The authors dismiss such standbys of conventional wisdom as targeting 75–85 percent of pre-retirement income as retirement income, diversifying the investment portfolio, and fixing one’s spend-down rate in retirement. They urge a rigorous analysis of all the resources investors can tap to smooth their spending currently and through retirement.
Laurence J. Kotlikoff and Scott Burns present revolutionary thinking about financial planning based on economic theory in Spend ’til the End: Raising Your Living Standard in Today’s Economy and When You Retire. Eschewing the abundance of financial planning methods that focus on estimates of future financial needs, inflation, and hypothetical returns from selected asset allocations, the authors turn to Irving Fisher’s economic theory of consumption smoothing. Students of economics may have read Fisher’s Rate of Interest (1907) or The Purchasing Power of Money (1911). As the authors point out, Fisher (1867–1947) rigorously studied how much people should consume and how much they should save.
In this highly readable and informative book, Kotlikoff and Burns dismiss such standbys of conventional wisdom as targeting 75–85 percent of pre-retirement income as retirement income, diversifying the investment portfolio, and fixing one’s spend-down rate in retirement. Rejecting riches-to-rags and rags-to-riches scenarios, the authors urge a rigorous analysis of all the resources investors can tap to smooth their spending currently and through retirement. This analysis comprises ideas not only for deploying investments and savings but also for saving money in several areas, including children’s education, living in lower-cost parts of the country, owning a home, and paying down a mortgage. Their recommendations are all presented in practical terms and with good humor.
Private wealth advisers will do a double take at the authors’ investment advice. Kotlikoff and Burns upend the conventional wisdom regarding asset allocation based on age and the “safety” of certain assets, especially bonds. Believing that inflation can shoot up at any time, they sharply criticize a strategy of seeking safety by holding bonds with coupons denominated in nominal terms, particularly the long-term variety. The authors consider Treasury Inflation-Protected Securities (TIPS) the only safe asset despite their seemingly low current and projected returns. They affirm that owning TIPS constitutes a safety-first investment approach to retirement. Not surprisingly, they are concerned about long holding periods for stocks and the associated risk to value.
One chapter that requires the immediate attention of private wealth advisers is titled “Converting.” One of the shortest chapters in the book, it is also the timeliest because it is based on the newly available option for investors to convert an unlimited portion of their 401(k) plan, regular IRA, SEP (simplified employee pension), Keogh plan, and similar tax-deferred retirement plans into a Roth IRA. Although conversion would not defer taxes, it would more than likely result in a lower rate than would apply in the future, considering the top marginal rate under both the alternative minimum tax (28 percent) and the regular income tax schedule (35 percent). In terms of future tax savings, conversion would also result in living-standard gains for upper-middle- and upper-income workers—with the caveat of potential changes in tax policy.
Even those who do not read the book can run ESPlannerBASIC, a free, economics-based financial planning tool provided by Kotlikoff’s company, Economic Security Planning, Inc.1 In economics planning mode, the program recommends how much to spend each year on a discretionary basis to smooth one’s living standard over time without going into debt. In conventional planning mode, the program allows users to set a post-retirement discretionary spending target and will then smooth their pre-retirement living standard only.
When Kotlikoff and Burns were writing the first edition (published in 2008 as Spend ’til the End: The Revolutionary Guide to Raising Your Living Standard—Today and When You Retire), the economy was improving. The authors revised it last year in light of the global economic crisis, which they consider unmatched since the Great Depression. If the economy languishes for an extended period, their work will prove invaluable for its sensible and realistic approach to financial planning.
—J.J.M.