By Kerry Hannon, Next avenue
Laurence Kotlikoff, the provocative Boston University 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.” He offers counter-intuitive and surprising personal finance advice, whatever your age.
You will want to hear them.
I had to smile at some of Kotlikoff’s remarks, as they are often thought out, but rarely verbalized.
Take this nugget: “Marrying for money can seem rude,” he wrote. “But it’s one of the oldest financial practices. For most of us, love transcends money. But we humans have the ability to fall in love with a lot of people. And it There’s no shame in targeting your swoon on someone who can provide you with a higher standard of living. The bottom line: If you’re going shopping for a partner or spouse, you might as well shop for someone. one who earns much more than you.
Laurence Kotlikoff’s “Money Magic” Views
He is not a player. It’s not his style. It is serious. In fact, it’s exactly because Kotlikoff’s opinions are worth hearing that Next Avenue named him Influencer In Aging 2015 and why the site republished articles he wrote for “PBS NewsHour.”
In his new book – his 20th – Kotlikoff explains how to maximize Social Security benefits, why mortgages are “not your friend” and why he’s a fan of Treasury bills and Treasury bond funds whose yields are linked to inflation known as TIP. But perhaps his two most important tips: tie your financial plans to our longer lives, and don’t retire too soon.
Let’s just say that this former presidential candidate (that’s right, a write-up) is a bit of a rabbleurser when it comes to conventional financial advice. For example, he urges retirees to tap into their Individual Retirement Account (IRA) first and Social Security second 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 managing long-term careers, which can be summed up in three words: Don’t be complacent.
“Keep thinking about tomorrow,” he wrote. “Are you in the best possible career for the rest of your working days? Should you change? Is your current career in danger? In other words, keep your options open by keeping your eyes peeled. Set a date every few months to do a career checkup with a spouse, partner, relative or friend.”
I interviewed Kotlikoff to find out more. Strong points:
Kerry Hannon: Why did you write this book now?
Laurence Kotlikoff: This book is a wholesale attack on conventional financial planning, which is about 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 probability of running out of money.
There is urgency because baby boomers are retiring too soon. They arrive at retirement with too few assets and they take their social security far too early. I see all these massive errors. I think the first article I wrote after grad school was about insufficient savings. I have been dealing with this question for forty years.
You write that someone should plan their financial life based on their “maximum age” — their actuarial life expectancy. What is your thought behind it?
There is a financial risk in living too long after retiring too soon. We have to plan our life as much as possible because we could live that long. There is no getting around the fact that we cannot count on death in time.
We have to look at the worst financial scenario, that is to say the worst-case scenario. Financially speaking, it’s living up to your maximum age because you have to pay for yourself all the time.
The probability of reaching your maximum is so low, but you can’t ignore the future and the potential to live that long – that’s your planning horizon.
Tell me a bit about your secrets for maximize social security to get the best possible retirement benefits.
One thing is to know everything your benefits, because it’s use it or lose it with Social Security. If you don’t know them and apply too late, they’re just gone.
Be patient would be another top secret. For each year you delay applying between your full retirement age [66 to 67 depending on when you were born] and at age seventy, your Social Security benefits increase by eight percent.
These days, the Social Security administration is overpaying us at a staggering rate for our patience, because the benefit will increase dramatically if you wait to take it at [age] seventy.
It’s going to be about seventy-six percent higher after inflation than if you take it at sixty-two [the earliest year you’re allowed to begin claiming]. It’s a huge difference.
Being patient with your retirement benefit will also increase the benefit for your surviving spouse and children and ex-spouses, if they were married to you for ten years or more.
Another secret is to do not ask any question to the Social Security agents because half the time they will get the wrong answer or a misleading or incomplete answer.
You recommend people dip into their retirement accounts to delay Social Security retirement benefits. Why?
You have to pay taxes on the 401(k) or IRA one way or another, and one of the benefits of delaying that withdrawal was getting a lower tax bracket. But that’s not such a huge benefit anymore since the tax law changed in 2017.
People will say, “I want to leave my money in my 401(k) and take my social security early because I know the stock market is going to have a killer.”
But we can’t rely on stocks. Social Security gives a positive and real return which is really quite huge if you wait to take it.
The financial industry is trying to sell products and they can still earn commissions on the money that’s in the 401(k) or IRA.
You write that mortgages are “not your friends”. Why?
They are financially expensive. They are financial losers. The other thing is they are tax losers because the standard deduction has been increased so much and no one is really taking the itemized deduction [for mortgage interest] more.
Withdrawing money from your IRA, paying taxes on it, and paying off that mortgage over thirty years can make you a bundle if we’re talking about a big mortgage. It’s a way to get a safe and real return.
Yesou write about the magic of postponing retirement, and it’s one of the things I love to tell people the most. Can you explain?
Deciding when to retire is very complicated, as it affects how much you need to spend this year, how much you need to save or can spend on an ongoing basis, and how much you need to save until then. when you retire. This affects your taxes. This affects the amount your employer will contribute to your 401(k).
If you retire early, there will be less [retirement plan] contributions. This has an impact on your health insurance; you may need to purchase a font. There are all these interconnected issues.
It’s not an easy decision, but with each year you wait, you know you’re reducing the risk of running out of money. The earlier you retire, the more years you have to support yourself. I view retirement for most people as financial suicide. It’s a decision to take the longest vacation of your life.