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Two can live as cheaply as one? Or 1.7?

Submitted by bargainsarizona... on 21 November 2008 - 5:35pm

Hi, perhaps someone can help me understand this.

When I enter two can live as cheaply as 2.0 vs 1.7, the combined consumption is about $4000 higher (ballpark consumption is about $80k) with the 2.0 than it is with using 1.7; I would have thought our consumption would be higher with numbers less than 2.0 ... what am I missing in my thinking? All other input factors were held constant, including the monte carlo portfolio inputs. Thanks.

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Submitted by Laurence Kotlikoff on 23 November 2008 - 12:42am.
1

Hi, When you reduce economies of shared living by saying the 2 can live as cheaply as 2 rather than as 1.6 (the default value), you are telling the program that it needs to spend more when there are two people around relative to when there is only one person around. So, your recommended consumption in the short run (when you have more than one person at home) rises, but in the long run, when one spouse hits his/her maximum age of life, and the other continues to live (I'm assuming this is your situation), the program will recommend lower spending. best, Larry

Submitted by bargainsarizona... on 23 November 2008 - 9:56am.
2

Hi Larry K,

Thanks for your answer but I'm still confused. My wife and I are the same age, and I set our maximum age (death) at 100 for both of us. Thus, I guess I still don't understand why our consumption shows higher when the "two can live as cheaply" is set at 2.0 than at 1.6 or 1.7. I must still be missing something?????

Thanks, ... Larry F.

Submitted by Anonymous on 23 November 2008 - 11:05am.
3

Take a look at that Total Spending report. Changing the the 1.6 to 2.0 will impact life insurance needs too, which in turn changes the consumption. But perhaps that's not much help.

Dan

Submitted by Dick Munroe on 24 November 2008 - 9:34am.
4

fletchlt at verizon.net wrote:Hi Larry K,

Thanks for your answer but I'm still confused. My wife and I are the same age, and I set our maximum age (death) at 100 for both of us. Thus, I guess I still don't understand why our consumption shows higher when the "two can live as cheaply" is set at 2.0 than at 1.6 or 1.7. I must still be missing something?????

Thanks, ... Larry F.
Larry,

When you set 2 can live as cheaply as 2, what you are telling ESPlanner is that there is no benefit what-so-ever to sharing a house (car, groceries, etc). Therefore ESPlanner thinks you have to spend more money to maintain a particular living standard.

If you say that 2 can live as cheaply as 1.6 (the default) then ESPlanner will spend LESS money to maintain a given standard of living since, in effect, you have the benefit of an extra .4 person floating around your personal economy for which you are no longer paying.

Dan is right too. There will be lower insurance requirements, at the very least.

Best,

Dick Munroe

Submitted by bargainsarizona... on 24 November 2008 - 12:44pm.
5

munroe wrote:fletchlt at verizon.net wrote:Hi Larry K,

Thanks for your answer but I'm still confused. My wife and I are the same age, and I set our maximum age (death) at 100 for both of us. Thus, I guess I still don't understand why our consumption shows higher when the "two can live as cheaply" is set at 2.0 than at 1.6 or 1.7. I must still be missing something?????

Thanks, ... Larry F.
Larry,

When you set 2 can live as cheaply as 2, what you are telling ESPlanner is that there is no benefit what-so-ever to sharing a house (car, groceries, etc). Therefore ESPlanner thinks you have to spend more money to maintain a particular living standard.

If you say that 2 can live as cheaply as 1.6 (the default) then ESPlanner will spend LESS money to maintain a given standard of living since, in effect, you have the benefit of an extra .4 person floating around your personal economy for which you are no longer paying.

Dan is right too. There will be lower insurance requirements, at the very least.

Best,

Dick Munroe

Thanks for the reply, but I guess I'm still confused. ESPlanner is spending all available money (i.e. zero balance of all assets at age 100) so why is the consumption recommendation for 2.0 higher than consumption recommendation for 1.6 - all other input factors held constant? I still don't get it. And, there is zero insurance recommended so I don't think that is the issue.

Thanks.

Submitted by Anonymous on 24 November 2008 - 2:51pm.
6

Larry:

I guess when we are working with a program as complex as this where every number is related to every other number in the system, it's hard sometimes to track what is happening.

For example: when I create a very simple test case with a married couple, same age, a chunk of assets, I get Consumption at 63,443 at both 2 and 1.6. The "per person living standard" (see far right column) shows 31,721 and 39,652 respectively. So the per person living standard does go UP at 1.6 vs 2--as we would expect. The consumption, however, stays the same.

When I run my own case which is more complex, I get 50,165 and 49,325 (at 2 and 1.6 respectively). The corresponding per adult living standard is 25,082 and 30,828. So in my case, the consumption goes DOWN and the per-adult living standard goes UP. I see my savings recommendations changing (I am asked to save more at 1.6 than at 2 early on).

I don't offer all of this as an explanation of what you are seeing, but only to say that because ESPlanner is working out such complex mutual relations of so many numbers, it's not surprising that things are sometimes counterintutive. As you say, one would expect to see consumption go up. In my case, per adult living standard goes up in both cases. Does yours? This may be different from expecting household consumption to go up.

You see consumption go down (as I do) but I suspect you see per adult living standard go UP?

Dan

Submitted by bargainsarizona... on 24 November 2008 - 6:42pm.
7

Thanks to all who have responded.

Thanks all for the help. I'm going to be away for a few days and will "play" with my numbers later. I'll let you all know if I get comfortable with the results. I expect that I'm missing something and will let my brain soak on it for a few days in the absence of a computer. Thanks again.

.... Larry F.

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