Asking the right retirement questions
Laurence Kotlikoff, an economics professor at Boston University and Social Security expert, was recently interviewed in Barron’s by Neil Temblin. Kotlifoff discussed retirement issues that he covers in a new book due in January. I plan to review the book in a future column.
Kotlikoff made the interesting observation that most financial planners do not ask the right question to prospective retirees. He believes it’s not very useful to ask them how much they would like to spend in retirement. After all, retirees can only spend what they have. Rather, Kotlikoff believes the objective should be for retirees to maximize their lifestyle based on the wealth they have amassed.
Consider the tendency of too many retirees to claim their Social Security benefits as soon as possible at age 62. Kotlikoff compared that approach to reducing the amount you spend on your homeowner insurance to make sure you won’t lose money if your house doesn’t burn down. It’s twisted logic.
He points out that if you are alive at 90 — and more people are living to that age and beyond — you will be happier if you had waited until age 70 to start collecting Social Security, as your benefit will be 76% higher than if you started taking it at 62. If your house burns down, you will be happy you bought good homeowner insurance. Waiting to apply for Social Security benefits solves one of the biggest financial risks we face: living too long and outliving our financial resources.
I have written before about the advantages of waiting until 70 to begin benefits, but not everyone can afford to do so, and retirees have to take into consideration their health status when they decide how long to wait to initiate benefits.
You can read a lot more about this and related issues in “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security” (Simon and Schuster), which Kotlikoff co-authored. The book is still current and is excellent.
In the Barron’s interview, Kotlikoff discussed other mistakes retirees make, such as retiring prematurely. He points out that some retirees will be retired longer than they have worked. Every year you delay retiring, he pointed out, is a year less that you have to finance from saving.
Another common mistake is not downsizing early enough. Kotlikoff suggested that many retirees who live in high-expense areas should consider moving to lower-cost areas where they can have just as good a lifestyle, perhaps better.
Temblin asked Kotlikoff if he believed money spent on education was well spent. Kotlikoff says that for 60% of those who attend college, it is a worthwhile investment, but 40% don’t finish. He argues that nobody should borrow to attend college because it is too risky.
I agree it is risky, and many should think seriously about borrowing. But for many, it is necessary — especially for those who must attend college for more than four years in order to receive a law or medical degree.
Temblin asked Kotlikoff how he is currently invested. He responded that he believes the stock market is currently overvalued, dependent on Federal Reserve support and its commitment to low interest rates. Kotlikoff indicated that half of his portfolio currently is in cash because of the tricky investment climate.
Kotlikoff suggested that retirees invest more in common stocks as you age.
I agree that retirees should not decrease the amount of equities in their portfolios during retirement. When I retired, I allocated 50% of my portfolio to equities, predominantly diversified low-cost index funds. I have made monthly withdrawals consistent with my lifestyle, rebalancing at least annually. Even after 26 years, because of the increase in the value of equities, my overall portfolio as well as the equities have increased in value.