Living Standard

Per-adult living standard is related to household discretionary spending. Whereas discretionary spending can be said to refer to the household's annual spending allowance (both adults and any children), the per-adult living standard (or just living standard) reduces this amount to the per-adult equivalent. Why is this important or interesting? Living standard is the amount needed for one person to have the equivalent standard of living as two should one pass away. When the planning model shows the two persons dying in different years, the survivor should expect, not the household discretionary spending amount, but rather the single, per-adult equivalent amount. This equivalent amount is not simply half the amount needed with both of the adults alive, but rather it reflects an economy of scale which defaults (see Settings and Assumptions) to a factor of 1.6 reflecting the assumption that two can live as cheaply as 1.6. To learn more about the math behind these settings, you can view this user manual page.

Living standard per adult is thus important because it indicates the dollar amount needed to insure each year. When MaxiFi recommends life insurance, it's this per-adult living standard that is what is being insured, not the household amount—after all, there will be just one person to provide for after the death, not two.

Living standard per adult is also important because it determines what the survivor's living standard will be in a model where one adult outlives the other. When a model reflects two adults dying in different years, changing the per-adult living standard factor will impact discretionary spending because more (or less) spending will be needed for the survivor. When both adults are scheduled to die in the same year per the model, the household discretionary spending will not be impacted by the per-adult living standard factor, though term life insurance calculations may or may not be impacted if the change causes more or less insurance to be needed.

Or we can describe it this way:

A factor of 2 means no sharing of resources (no economy of scale) and a factor of 1.6 means more sharing or increased economy of scale.

When two people are the same age (and no children to keep the calculation simple), when the "live as cheaply as" factor is changed we would see the following: The discretionary spending will stay the same, but the amount of per-adult living standard go up when there is more sharing (e.g. 1.6) and down when there is less sharing or no sharing (e.g. 2) with the household amount (discretionary spending) staying the same.

But when two people are not the same age, the cost to keep the survivor's per-adult living standard as it was with both alive is funded from lifetime household discretionary spending and thus the discretionary spending can go down when per-adult spending has gone up because of more sharing.

In short, household discretionary spending is the most practical number to focus on because it reflects household spending. Per-adult living standard is a bit more of a technical number that becomes important when looking at life insurance and survivor needs. Per adult living standard is the true bottom line because MaxiFi arranges your annual discretionary spending to keep your per-adult living standard constant over time to the maximum extent possible without letting you go into debt. Discretionary spending, on the other hand, includes both adults and any children in the household. When children are in the household, discretionary spending will not be smooth because of the cost of children while at the same time the per-adult living standard will be smooth.

Note also with regard to children and per-adult living standard:
For a single, childless adult the Per-Adult Living Standard and Household Discretionary Spending are identical. But for households with children and/or two adults, it gets a little more complicated.

First, children typically consume less than adults. MaxiFi assumes that children consume at 70% of the level of an adult (you can change this Adult Equivalence Factor under Settings and Assumptions).

Second, MaxiFi knows (from your inputs) the years in which your household size will be relatively large and the years when it will be relatively small. It also knows that achieving a given living standard per person is cheaper in years when your household's size is larger. The reason is that "two can live more cheaply than one." A married couple with two children doesn't need to pay four heating bills, it can buy in bulk, it can share the use of cars, etc. These are called economies of shared living.

MaxiFi accounts for economies of shared living by allocating more of your lifetime discretionary spending to years when your household size is small and you can't share expenses. The program assumes that 2 adults can live as cheaply as 1.6 adults (you can change this Economies of Shared Living assumption under Settings and Assumptions).

To summarize, MaxiFi arranges your annual discretionary spending to keep your Per-Adult Living Standard constant over time to the maximum extent possible without letting you go into debt. If you face cash constraints that require having a lower living standard for a while (as you pay off your mortgage, get the kids through college, etc.), the software will smooth your household's Per-Adult Living Standard over the period during which you are cash constrained and smooth it at higher levels in periods thereafter. If you are constrained over multiple periods, the program will show you having one living standard for a while, a higher one for a while, followed by a yet higher one for a while, and so on.