Most retirement plans are wrong, says economist Laurence Kotlikoff. Here’s how to think about it.


Economist Laurence Kotlikoff thinks most financial planners go wrong. Rather than helping clients build wealth for a retirement income goal, the Boston University professor says the focus should be on smoothing out and protecting spending throughout life. of a person, then on saving to achieve that goal.

Kotlikoff advises most retirees to wait as long as possible to claim Social Security in order to get the greatest possible benefit, even if it means spending their savings. And he says retirees should consider using retirement accounts to pay off their mortgages because it’s a safe and guaranteed return on their money. Kotlikoff founded a company 28 years ago to put his ideas into action. It sells software for professional planners and households that use an economist’s perspective to determine savings and spending. He sells separate software on how to maximize Social Security benefits.

The 70-year-old likes to shake things up. He ran for president as a written candidate in 2012 and 2016. His motivation was to publicize economic solutions to the public policy problems facing the United States, he says.

Kotlikoff grew up working in his father’s department store in Camden, NJ. The store went bankrupt after the town fell, and his parents were left with next to nothing. He went to college with the idea of ​​becoming a doctor, but switched to economics. He has published research on a variety of topics, from carbon taxation to healthcare reform to generational economics.

We contacted Kotlikoff by phone while driving near his home in Providence, RI. At one point our conversation was interrupted because he provided information for a Swiss visa; at another point, he had to navigate his way through an unstable parking barrier with a parking attendant. A modified version of our conversation follows.

Barron: What is your basic problem with financial planners?

Laurence Kotlikoff: The purpose of our life is not to accumulate wealth so that people can charge us fees on our assets. It’s about having the best lifestyle possible, given our resources, so that we don’t end up living on the streets if the market collapses, if the house burns down, or if we live to be 100 years old.

You are calling for the smoothing of consumption throughout life. Aren’t financial planners doing just that by helping people build retirement portfolios?

Saving for retirement is the go-to step in smoothing consumption, but you don’t want to under-save or over-save. You want to do it right.

Economists look at the resources in your life and determine what you should be spending so that you can keep spending it. They don’t ask how much you would like to spend in retirement, which is the first question most planners ask themselves. My answer to this question is $ 1 billion a day. This is a ridiculous question.

You can only spend what you have. Once you know what you have, you know what you can spend.

How do you invest your own money?

It seems to me that the stock market is overvalued and dependent on support from the Federal Reserve and its commitment to low interest rates. And I consider that to be an unbearable policy, so I consider the stock market to be very risky. About half of my assets are in cash because I think it’s a very tricky investment climate.

I pulled out of the market when Covid hit, and the market fell, and I was very proud of myself. But I didn’t expect the Fed to come back and support the corporate bond market to the extent that it has.

Did you miss part of the rebound?

I missed the rebound, staying out of the market for about six months. And I came back with two hedge funds that use market-independent arbitrage methods.

Barron’s Retreat: Q&A Series

Millions of Americans are asking for Social Security early, so they can get back all the money they’ve invested. Are they wrong?

Well, it’s kind of like cutting back on the money you spend on home insurance to make sure you don’t lose money if your house doesn’t burn down. It is a trick of logic. So they are wrong.

If you’re 90 and alive, you’ll be very happy you waited until 70 to start collecting a 76% higher check. [than if you were 62]. Just like if your house is on fire, you will be very happy that you purchased this home insurance. This should be understood as buying insurance against one of the biggest financial risks we face, which is living too long and outliving our money.

What are some other mistakes Americans make in retirement?

Take good care of their home. A lot of people haven’t downsized. And there are a lot of places in the country that are much cheaper than others, where you can have an equally good, maybe better, lifestyle.

Other mistakes?

People retire too early. If you can’t maintain the standard of living you want, I would say it’s too early. Every year you delay retirement, that’s one less year you have to fund through savings. Many people who stop working early will end up retired longer than they worked.

Are you already planning to retire?

No, I’m having too much fun.

You grew up working in your father’s department store in Camden. Did you learn anything that is helping you now?

That small businesses, in particular, face many risks, and you may be faced with the unexpected. In this case, the city collapsed.

The biggest lesson was the need to prepare for old age by diversifying. My dad and his two brothers had every penny in the store. When the store went bankrupt, he and my mom had their house, but that was it. So it’s up to me and my brothers and sisters to take care of them.

Has their failure shaped your views on retirement income?

Yes. It must be diverse. With my parents, a lot of what they earned went into their children’s education. So taking care of them was a return on investment and a return on investment.

What interested you in economics?

Well, I was thinking of becoming a doctor, and I was confronted with a frog that I had to kill and resuscitate several times, so I quickly became a major in economics.

I didn’t know anything about economics until I went to college. I did not know that the whole area existed. I took a class with a fantastic teacher, and he turned me on, and I was on my way.

How did you become an expert in social security?

The purpose of our life is not to accumulate wealth so that people can charge us fees on our assets.

– Laurence Kotlikoff

Once I started building my business 28 years ago and developing the software to prescribe household financial medicine, I couldn’t do anything stupid with the occasional social security knowledge. So, I was on the phone every week with the top Social Security actuaries asking them questions because you really can’t understand anything from their handbook.

We hear that money spent on education is well spent because it increases income for life. True?

Investments in college, graduate school, or even to become a plumber will usually pay off if you make a wise personal investment.

But 40% of kids who start college don’t finish. And many of them borrow for the privilege of failing in college. No one should really borrow for college. It is far too risky.

Is prepaying your mortgage smart? Friends have told me they don’t because they might earn more on the stock market.

Ask them, if they had paid off their mortgage, would they turn around, borrow money, and put it on the stock market? They never would. So it is an irrational statement that they are making to you.

Do Roth IRA Conversions Make Sense?

They do and they don’t. You have to be careful if you convert too much, you may actually be increasing your taxes rather than reducing them. You want to convert years where your tax bracket is relatively low compared to your future years.

If people take Social Security early, doing Roth conversions can increase their taxes on Social Security benefits and it could increase their Medicare premium. It’s a tricky math to know when and how much to convert, and it involves all of those moving parts.

You have a book that promises to give away an economist’s secrets for more money, less risk, and a better life. Can you unveil these secrets?

Well, there are secrets for all stages of the life cycle. So there are secrets like a cabin with mom to save on housing costs. Don’t borrow for college. Take money from your IRA to pay off your mortgage. Invest more in stocks as you get older in retirement. It’s full of things you don’t expect.

Why have you run for president twice?

I thought it really was up to economists to convey to the public what we think needs to be done about a whole host of political concerns.

So what I did was talk to health economists before writing my platform on how to reform the health system, and talk to top public finance economists on how to fix it. our tax system. I didn’t think I was going to win.

Have you made any personal financial mistakes that broke the rules of the economy?

I rebuilt a vacation cottage once out of emotional attachment, where it would have cost half the cost to tear it down and start over.

Everyone gets their emotions tangled up in their financial decisions.

Thanks Laurence.

[Read Lawrence’s defense of his positions in this interview: An Economist Defends His Views on Delaying Social Security and Paying Off Mortgages]

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