Few of us aim to starve in our 30s only to splurge in our golden years; or conversely, to overspend while young, only to dine on dog food in retirement.
Economic theory, says Boston University economist Laurence Kotlikoff, assumes that “people save in order to smooth their consumption over time, creating a relatively level living standard.” It’s akin to Joseph advising the Pharaoh to store the excess during seven years of bumper crops against seven years of famine.
Now, Prof. Kotlikoff has teamed up with University of Calgary’s School of Public Policy to offer free software that aims to give people some certainty around that process. Called ESPlannerBASIC Canada, the software is available free at canada.esplanner.com. Originally developed for the U.S., the School of Public Policy Canadianized it because “we see it as a valuable educational tool,” says director Jack Mintz.
Prof. Mintz contends people need to be engaged in their retirement decision making and “this encourages them to think about what they’re spending and what kind of savings they’re going to need.” The school also plans to use the sophisticated tool for policy analysis – to determine, for example, how a change in tax rates affects a family’s savings.
ESPlanner operates on the assumption that the traditional approach to financial planning is flawed.
Most financial planners will tell you that you should save enough money in your earning years to replace 75% to 85% of your pre-retirement income during retirement, Prof. Kotlikoff says. But that approach is simplistic, and not entirely disinterested.
Instead, Prof. Kotlikoff takes an economist’s approach to the question of how much salary you should be saving and spending throughout life, accounting for inputs such as whether you’re eligible for pensions (government and private); whether you own or rent your home; and whether you have kids and will pay for their education.
Other financial calculators might suggest you save 15% of your income per year, but ESPlanner adjusts for changes in tax rates, high-expenditure years (when the kids head off to uni, for example), and years when expenditures should be lower (the eventual launch of the children or the death of a spouse).
What it spits out, in the end, is a detailed plan telling you what you should save and spend year by year until age 100, depending on your age and stage of life.
ESPlanner might suggest a lower savings target in the years when you’re house-poor with kids underfoot, and a higher target during low-expenditure years, essentially smoothing the amount of discretionary income you have to spend over time.
When you change the inputs, the plan changes. That makes it easy to run “what-if” scenarios to see how retiring earlier (or later), having children, timing RRSP withdrawals, and other financial and lifestyle decisions affect your saving and spending plan, Prof. Kotlikoff explains.