Smoothing Living Standard/Consumption

“Consumption Smoothing” is something we all try to do on a routine basis in our short-term economic lives. If we get paid once a month, we might try to budget to spend the same amount each week, i.e, we try to maintain an even or smooth living standard even though our income does not come in evenly each week. A school teacher might get paid nine months in the year, but he or she tries to smooth that income to create an even living standard through the twelve-month year.

Surprisingly, we rarely apply this same common sense approach to our long-term economic lives. If we have assets, labor earnings, asset income, future Social Security and pension benefits, retirement account withdrawals, mortgage payments, and other planned expenses, why don’t we smooth our living standards across years, not just weeks and months. And why not smooth it across all present and future assets and income and all those changes in “off-the-top” expenses so that discretionary spending per household (what's left over to spend after off-the-tops, our annual living standard) remains constant each year over the rest of our lives?

This is just what MaxiFi is programmed to do, smooth discretionary through the years from the current year through to the end of life. It will show you how much to save in years of surplus so that you can withdraw in other years in ways that will make your annual spending (living standard) smooth year to year regardless of whether income is high or low. It's what makes MaxiFi Planner different from conventional financial planning programs that ask you to set your desired spending. MaxiFi does the inverse: it discovers your available spending and shows you the annual, inflation-adjusted spending allowance for each year through the rest of your life.

When you view your MaxiFI reports you will want to look at your annual discretionary spending and see if it's smooth through the years. If it's not, you may be looking at a model that is liquidity constrained (aka, cash constrained, borrowing constrained).