Consumption smoothing

Economics-Based Planning
The Number: Retirement Planning Gone Wrong
Laurence J. Kotlikoff, 01.22.10, 12:50 PM ET

"What's your number?" This is the standard question posed by conventional financial planning which asks, in essence, "How much money do you need to retire?"

But it makes no sense to me or other economists I know. When asked this question, my immediate response is "$1 trillion." I figure that will get me by. But then I realize that hitting that target would be rather tough--actually, downright impossible.

On the other hand, if push came to shove, I could live on the street and panhandle, so maybe $0 is all I really need in retirement assets. But that's not right either. I don't want to splurge now and starve later. Nor do I want to starve now and splurge tomorrow. What I really want is a smooth living standard over time. That's what we economists call consumption smoothing.

By Humberto Cruz

I keep the family financial records current and organized. Still, it took me nearly two hours to find and enter the copious and detailed information requested by the financial planning software I just tried.

It was by far the most exhaustive and at times exhausting personal finance program I’ve used. But it was also the most thorough, earning my faith and respect.

The program I used is developed by Economic Security Planning, Inc., a company headed by Laurence J. Kotlikoff, professor of economics at Boston University.

Unlike other programs that merely ask a few quick questions, ESPlanner software doesn’t assume we will spend a set percentage of our pre-retirement income in retirement.

Economist Laurence Kotlikoff wants financial planners to get new tools.

By ELLEN UZELAC

For years, Boston University economics professor Larry Kotlikoff has advocated for consumption smoothing — essentially creating a sustainable living standard that “smooths” out over a person’s lifetime. He’s even created a software solution that gets the job done.

But the advisory community has overall ignored the economist’s top counsel: that economics-based planning replace traditional financial planning. That could be changing.

Special Report July 2, 2009

After watching their savings evaporate and their net worth plunge, many are giving up on retirement planning. But there are ways out of this mess without winning the lottery

By Peter Coy

The Wall Street Journal * JUNE 8, 2009

The Best Online Tools for Personal Finance
Consumers are paying closer attention to what they buy, how much they save, and where they invest. These resources can be a huge help. Even better, most of them are free.

By SHELLY BANJO

It’s tougher than ever to plan your finances. But it’s also easier than ever to find help on the cheap.

By Arden Dale
Of DOW JONES NEWSWIRES
1 June 2009

NEW YORK (Dow Jones)--Looming tax hikes make it important for retirees who write their own paychecks to rethink the order in which they tap savings accounts.

Conventional wisdom in many quarters is that it is best to use taxable accounts first and let tax-deferred savings compound.

But there are always exceptions, and now "we have to plan knowing tax rates are going up," says Laurence J. Kotlikoff, a professor of economics at Boston University.

May 1, 2009
By Laurence J. Kotlikoff

The stock market may be a wild and crazy ride, but it's generally (about 70 percent of the time) an uphill one. The trouble is, market averages lie. Where one ends up capital accumulation-wise depends not just on the market, but on the extent of one's spending along the way. Seems obvious, but too often spending is ignored in discussions of investment performance. For example, when we talk about market returns ­ “the S&P 500 did this-and-that over this-and-that period” ­ we assume every penny of income was reinvested over time.

April 17, 2009

Are You Saving Too Much for Retirement? ESPlanner Basic May Have Answers

A new free online tool performs some extremely complex calculations to make financial planning simpler for small investors.

ESPlannerBasic, set to be officially launched later this week, takes a different approach than many competing online tools. Rather than calculating your odds of meeting your spending goals in retirement, the tool is intended to help you maintain a stable standard of living throughout your life. It’s available at www.esplanner.com/basic.

Sunday, May 3, 2009

by Jay Fitzgerald

Maybe there’s a different way to approach retirement - and a Boston University economist thinks he’s found it.

After the beating 401(k)s and IRA accounts took last year, Laurence Kotlikoff said that maybe Americans have finally realized they can’t count on saving enough money before retirement.

As a result, his company, Economic Security Planner, last month launched a free online software product that he says will help consumers analyze and prioritize their current income and spending patterns.

The goal for consumers should be to “smooth out their living standards,” both before and after retirement, so that there’s no jolt during a transition from work to the Golden Years, he said.

The plan sounds an awful lot like standard financial planning.

Are You Saving Enough?

Boston College’s Center for Retirement Research recently found that about 64% of Americans aren’t saving enough to maintain their standard of living in retirement. Some ways to tell if you’re at risk:
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