If I had to sum up economics’ approach to financial planning in five words, it would be “It’s your living standard, stupid.” Economists, going back to Yale’s Irving Fischer in the 1920s, have been examining how people should organize their financial lives. Our prescriptions are clear and commonsensical, but very different from the advice being conveyed by conventional financial planning tools.

Economics’ approach to financial planning proceeds from physiology, in particular the fact that people get satiated. If I present a famished 10-year-old with 20 cupcakes, he will spend one nanosecond inhaling the first, two seconds sucking down the second, one minute masticating the third, 10 minutes digesting the fourth, and then suggest saving the rest for tomorrow. His reaction reflects satiation, what we economists call diminishing returns to consuming everything at once.

Diminishing returns is the reason we save, insure and diversify. We want to spread our cupcakes over all years of our lives—over good and bad times—including times when our risky investments score big and fail miserably. This spreading out of consumption over time and times is called consumption smoothing.

Every year thousands of students begin their graduate studies in economics at universities in the United States and around the world. Every year those first-year students learn about consumption smoothing and how to use a special mathematical technique called dynamic programming to solve consumption smoothing problems.

But economists are like doctors who specialize in research, but never see patients. No academic economist, with the exception of yours truly via my company’s software, has bothered trying to provide consumption smoothing and related tools to the public and the planning community. The reasons are two. First, economists think their job is studying economic behavior, not fixing it. Second, making dynamic programs for research is quite different from making them for commercial use, when they need to run in a second or two, not up to an hour.

Give Advice or Sell Products, Not Both

A third hurdle is that the planning community seems very stuck when it comes to considering alternative ways to frame advice. Traditional planning is geared toward product sales. It begins by setting old-age spending targets for clients that are typically unrealistically high and then suggesting the client invest in high-yield, but also high-risk as well as high-fee securities as the best means to raise the probability of meeting the target. These investments do deliver a higher probability of makings one’s target, but also a higher probability of losing one’s shirt. This downside risk is too often underplayed in the analyses.

This bait-and-switch technique is so ingrained in the industry and the curriculum of each of its certification programs that very few financial planners recognize it for what it is. By and large, they believe they are providing prudent advice. They also seem to miss the basic conflict of interest underlying their business, namely, one can’t give advice objectively if one’s income depends on the nature of that advice. Product sales or annual fees based on assets under management are remunerations that connect back to advice. Planners should give advice or sell products (including their money management), but not both. And the government should take steps to enforce that firewall. Doctors aren’t permitted to profit from the sale of specific drugs to their patients for good reason.

Good Economics Vs. Conventional Planning

Let me give 10 examples where good economics and conventional planning part company.

1. Traditional financial planning sets a retirement spending target based on nothing more than guesswork, which is almost guaranteed to deliver different and, most likely, very different living standards before and after retirement. This violates consumption smoothing.

2. Traditional planning tells households upon reaching retirement to disregard the spending target they’d been planning for up to retirement and instead spend 4 percent of their retirement assets each year in retirement. This is, to say the least, systematically inconsistent advice.

3. Traditional planning tells households to spend the same amount in retirement each year no matter what happens to the value of their assets. No economist anywhere on the planet would sanction such behavior or offer such advice. It’s, frankly, just nuts.

4. Traditional planning runs Monte Carlo simulations of achieving one’s target in all years of retirement, where these simulations assume that households spend the same amount year in and year out no matter what happens to their assets. This is simulating behavior that no one in his right mind would follow, making the simulations dangerously misleading.

5. Traditional planning tells the rich to invest more in the stock market and the poor more in bonds, when the opposite is proper economic advice. Why? Because the poor have a much higher floor to their living standards based on government support programs when measured relative to their resources than do the rich.

6. Traditional planning tells the elderly to avoid stocks and switch to bonds when economics says the opposite. Why? Because government support, via Social Security, Medicare and Medicaid, is like holding bonds, and as one spends down his assets, investing relatively more of one’s remaining assets in stocks is the only way to remain appropriately diversified across risky and safe securities.

7. Traditional planning maintains that stocks are safer in the long run when theory and evidence say the opposite. The longer one holds stock, the higher the chances of both dramatically beating bonds, but also losing everything.

8. Traditional planning treats cash as the safe asset, when TIPS (Treasury Inflation Protected Securities) are the only asset approaching something reasonably safe.

9. Traditional planning focuses on life expectancy when considering one’s planning horizon, when maximum age of life is the proper end date for one’s financial plan. Households aren’t insurance companies. They can’t pool over thousands of possible dates of death. They will die but once and it may be at their maximum age of life. And because they may make it that far, they have to plan for that event. Economics says that households that aren’t super risk averse will deal with lifespan uncertainty, not by counting on dying on time, but by planning to spend less as they age. This is consumption smoothing with a trend, something my company’s software, ESPlannerPRO, permits one to incorporate.

10. Traditional planning suggests that having more children necessarily raises desired life insurance holdings. Not true, as the cost of the extra children reduces the sustainable living standard that needs to be insured.

These specific problems drive economists slightly mad when they contemplate the advice the planning industry is providing the public. But the real pity is conventional planning doesn’t even have a way to get to the right answers because it’s using what amounts to horse and buggy technology. Let me make this clear.

All financial planning questions begin and end with one’s living standard. But conventional planning can’t answer any of them because conventional planning tools don’t calculate households’ sustainable living standard. As a result, conventional planning can’t answer the simplest question, such as “How much will my sustainable living standard per household member fall if I retire two years early?” Or, “What are the chances I’ll experience a living standard reduction of 40 percent or more if I continue to hold my current portfolio?” Or, “How much can I raise my living standard by upping my 401(k) contributing, waiting till 70 to collect Social Security, moving to Florida to avoid state taxes, and taking a higher-paying, but more stressful job?”

For my part, I’ve mostly given up on re-educating financial planners. I’m focused on putting consumption smoothing tools directly into the hands of the public. To that end, I’ve provided a simple web-based version of my company’s software—ESPlannerBASIC—for free use by the public (without login) at www.esplanner.com/basic. ESPlannerBASIC was ranked the No. 1 web planning tool by Money magazine, named “Best of the Web” by Forbes and written up in the New York Times and many other leading publications. I’ve also produced a variant of ESPlanner that does what I call “upside investing.” It builds a living standard floor for households and shows the upside to their living standard once risky assets are converted to safe assets.

My hope is that once the public starts doing consumption smoothing, they will force planners to do so as well. At that point, planners will realize that their true value added lies not in trying to beat the market, but in finding safe ways to raise their clients’ living standards. They will also realize that their job is not to recommend portfolios, but to show their clients the living standard level and risk associated with different portfolio choices and let their clients, who, unlike the planner, actually know their true risk preferences, decide.

To summarize, economics has an enormous amount to offer the financial planning industry. But the industry has ignored economics, providing millions of Americans with what I and other economists view as truly awful advice. The question is how long your industry will continue to do so and why.

Laurence Kotlikoff is a William Fairfield Warren Professor at Boston University, a professor of economics at Boston University, a fellow of the American Academy of Arts and Sciences, a fellow of the Econometric Society, a research associate of the National Bureau of Economic Research, president of Economic Security Planning Inc., a company specializing in financial planning software, a columnist for Bloomberg and Forbes, and a blogger for The Economist.