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Consumption smoothing

The Perils of Oversaving

The Number: Retirement Planning Gone Wrong

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.

New Financial Planning Software

Outspoken Thinker

Economist Laurence Kotlikoff wants financial planners to get new tools.


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.

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Savings Withdrawals As Tax Hikes Loom

By Arden Dale
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.

Raising Retiree Clients' Living Standards

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.

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