• Laurence Kotlikoff Boston University


Traditional financial planning is based on a fundamental rule of thumb: Aim to save enough for retirement to replace 80 per cent of your pre-retirement income with income from pensions and assets. Millions of Canadians follow this formula. Yet, there is no guarantee this approach is consistent with a savings plan that will allow them to experience their optimal standard of living — given their income — throughout their working lives. Consumption smoothing happens when a consumer projects her income and her non-discretionary expenses (such as mortgage payments) all the way up until the end of her life, and is able to determine her household discretionary spending power over time, to achieve the smoothest living standard path possible without going into debt. When consumption smoothing is calculated accurately, a person’s lifestyle should be roughly the same whether she is in her 30s with small children, in her 50s with kids in college, or in retirement, with adult children. Consumption smoothing allows that to happen. But while it is conceptually straightforward, consumption smoothing requires the use of advanced numerical techniques. Now, Canadian families have access to a powerful consumption-smoothing tool: ESPlannerBASIC Canada. This free, secure and confidential online tool will allow Canadian families to safely and securely enter their earnings and other financial resources and will calculate for them how much they can spend and how much they should save in order to maintain their lifestyle from now until they die, without going into debt. It will also calculate how much life insurance they should buy, to ensure that household living standards are not affected after a family member dies. Users can easily and instantly run “what-if” scenarios to see how retiring early (or later), changing jobs, adjusting retirement contributions, having children, moving homes, timing RRSP withdrawals, and other financial and lifestyle decisions would affect their sustainable living standards. ESPlannerBASIC Canada can also be used to understand how families should adjust their saving-and-spending behaviour when there are changes to tax rates and other fiscal policies. When used properly, ESPlannerBASIC Canada gives Canadian families the power to plan the lifestyle they want, based on what they can actually afford, without going into debt, or saving too little — or even too much — for retirement.