in a while I see a 'new' wonderful book or program about this.

Bottom line for me...

It comes down to nothing more complicated than common sense, understanding basic cash flows and your spend (and any future increases to that spend in retirement), basic back of the envelope math skills, and a basic understanding of the effects of inflation.

I have used a detailed retirement spreadsheet program. Also did a basic math calculation. Thirteen years forward the outcome on both was essentially the same. Always used after tax calculations because that is what is available to spend.

The only difference on both calculations results from my use of a more conservative ROI number and inflation assumption. In our favor.

 

[LateToFIRE]

As I have gotten my arms around what our spending would look like in retirement, I segmented budget into non-discretionary (housing-related, vehicle-related, groceries, medical) and discretionary (eating out, wine, shopping, wellness travel, charitable, gifts).

But, had not given thought to the idea of different funding buckets for different purposes - was more focused on overall withdrawal rate. Interesting food for thought.

 

[retiredprofessor]

Let's say you want to manage taxable income apart from expenses - would you fund these kind of things (annuities, bond ladder, etc) in a Roth? I am very focused on what my taxable income is (for ACA purposes now and for things like IRMAA when I turn 65).

How you fund the MDF is a different question... but you are correct, considering the tax consequences is critical.



From what they say on their podcast, many of their clients secure income (social security and pension) often more than meets their MDF early in retirement. But, as time goes on MDF costs will go up faster than secure income (partly because most pensions are not inflation adjusted and partly because medical expenses will like rise faster than inflation). Part of their philosophy is that you should set aside any money to pay MDF expenses in a very secure (low risk) investments. They seem to like SPIAs to address the shortfall.



Rather than a SPIA I am planning on creating a TIPs ladder that will pay MDF until age 95. If, for example, I buy $30,000 in TIPs maturing in 2045 then I know I will have an inflation adjusted bond to provide $30,000 in MDF.


My preliminary estimate is that I will need to spend $900,000 to fully fund the TIPs ladder. I will buy these in my traditional IRA.



With that financial commitment I think I will be more comfortable spending money in retirement.

 

[jazz4cash]

My master ER spreadsheet has 3 columns which for purposes of this thread I’ll call ’What I Need’, ‘What I Want’, and ‘Blow That Dough’. That’s a low, medium, and high estimate for every expense I can think of. I deduct conservative estimates for secure income. The difference has to be funded with the nest egg @4% WR including a sinking fund for optional mortgage payoff. I ER’d a tad below the ‘BTD’ estimate 8 yrs ago.