Consumption Smoothing

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Consumption smoothing is an economic concept which refers to balancing out spending and saving to attain and maintain the highest possible living standard over the course of one's life. This idea is notable because of its difference in approach to common knowledge about preparing for retirement, in which individuals are encouraged to save a particular % of their income throughout their life. Some 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.

The concept of consumption smoothing is meant to avoid these twin risks, and has been popularized by the economist Laurence J. Kotlikoff, a professor of economics at Boston University and author of several books including The Coming Generational Storm.

According to the Wall Street Journal, "Kotlikoff and his colleagues have developed and market a tool called ESPlanner (www.ESPlanner.com) based on economists' theory of 'consumption smoothing'." Andrea Coombes reviewed this product in the Journal and analyzes it and other retirment calculators in her article at http://online.wsj.com/article/SB119473005429289158.html?mod=googlenews_wsj .