This Economist Says Most Retirement Planning Is Wrong. Here’s How to Think About It.

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

The 70-year-old likes to stir things up. He ran for president as a write-in candidate in 2012 and 2016. His motivation was to publicize economic solutions to public-policy problems confronting the U.S., he says.

Kotlikoff grew up working in his father’s department store in Camden, N.J. The store went broke after the city declined, and his parents were left with almost 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 reached Kotlikoff by phone as he was driving near his Providence, R.I., home. At one point, our conversation was interrupted as he provided information for a Swiss visa; at another point, he had to talk his way through a balky parking gate with a parking attendant. An edited version of our conversation follows.

Barron’s: What’s your basic problem with financial planners?

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

You call for smoothing lifelong consumption. Aren’t financial planners doing exactly that by helping people build retirement portfolios?

Saving for retirement is the quintessential step in consumption smoothing, but you don’t want to undersave or oversave. You want to get this right.

Economists are looking at your lifetime resources and figuring what you should spend so you can keep on spending it. They’re not asking how much you’d like to spend in retirement, which is the first question most planners ask. My answer to that question is $1 billion a day. It’s 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 have your own money invested?

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

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

You missed out on part of the rebound?

I missed out on the rebound, staying out of the market for about half a year. And I’ve waded back in with two hedge funds that use arbitrage methods that are independent of how the market does.

Millions of Americans claim Social Security early, so that they can get back all the money they put in. Do they have it wrong?

Well, it’s kind of like reducing the money you spend on your homeowners’ insurance to make sure you won’t lose money if your house doesn’t burn down. It’s a twist of logic. So they do have it wrong.

If you’re 90 and you’re alive, you’re going to be very happy that you waited until 70 to start collecting a 76% higher check [than if you were 62]. Just like if your house burns down, you’re going to be very happy you bought that homeowner’s insurance. This needs to 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 that Americans make in retirement?

Dealing properly with their home. A lot of people haven’t downsized. And there are lots of places in the country that are much cheaper than others, where you can have just as good a lifestyle, maybe better.

Any other mistakes?

People retire too early. If you can’t maintain the living standard you’d like, I’d say it’s too early. Every year you delay retirement is a year less that you have to finance from savings. Many people who stop working early will end up being retired longer than they worked.

Do you ever plan to retire?

No. I’m having too much fun.

You grew up working in your dad’s department store in Camden. Did you learn anything that helps you now?

That small businesses, in particular, face lots of risk, and there’s a chance you’ll get hit with the unexpected. In this case, the city fell apart.

The biggest lesson was the need to prepare for old age by being diversified. My dad and his two brothers had every single penny in the store. When the store failed, he and my mom had their house, but that was it. So it fell to me and my siblings to take care of them.

Did their failure shape your reviews on retirement income?

Yeah. It has to be diversified. With my parents, a lot of what they earned had gone into their kids’ educations. So, our taking care of them was payback and a return on their investment.

What got you interested in economics?

Well, I was thinking about becoming a doctor, and was confronted with a frog that I had to kill and resuscitate repeatedly, so I quickly became an econ major.

I knew nothing about economics before I went to college. I didn’t know the whole field 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?

Once I started building my company 28 years ago, and was developing the software to prescribe financial medicine for households, I couldn’t screw around any longer with casual knowledge of Social Security. So, I was on the phone on a weekly basis with the top actuaries at Social Security asking them questions, because you really can’t figure anything out from their handbook.

We hear that money spent on education is well spent because it lifts lifetime earnings. True?

Investments in college, grad school, or even becoming a plumber are generally going to pay off if you’re making a sensible personal investment.

But 40% of the kids who start college don’t finish. And a lot of them borrow for the privilege of failing out of college. Nobody should really borrow for college. It’s far too risky.

Is paying off your mortgage early smart? I’ve had friends tell me they’re not doing it because they could earn more in the stock market.

Ask them, if they had paid off their mortgage, would they turn around and borrow money and put it in the stock market? They would never do it. So, it’s an irrational statement they’re 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 raise your taxes, rather than lower them. You want to convert in years when your tax bracket is relatively low compared with your future years.

If people are taking Social Security early, doing Roth conversions can kick up their Social Security benefits taxations and it could raise their Medicare premium. It’s a delicate calculation to figure out when and how much to convert, and it involves all these moving parts.

You have a book coming out that promises to give an economist’s secrets to more money, less risk, and a better life. Can you dish on these secrets?

Well, there are secrets for all stages of the life cycle. So, there are secrets like shack up 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 age in retirement. It’s chock-full of things that you wouldn’t expect.

Why did you run for president twice?

I thought it was really incumbent upon economists to convey to the public what we feel needs to be done on an entire swath of policy concerns.

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

Have you made personal financial mistakes that violated the rules of economics?

I rebuilt a vacation cottage one time out of emotional attachment, where it would have cost half as much to tear it down and start from scratch.

Everybody gets their emotions tangled up in their financial decisions.

Thank you, Laurence.

Write to us at [email protected]