ESPlanner’s Approach to Financial Planning

Traditional financial planning asks households to do all the hard work. It makes them set their own saving and life insurance targets. This puts them at risk. If they set their targets too low, they’ll be advised to undersave and underinsure. If they set their targets too high, they’ll be advised to oversave and overinsure. ESPlanner finds the right targets. It calculates a household’s highest sustainable living standard and the amount of saving and life insurance needed to maintain and protect that living standard through time.

ESPlanner was developed by two of the nation’s leading experts on saving and insurance— Dr. Jagadeesh Gokhale, former Senior Economic Advisor to the Federal Reserve Bank of Cleveland and now Senior Fellow at the Cato Institute, and Professor Laurence J. Kotlikoff of the Department of Economics at Boston University. Their approach is grounded in the life cycle model— the standard economic theory of saving and insurance. According to this theory, households have a fundamental goal in deciding how much to save and insure— spending as much as they can afford while avoiding major reductions in their living standards through time.

Maximizing and “smoothing” a household’s living standard isn’t easy. ESPlanner uses advanced mathematical techniques, including dynamic programming, to calculate the saving and life insurance needed to a) balance consuming in the present with consuming in the future and b) preserve the household’s living standard for survivors. By following ESPlanner’s annual recommendations, households save more when they can and less when they can’t. Their saving, not their life style, adjusts to their economic circumstances. And their life insurance holdings change with changes in their insurance needs.

ESPlanner takes into account a household’s economic resources, taxes, and Social Security retirement, survivor, and spousal benefits. It considers a household’s current and future demographic composition. It also considers its tax-deferred saving, current housing expenses, future housing plans, special expenditures, estate plans, capacity to borrow, life-style preferences, and a host of other key factors.

ESPlanner’s contingent planning feature recognizes that survivors may have special needs and different incomes. ESPlanner also lets users quickly vary its inputs, like the households’ ages of retirement, ages of collecting Social Security retirement benefits, and ages of withdrawing tax-deferred assets, to determine how these choices alter its maximum sustainable living standard.

Although its calculations are based on advanced mathematical tools, its interface is very user-friendly, and its recommendations are easy to follow. Furthermore, it’s easy to check that ESPlanner is smoothing and preserving households’ living standards to the extent possible given one’s assumptions.

Learn more about the economic approach (ESPlanner's approach) to financial planning from Kotlikoff's article published in the Journal of Financial Planning (11/08/2007). A manuscript version of the article is provided below.

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