Sunday, July 26, 2009

Free Online Retirement Planning Software ESPlannerBasic

ESPlannerBASIC, a free online version of a powerful financial-planning service, has just been developed. Now that the investment dust and damage of the past 18 months is settling, this is an excellent time to take an honest look at your financial future. ESPlannerBASIC is financial planning software that's worth your time and effort.

What is ESPlannerBasic?
ESPlannerBASIC is economics-based software, calculating of how much you should spend, save, and insure each year to achieve a stable living standard -- now and through retirement.

ESPlannerBASIC is a financial tool that can help you raise your spending power and make lifestyle decisions. It shows the living-standard impacts of changing jobs, contributing to retirement accounts, having children, down-sizing your home, retiring early, waiting to collect Social Security, and much more.
The software incorporates all your economic resources as well as "off-the-top" expenditures on housing, taxes, college, etc. It then develops annual discretionary spending, saving, and life insurance recommendations.

The results are designed to help you develop a stable living standard without putting you into debt.
Even the free version of this tool is no lightweight. You will need to devote a good half an hour providing the information requested by the interactive tool. But it can be very helpful in telling you where you stand in ways that lots of other financial-planning tools do not. Developed by economist Laurence Kotlikoff at Boston University, ESPlannerBASIC is based on a philosophy of "consumer smoothing." It doesn't just tell you how much money you need for "retirement" (whatever that is, these days). It tells you how much you should spend and save every year, and shows you how lifestyle decisions will raise or lower your standard of living.

Consumption Smoothing
Consumption smoothing is an economic theory where the primary goal of financial planning is instead to avoid abrupt changes in one’s standard of living. Here is one graphical explanation:
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Consumption Smoothing approach is quite different from other theories of the retirement planning, when the individuals are encouraged to save a particular % of their income throughout their life. The critics of the consumption smoothing theory believe that this approach is flawed and typically leads to one of two outcomes: over-saving or over-spending. In over-saving, one lives as a pauper in youth to afford a high class retirement; in over-spending, one puts off saving for retirement to have a high standard of living while young, and is forced to postpone retirement and/or significantly reduce their standard of living when they can no longer work. However, the supporters claim that the theory particularly developed to address the optimal levels of the saving through the employment career.

Note that Consumption Smoothing, as an idea, has a long history in economics. The late Franco Modigliani won a Nobel for his work on life cycle saving theory in the 60s and it has developed quite a bit since. The idea has been easier to theorize about than put in practice until recent advances in computer power. Today, using dynamic programming, it is possible to enter a large amount of defining data and have a laptop prescribe what your lifetime consumption should be, year by year. 



How ESPlannerBasic Works?
You enter your current and projected salary, retirement age and savings, among other things. The site calculates your sustainable living standard and allows you to tinker with how much a job change, housing move or retirement-account contribution can raise or lower your living standard.

Then the program recommends annual amounts of discretionary spending, savings and life-insurance holdings. The program incorporates a lot of the nitty-gritty details other programs tend to leave out, such as federal and state taxes and future Social Security benefits.

Note that the process can be time-consuming—it might take you for the first time up to 45 minutes to fill out all the necessary information. The basic version stores your plan for only 24 hours, so every time you want to run the simulation, you must input the numbers.

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