Annual Suggestions Report

This report provides annual recommendations for saving, consumption, and life insurance. All amounts are in today’s dollars. This is perhaps the most important of all the reports since it shows annual recommended discretionary spending. This is our household bottom line and the number we are most interested in as we compare “what if’s.”

Annual saving is the increase over a year in the level of regular assets. It equals a household’s total income (the sum of its non-asset and asset income) less the sum of spending (on consumption, special expenditures, housing expenditures, insurance premiums, and funerals and bequests in excess of home equity used to cover those expenses), retirement account contributions, and taxes. Saving does not include increases in equity arising from paying off mortgages or other loans on your homes. Nor does it include contributions to retirement accounts. In other words, “saving” is not something you must set aside out of your final “discretionary spending” amount. Instead, it is that amount the program finds is available in addition to recommended consumption in your personal economy and is recommending you set aside in order to help smooth consumption now and in the future. Saving or dissaving is the “governor” on our household economy and allows us to keep a smooth living standard by adding to regular assets when we have extra and withdrawing from it when we don’t otherwise have enough to maintain the smooth living standard.

Consumption (also called household discretionary spending) refers to all expenditures by the household other than special expenditures, taxes, housing expenditures, life insurance premiums, bequests, Medicare Part B, and funerals--in other words, everything you see on the Total Spending Report plus taxes. This accounting is made clear in the Total Spending Report. Recommended annual consumption is calculated to provide a household with the highest sustainable living standard given its economic resources, tax payments, plans for special expenditures, funerals and bequests, retirement account contributions, housing expenditures, maximum indebtedness, and preferences about how you you’re your household’s living standard to change through time. Recommended consumption declines when children reach age 18 and leave the household and when a spouse/partner reaches his or her maximum age of death. But although household consumption declines when children leave the home (or goes up when they are born), the per-adult living standard will stay the same if it is economically possible without going into debt.

If smoothing the household’s living standard would require it to exceed its debt limit, recommended consumption will be reduced to keep the household from going into debt. Once the household is no longer cash constrained, recommended consumption increases.

Households can have multiple periods in which they reach their debt limit and are subject to cash constraints. In this case, the household’s living standard will rise through time as it moves from one cash constrained interval to another.

The household’s living standard can never be lower in future periods than in the present because the household, assuming it wants a smooth living standard, is always free to save more in the present so as to be able to spend more in the future. In so doing, the household lowers its current living standard and raises its future living standard, with the difference between the two being reduced.

Households can use whole life insurance policies as well as term insurance policies to achieve the recommended amounts of term life insurance. Whole life policies combine term insurance with a savings account. In paying whole life insurance premiums, purchasers of whole life policies are, in effect, purchasing a term insurance policy plus making a contribution to a saving account. The amount of term insurance contained in a whole life policy can be calculated by subtracting the face value of the policy from its cash value.

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