Smart money advice from a personal finance iconoclast

For 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.” In it, he offers surprising and counterintuitive personal finance advice, regardless of his age.

You will want to hear them.

I had to smile at some of Kotlikoff’s exposition because it is often thought about, but rarely verbalized.

Take this nugget: “Marrying for money may sound rude,” 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 is no shame in directing your swoon towards someone who can provide you with a level The bottom line: If you’re shopping for a partner or spouse, you might as well shop for someone who’s earning a lot more than you.”

Views of Laurence Kotlikoff’s ‘Money Magic’

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

In his new book, his 20th, Kotlikoff delves into how to maximize Social Security benefits, why mortgages are “not your friend,” and why he’s a fan of Treasuries and Treasury bond funds whose yields are linked to inflation known as TIP. But perhaps the two most important pieces of advice from him: Tie your financial plans to a longer life, and don’t retire too soon.

Let’s just say this former presidential candidate (that’s right, a brief) is a bit of a troublemaker when it comes to conventional financial advice. For example, it encourages retirees to use their Individual Retirement Account (IRA) first and then Social Security and withdraw their IRAs to pay their mortgages.

Who says that?!

And Kotlikoff caught my 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? Should you make a change? Is your current career in jeopardy? In other words, keep your options open by keeping your eyes open. 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. Reflexes:

Kerry Hannon: Why did you write this book now?

Laurence Kotlikoff: This book is an all-out attack on conventional financial planning, which is saving the wrong amount when you’re young, planning too little, and spending too much when you’re older.

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

We have an urgency because baby boomers are retiring too soon. They are retiring with too few assets and are collecting their Social Security too soon. I see all these massive errors. I think the first article I ever wrote out of grad school was about the insufficiency of saving. I have been concerned with this issue for forty years.

You write that someone should plan their financial life for their ‘maximum age’: their actuarial life expectancy. What is your thinking behind that??

There is a financial risk of living too long after retiring too soon. We have to plan our life to the maximum because we could live so long. There is no way around the fact that we cannot count on dying in time.

We have to look at the worst financial scenario, which is the catastrophic scenario. Financially speaking, that’s living to full age because you have to pay for yourself all the time.

The probability of maxing out is very low, but you can’t ignore the future and the potential of living that long – that’s your planning horizon.

Tell me a little about your secrets maximize social security to get the highest possible retirement benefits.

it’s one thing to know everyone your benefits, because it’s use it or lose it with Social Security. If you don’t know about them and apply too late, they are simply gone.

Being patient would be another top secret. For each year that you delay in claiming between your Full Retirement Age [66 to 67 depending on when you were born] and age seventy, your Social Security benefits increase by eight percent.

These days the Social Security Administration overpays us at a staggering rate for being patient because the benefit will increase dramatically if you wait to take it on [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]. That is a big difference.

Being patient with your retirement benefit will also increase the benefit for your surviving spouse and children, and your former spouses, if they were married to you for ten years or more.

another secret is not Ask any question to the Social Security representatives because half the time they will have an incorrect or misleading or incomplete answer.

You recommend that people use their retirement accounts to delay receiving Social Security retirement benefits. Why?

You have to pay taxes on your 401(k) or IRA one way or another, and one of the benefits of delaying that withdrawal was getting into a lower tax bracket. But that’s not much of an advantage anymore since the tax law changed in 2017.

People will say, ‘I want to put my money in my 401(k) and take my Social Security early because I know the stock market is going to make a killing.’

But we can’t count on stocks. Social Security is giving a real, positive return that is really huge if you wait to take it.

The financial industry is trying to sell products and they can continue to earn commissions on the money that is in a person’s 401(k) or IRA.

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

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

Taking money out of your IRA, paying taxes on it, and paying off that thirty-year mortgage can make a pretty penny for a big mortgage. It is a way to obtain a safe and real return.

YYou write about the magic of late retirement, and that’s one of my favorite things to tell people. You can explain?

Choosing when to retire is very complicated because 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 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 less [retirement plan] contributions. Affects your health insurance; you may have to go buy a policy. There are all these interconnected problems.

It’s not an easy decision, but every year you wait, you know you’re reducing the risk of running out of money. The earlier you retire, the more years you will have to self-finance. I think of retirement for most people as financial suicide. It is a decision to take the longest vacation of your life.