January 21, 2022

‘A Large-Scale Attack on Conventional Financial Planning’ – Some Provocative Views on Retirement, Social Security and Mortgages

Laurence Kotlikoff, Boston University’s provocative economics professor and social security expert, has written an excellent new book, “Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life.” In it, he offers counterintuitive and surprising tips for personal finance no matter your age.

You want to hear them.

I had to smile at some of what Kotlikoff lays out, because they are often thought of but seldom articulated.

Take this nugget: “Marrying for money may sound blunt,” he writes. “But it is one of the oldest financial practices. For most of us, love transcends money. But we humans have the ability to fall in love with many people. And there’s no shame in turning your swoon over someone who can provide you with a higher standard of living. The bottom line: If you’re shopping for a partner or spouse, you might as well shop for someone who earns a lot more than you.

Laurence Kotlikoff’s ‘Money Magic’ Views

He is not playful. That’s not his style. He’s serious. In fact, it’s precisely because Kotlikoff’s views are worth hearing that Next Avenue called him a 2015 Influencer in Aging and why the site has reissued pieces he wrote for “PBS NewsHour.”

In his new book — his twentieth — Kotlikoff takes a closer look at how to maximize Social Security benefits, why mortgages are “not your friend,” and why he’s a fan of government bonds and government bond funds whose returns are linked to inflation, known as TIPs. But perhaps two most important pieces of advice are: link your financial plans to our longer lives and don’t retire too early.

Plus: When should I appeal to social security? The dilemma and the strategy

Let’s just say that this one-time presidential candidate (it’s true; an inscription) is a bit of a troublemaker when it comes to conventional financial advice. For example, he urges retirees to tap their individual retirement account first, then Social Security, and cash out their IRAs to pay off their mortgages.

Who says that?!

And Kotlikoff had my full attention when I read his take on long-term career management, which can be summed up in three words: don’t be complacent.

“Keep thinking about tomorrow,” he writes. “Are you in the best possible career for the rest of your working days? Need to transfer? Is your current career in jeopardy? In other words, keep your options open by keeping your eyes peeled. Set a date every few months to do a career review with a spouse, partner, parent, or friend.

I interviewed Kotlikoff to find out more. Highlights:

Kerry Hannon: Why did you write this book now?

Laurence Kotlikoff: This book is a full-scale attack on conventional financial planning, centered on saving the wrong amount when you’re young, planning too little, and spending too much when you’re old.

Under these assumptions, if you have a conservative portfolio, you have a very high chance of running out of money.

We have urgency because the baby boomers are retiring too early. They retire with too little capital and withdraw their social security far too early. I see all these huge mistakes. I think the first paper I wrote after graduation was about the inadequacy of saving. I have been dealing with this matter for 40 years.

To see: The pension crisis: where do we stand?

You write that a person should plan his financial life for his “maximum age” – his actuarial life expectancy. What’s your thought behind it?

There is a financial risk of living too long after retiring too early. We have to plan our maximum life because we may live that long. There’s no getting around the fact that we can’t count on dying on time.

We have to look at the worst-case financial scenario, the catastrophic scenario. Financially, that is reaching your maximum age because you have to pay for yourself all the time.

The odds of hitting your max are so low, but you can’t ignore the future and the potential to live that long — that’s your planning horizon.

Tell me about your secrets to maximizing Social Security to get the biggest retirement benefits possible.

One thing is to know all of them your benefits, because it’s use or lose with social security. If you don’t know them, and you apply too late, they’re just gone.

Be patient would be another top secret. For each year that you postpone declaration between your full retirement age [66 to 67 depending on when you were born] and 70 years, your Social Security benefits increase by 8%.

Today, the Social Security Administration is overpaying us at an astonishing rate for being patient, because the benefit will increase dramatically if you wait to withdraw it. [age] 70.

It will be about 76% higher after inflation than if you put it at 62 . takes [the earliest year you’re allowed to begin claiming]. That’s a huge difference.

If you are patient with your retirement benefit, the benefit will also increase to: your surviving spouse and children and your ex-spouses, if they were married to you for 10 years or more.

Another secret is to not ask the Social Security reps any questions because half the time they have the wrong answer or a misleading or incomplete answer.

You recommend that people tap their retirement accounts to delay taking Social Security retirement benefits. Why?

You somehow have to pay taxes on the 401(k) or the IRA, and one of the benefits of deferring that withdrawal was to get a lower tax bracket. But that is no longer such a big advantage since the tax law changes in 2017.

People will say, ‘I want to leave my money in my 401(k) and withdraw my Social Security early because I know the stock market is going to kill me.’

But we cannot count on stocks. Social Security provides positive real returns that are really huge if you wait to take it.

The financial industry is trying to sell products and they can continue to earn fees for money that is in people’s 401(k) or the IRA.

You write that mortgages are ‘not your friend’. Why?

They are financially expensive. They are financial losers. The other thing is that they are tax losers because the standard deduction has been increased so much and no one really takes the itemized deduction [for mortgage interest] not anymore.

By taking money out of your IRA, paying taxes on it, and paying off that 30-year mortgage, you can make a bundle if we’re talking a large mortgage. It’s one way to get a safe, genuine return.

YesYou write about the magic of delayed retirement, and that’s one of my favorite things to tell people. Can you explain?

Choosing when to retire is very complicated because it affects how much you should spend this year, how much you should save or spend permanently, and how much you should save until you retire. It affects your taxes. It affects how much your employer will contribute to your 401(k).

If you retire early, there will be fewer of them [retirement plan] contributions. It has consequences for your health insurance; you may need to buy a policy. There are all these interrelated problems.

Do not miss: Help Your Teen Turn $500 Into Nearly $2 Million

It’s not an easy decision, but every year you wait, you know you’re reducing the risk of going over your money. The sooner you retire, the more years you have to finance yourself. I think of retirement as financial suicide for most people. It’s a decision to take the longest vacation of your life.

Kerry Hannon is the author of “Great Pajama Jobs: Your Complete Guide to Working From Home.” She has covered personal finance, retirement, and careers for the New York Times, Forbes, Money, US News & World Report, and USA Today, among others. She is the author of more than a dozen books, including “Never Too Old to Get Rich: The Entrepreneur’s Guide to Starting a Business Mid-Life.” Her website is kerryhannon.com.

This article is reprinted with permission from NextAvenue.org© 2022 Twin Cities Public Television, Inc. All rights reserved.

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