Maximum Indebtedness

Hi, could you please explain how the maximum indebtedness value works or point me to an already answered question. Is this just a way to point out the shortfall in earnings that has to be made up or is it the loan you must take out and this begs the question of how the loan will be paid


Dan Royer's picture

Yes, you could also look at "borrowing constraint" or "liquidity constraint." In some situations a model will show the living standard or discretionary spending jumping to a higher level in the future. If this is borrowing constraint it means that there is money in the future that can't be used now--one would have to borrow against it in order to bring a living standard up to that future level. Indicating a max indebtedness or willingness to borrow is one way (perhaps not the best way) to address this short term lack of regular assets.

Imagine you get 5 million dollars when you are 75. At that point your living standard will go up but until then it's going to be lower than that age forward unless you borrow money against this future windfall. Such conditions are caused by an inheritance, postponing SS, lower taxes in the future when a ROTH kicks in etc. but only when there is not enough in Regular Assets to balance this future windfall.

Thank you for the answer. If I am not asking an already posted reply, could you say what is the relationship between the 3 items below as they appear in the first line of the annual suggestions. Does Savings (nn) mean that I am withdrawing more than I should and if not for this, the discretionary spending could have been higher?


Discretionary Spending 35,336
Insurance 315,840

Dan Royer's picture

In the Annual Suggestions report, you see Discretionary Spending and also Saving columns and Life Insurance columns for H and W. The Discretionary Spending is what is available in each year. The Saving (or dissaving) is what you should add to or withdraw from Regular Assets. Insurance is the amount needed to protect the survivor's per-adult living standard.

Just ignore the 2017 Suggestions report for now. It's confusing and simply comparing the program's suggestions to what you indicated you are saving in the current year.

It might be helpful to watch the first four videos in Learn More (see main menu links at top this page)

Thank you. Finally got it! In my case, with the negative savings, I need to work at least part-time and earn enough to offset the negative savings + any extra discretionary income I want.

Dan Royer's picture

Well, everyone is going to have negative saving (dissaving) somewhere in the model since that withdrawal is needed to ultimately liquidate the Regular Assets. We want to spend down those assets to $0 by the final year.

If you have far more assets in the future than you can get to now, you'll be borrowing constrained and you'll see that you hit $0 in Regular Assets before your final year. Thus your discretionary spending pattern will be a stair step up.

Is there a point in time prior to the terminal year where regular assets drop to 0? If that's in retirement, consider special withdrawals of amounts larger than the calculated smooth withdrawal. It has to be enough where regular assets are >0.

If successful, that may result in higher withdrawals in earlier years. There begins a series of trial and error to determine how to manipulate special withdrawals to keep regular assets >0.

If those 0 balance years occur prior to retirement, Dan's comments apply. Special withdrawals won't help unless you plan to liquidate your retirement funds in advance of retirement.

Indebtedness is a way to smooth over those gaps but you're borrowing against future income that might happen, or might not. In my view that's not a prudent approach unless you have a high certainty of inheriting Trump Tower in a few years.