Projecting an Aging Parent’s Finances
Thursday, July 12, 2018

In assisting my mother-in-law with her finances, one of the things I’ve done is to project how long her savings will last. I’m monitoring her income, spending and savings to ensure she is able to live comfortably now and still has enough to cover future potential living and care expenses. Since it may be of help to those of you who are either caring for or expect to assist an aging parent or are entering/in retirement, I’ll explain what I’m doing. (It can also work for those of you who want to create your own retirement budget.)

First, a brief background. One risk that most of us face is longevity. While we all desire to live for as many years as possible, longevity comes with the challenge of financing it. The longer we live, the more income we need. Longevity risk is therefore the chance of outliving one’s savings. It is a particular risk for those who lack enough in guaranteed income (Social Security, pensions, annuities, etc.) to cover their current and future expenses or who do not have enough wealth where longevity risk isn’t an issue.

Actuarial tables provide estimates of lifespan, but it is prudent to plan beyond those tables. While there is certainly an upper limit to how far beyond you should plan—Wikipedia lists fewer than 50 Americans who are currently 110 or older—an adequate margin of error should be factored in. Even living just five years longer than anticipated (e.g., 95 instead of 90) can put a strain on finances. At the current cutoff date on my projections, I allowed for enough of a cushion so that if we have to extend the forecasting out further, we can.

The other challenge is determining the amount of future expenditures. I used a 4.5% annual inflation rate for fixed expenses. This is at the upper end of the range that several retirement communities in the Chicago area say their annual price increases have been. What I haven’t factored in is the cost of additional care needed. The reason why is that I don’t know when it will be needed, the type of care required or how long it will be required. Knowing that this is an unknown, I’ve tested the projections to see what would happen under a much higher rate of spending to ensure that I’ve allowed for a reasonable margin of error.

I’m also tracking non-fixed expenses. I don’t know yet exactly what a “normal” level of spending will be for my mother-in-law as a widow, so I settled on a reasonable round number to use as an estimate. I’m tracking actual monthly spending to get a better baseline. Once I have a good baseline, I will adjust the projections accordingly. The good news is that I’ve overestimated discretionary spending so far.

To do all of this, I’m using a spreadsheet. Anyone who is comfortable doing simple calculations on a spreadsheet can create their own version. To assist you, I’ve created a sample spreadsheet in Google Docs. Personalize this based on your parents’ or your unique situation. (It’s also possible to create a similar strategy with a calculator and a sheet of paper, though doing so will require more time and effort.)

Here are the categories I use:

• Spending Projections: Forecasts of both fixed costs (e.g., housing) and discretionary expenditures (e.g., visits to the hairdressers, plays, etc.). I’ll update the housing costs each year whenever the retirement community increases its fees.

• Actual Discretionary and Total Spending: These are simply how much money is actually spent each month. I separate discretionary spending so that I can form a better baseline for it.

• Required Minimum Distributions (RMDs): Actual and projected withdrawals from IRA accounts. The IRS’ RMD worksheet can be used for estimating future-year withdrawals.

• Income: Social Security and pension income; I separate the two out because it’s easier for me to see the detail. I don’t use inflation-adjusted future levels; by doing so, this makes the projections more conservative. (I will update the amounts each year.) Interest and investment income could also be included here, though I’ve gone the conservative route and excluded it. Other regular sources of income should also be included.

• Taxes: These are an ongoing cost that need to be factored in. I’ve figured out my mother-in-law’s effective monthly tax rate and use it to give me a projected amount of aftertax income. I also estimate quarterly taxes and factor those into the calculations.

• Shortfall/Surplus: This is projected expenses less aftertax income. It’s the amount that must be funded from savings. I use it to determine how long savings will last.

• Account Balances: These are the actual account balances, updated monthly. I use these to determine how much my mother-in-law's actual wealth is changing relative to projections. All of the figures are from the end of the month and are taken from either statements or online account balances.

• Total and Projected Savings: These two columns show how actual savings (the sum of the actual account balances) compare to what I projected. These columns allow me to see how on-track my projections are. Each month, the projected number gets adjusted to start with the prior month’s actual savings balance so that it is constantly updated.

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Highlights from this month's AAII Journal

The Week Ahead

Dow Jones industrial average components Travelers Companies Inc. (TRV) and Microsoft Corp. (MSFT) will report earnings on Thursday. Joining them next week will be 33 other members of the S&P 500 index. Most of the companies reporting earnings next week will be mega-cap companies.

The week’s first economic reports will be May business inventories, the July Empire State Manufacturing Survey and June retail sales, all of which will be released Monday. Tuesday will feature the July housing market index and June industrial production and capacity. June housing starts and the Federal Open Market Committee’s (FOMC) periodic Beige Book will be released Wednesday. Thursday will feature the July Philadelphia Federal Reserve business outlook survey.

Federal Reserve Chair Jerome Powell will give his semi-annual testimony on monetary policy to a Senate committee on Tuesday and a House committee on Wednesday.

The Treasury Department will auction $13 billion of 10-year inflation-protected securities on Thursday.

What’s Trending on AAII
  1. For Bucket Portfolios, the Devil Is in the Details
  2. The Trinity Portfolio: Combining Diversification, Tilts and Trend-Following
  3. The Model Shadow Stock Portfolio’s Origins and Newest Stock
AAII Sentiment Survey

Optimism among individual investors about the short-term direction of the stock market rebounded, rising above its historical average. This week’s AAII Sentiment Survey also showed lower neutral sentiment and lower pessimism.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 15.2 percentage points to 43.1%. Optimism was last higher on June 13, 2018 (44.8%). The historical average is 38.5%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined by 5.1 percentage points to 27.8%. The decline pushed neutral sentiment below its historical average of 31.0%, breaking its 20-week streak above the average.

Bearish sentiment, expectations that stock prices will fall over the next six months, pulled back by 10.1 percentage points to 29.2%, pushing it below the historical average of 30.5%.

Many—but not all—individual investors anticipate continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment as well. While many approve of the Federal Reserve’s plan to continue gradually raising interest rates, some AAII members are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings growth and economic growth.

This week’s special question asked AAII members what they thought about the current dividend yield stocks are trading at. Three out of 10 respondents (30%) describe dividends as either being low or too low. Slightly more than 17% are satisfied with the current level of dividends, while 8% express a favorable opinion of the yields. About 10% of respondents either expect or want dividends to grow. Almost 5% of respondents say they do not consider dividends as part of their investing process.

Here is a sampling of the responses:

  • “Way too low. I strongly prefer fewer stock buybacks and more dividends to reward shareholders.”
  • “The yields are currently acceptable since they are still higher than the average interest paid on savings accounts.”
  • “Too low, but so are yields from bonds and cash accounts!”
  • “Satisfactory. Companies are continuing to increase their dividends at a solid pace.”
  • “Dividends will increase as a result of company performance, and the yield will increase.”


This week’s Sentiment Survey results:

Bullish: 43.1%, up 15.2 points
Neutral: 27.8%, down 5.1 points
Bearish: 29.2%, down 10.1 points

Historical averages:

Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!