Ben Mathew wrote: Mon Dec 16, 2024 1:11 pm
jmk wrote: Sun Dec 15, 2024 11:19 pm
Mathew, I've wondered why you've advised people to focus on the overall spending graph ("monthly spending during retirement") in setting risk levels, rather than the "general spending" graph of discretionary spending. In a system where the essential spending is covered in the most conservative way (by employment, pensions, safe bonds), isn't the real issue at hand on how much discretionary spending you can take with various risk levels etc?
Categorizing a particular expense or level of expenses as essential rather than discretionary is a choice. We can get the same expected spending by creating
(a) a low spending floor (few expenses categorized as essential) and a more conservative risk portfolio, or
(b) a high spending floor (more expenses categorized as essential) and a more aggressive risk portfolio
The difference is the shape of the spending distribution. To see and evaluate the difference between these two sets of outcomes, it's useful to see the overall spending graph. The discretionary spending graph hides the fact that we have a floor, and so does not tell the full story. Looking at the discretionary spending graphs helps to better understand the different pieces of spending, but I think it's best to start with the bigger picture and then drill down from there. There can also be cases where essential spending is insufficiently funded and so runs out of money, and the overall graph will show that as well.
I see your point about the overall graph being crucial to convey all the information, especially ensuring things are sufficiently funded. However, I still feel that the current options don't allow the full story from the spending part of the balance sheet. Yes, I can drill down to 'general" and "essential" graphs; but I also sometimes want want to see these spendings in the context of the "big picture".
May I suggest the additional option on the main Monthly Spending During Retirement card?
The landing card with its median spending line and bands would stay exactly as it is, of course. The sliding knob would now be Left-Off-Right.
Sliding the knob to the right would show the Income focus, just as it does now, with its colored income bars and ability to filter/highlight percentiles.
But sliding the knob to the left would now show a graph focusing on a Spending. The overall blue shapes would be identical at each percentile of course (the beauty of the model!). But instead of funding sources, we'd see colored bars for Essential Spending liabilities (or perhaps just a single congregate for all the "essential" spending). The "gap" between the overall bars and the essential spending(s) would represent the discretionary spending.
This would bring a certain symmetry to things suiting the actuarial model, which at any time focuses on either the income or spending lens of the balance sheet, depending on the context.