Lifecycle Financial Planning Spreadsheet

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assumer
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Joined: Fri Dec 21, 2012 11:11 pm

Lifecycle Financial Planning Spreadsheet

Post by assumer » Sun Jul 20, 2014 11:42 pm

I stumbled upon the lifecycle planning wiki page and it really resonated with me. It causes me a significant amount of stress being a young person at the start of his career not knowing my future income, blind to future expenses, etc.

I think the idea that you simply keep a straight trajectory of expenses each year, and maximize how much you can inflate your lifestyle without ruining your chance of dipping below your yearly expenditures, seems like a much more stress free way to do financial planning. As the wiki states, you aren't putting all the onus of risk reduction on diversification.

It seems like a more peaceful and less worry-prone way to live one's life. Essentially figuring out how much you can spend each year so that you are able to annuitize your necessary expenses, and maximize the discretionary expenses, taking into account the reasonably conservative values defining one's risk of losing one's job, and future expenses like college.

As far as I understand it, you hold the amount you want to spend each year as a constant within a range (smooth it) and change the other factors around it, such as AA, savings rate, change in next year's expenditures, etc.

However, I'm coming up a bit short on existing tools which do this. I use custom spreadsheets for everything financial so I clearly don't mind creating my own tool, but I'm a bit inexperienced on the methods.

Some help would be useful. Or if somebody wants to PM me financial planners who are boglehead-friendly and will do this for me for a fee, I don't mind paying for that peace of mind.

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bobcat2
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Re: Lifecycle Financial Planning Spreadsheet

Post by bobcat2 » Mon Jul 21, 2014 1:17 pm

I'd start by trying the free online ESPlanner Basic tool here -
Link - https://basic.esplanner.com/

and here - https://basic.esplanner.com/ESPlannerBa ... annerBasic.

After running ESPlanner Basic I would compare those answers with what you are getting in your spreadsheet.

Economist Wade Pfau discussed ESPlanner on a blog post a couple of years ago.
Link - http://wpfau.blogspot.com/2012/08/esplanner.html

If you want to pursue this further after working with ESPlanner Basic and your spreadsheet, consider purchasing the desktop version of ESPlanner. If you go that route I would suggest you also buy the financial planning textbook, Personal Life-Cycle Economics by Aaron Stevens. The book is financial planning from the life-cycle perspective and uses the ESPlanner software for making financial decisions. Just as importantly the discussion in the book shows the how and why the decisions are made in this manner. The book starts with spreadsheet calculations for life-cycle decisions and then as decisions become both more realistic and more complicated switches to using ESPlanner in place of the spreadsheets. The book goes a long way into life-cycle finance considering the only math used is time value of money calculations and high school algebra.

Link to book at Amazon - http://www.amazon.com/Personal-Life-Cyc ... +economics

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Re: Lifecycle Financial Planning Spreadsheet

Post by assumer » Mon Jul 21, 2014 1:49 pm

Wow thanks for the info. Will look at all those and possibly purchase what you suggested.

Since I am self employed and my income can vary wildly every month, am I a bad or good candidate for this type of financial planning? It's the unknown swings which cause my anxiety and I feel like that actually makes me an ideal candidate for the lifecycle planning model.

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Meg77
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Re: Lifecycle Financial Planning Spreadsheet

Post by Meg77 » Mon Jul 21, 2014 3:18 pm

The lifecycle planning model is actually not that different from the traditional model. The primary difference, which is significant, comes when you are a few years away from retirement, at which point it's usually recommended that you purchase an annuity or some combination of annuities to ensure a basic amount of necessary spending in retirement. The idea is to have your basic needs met with more or less guaranteed income sources such as pensions, social security, and annuities. Then you can maintain a more aggressive asset allocation with your savings in order to (hopefully) finance additional expenditures such as travel, entertainment, and giving. This is a fairly stark contrast with setting an asset allocation and sticking to it no matter what and assuming your spending will rise with inflation throughout retirement (when in fact most people spend a lot less in the last 10-20 years of their lives than they do immediately after retiring).

However, during your working life the lifecycle model and the traditional model aren't really all that different. You still need to accumulate some retirement assets - i.e. spend less than you make - and that applies whether you have volatile income sources or not. There's no way to know what your future income will be, but most families smooth their consumption (aka limit their spending) intuitively whether they realize it or not. When you are young and earn less, you borrow more (mortgages, student loans) and save less (this holds true even if you save a fixed percentage of your income throughout your working life). When you are middle aged you typically earn more, save more (again, even assuming you stick to the same percentage), and spend more (often on children). Later in pre-retirement you may have the same earnings but direct more of them to savings and debt repayment once the kids are out of the house. Then in retirement when earnings plummet you spend down your savings evenly (traditional model) and/or convert them to annuities (life-cycle model).

There's no perfect tool or ideal way to plan or predict future earnings or spending or savings when you are very young no matter which financial model you subscribe to. You might have kids, or more kids; inflation might spike, or not; there may be all sorts of market disruptions; you may lose your job or have a mediocre career with few big raises or get several major promotions and earn more than you ever imagined. You may start a business that flops or takes off. In any event it's tough to know what you'll want or need in retirement, and it's tough to get into the habit of saving "later" if you've never done it. Personally I think it's best to try to save a specific percentage of income throughout ones life. That way you are automatically saving more when you earn more and smoothing consumption somewhat.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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