Ep. 131 – Laurence Kotlikoff – Money Magic

Would you like to have sustainable living standards after your retirement? Maybe it is high time you started social security planning.

There are many things you should be thinking about when planning your retirement like; when you retire, the risk of the stock market, spending too much on housing later in life, and much more. Understanding social security and retirement planning from an economic point of view can help you raise your living standards without working more.

In this episode of the Secure Your Retirement podcast, we have Laurence Kotlikoff, a professor of economics at Boston University, author, and has got a wealth of knowledge on social security/retirement planning. Listen in to learn the difference between social security and retirement planning and why the former should be taken after the latter.

In this episode, find out:

• How Covid is going to shift in the coming months and why you should avoid the forthcoming inflation.
• How Lawrence got into social security planning and the products he offers on the same subject.
• Alternative paths to take to ensure you suspend your retirement payout until 70 years to get more value.
• Understanding the existing social security benefits and all that is attached to them.
• Things to be very careful about when it comes to your social security money.
• Why you should take your social security money second after your retirement money to adjust for risk.
• How to use your non-taxable money to pay off your debts and make retirement easier.
• Money Magic book – understanding the economic-financial planning for sustainable living standards plus other things.  
• How to figure out ways to raise your living standards without working more or longer.  

Tweetable Quotes:

• “Probably about 75% of people should wait until 70 to take their retirement and only about 6% are doing that.”– Laurence Kotlikoff
• “You could end up retired longer than you worked, so be very careful about when you retire.”– Laurence Kotlikoff

Get in Touch with Lawrence:

• Website: https://kotlikoff.net/

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon Stancil:	Welcome everyone to our Monday podcast. Every Monday, Murs and I, our goal is to bring folks to you that we think are individuals that can help you as you are planning for and living throughout retirement. And I think today we have a very, very interesting guest. He has his PhD in economics from Harvard. He’s written a multiple of books and has as different things to help people when they’re planning for and living throughout retirement. And his name is Larry Kotlikoff, if I said it correctly.
Larry Kotlikoff:	You did.
Radon Stancil:	But thank you very much for coming on the show with us today.
Larry Kotlikoff:	Yeah, my pleasure. Thanks for having me.
Radon Stancil:	Good. Now you said you’re in Switzerland right now. What are you doing in Switzerland?
Larry Kotlikoff:	Well, I’m working with some co-authors on carbon taxation, which is we’re putting together large models of lots of regions and lots of generations. So our current model’s got, I think, three million, it goes for about 3000 year and has about three million equations and three million unknowns. So this is kind of what you need to put together to get a handle on what carbon tax policy we should adopt. And the idea here is pretty cool. You can get a form win-win for all generations in all regions, by just spreading the gains, the people that are going to gain from carbon taxation, like people in India, because they’re not going to be suffering the damage. So you just get them to pay and on balance, they’re better off and you take their payments and you distribute those to people who would otherwise be hurt by the carbon tax. So this is just standard economic fair in terms of taking an economic problem and making it into something beneficial to everybody.
Murs Tariq:	Gotcha. Yeah. And you get to be in Switzerland as well to do it. So it’s always nice to be able to travel and do what you, I assume, love doing. We love having economists, or people that have backgrounds in economics on our show and especially a professor as well. So obviously there’s a lot that’s backing up everything that you’re going to say here. And I think we could take this episode in so many different directions. I know that you have authored a couple books around social security, around planning in general. We were talking before we started recording, so the majority of the people that are listening to our podcast are people that are close to, or already in retirement and they’re looking for, how do we navigate this, this aspect of we’ve been earning all of our lives, and now we have to transition into spending and that’s going to last for the next 30 some odd years.
	And so there’s a lot of things that go into that. We try to teach as much as we can on it. But before we get into, I think we’ll have a conversation around social security and proper planning. But before we get into that, you being very well versed in the economics, I’d like to just get your opinion on what’s going on today in the very macro perspective, and what your thoughts are, as far as everything that we’re dealing with, particularly in the US with the coronavirus and everything. We’ve had economists on from time to time and they give us their perspective. So if you have a two or three minute spiel, we’d love to hear it.
Larry Kotlikoff:	Yeah. I think we’re likely to see the virus, we’re getting close to herd immunity, so we’re likely to, unless we get another bad mutant, we’re likely to hopefully see the end of a coronavirus, COVID, in a few months. The numbers could come down rapidly like they did before, and hopefully not come back up. But then we have other things going on. We still have this trade war going on, China. China’s getting very aggressive. We have the Democrats, Republicans locked in a battle over whether they’re going to endorse the debt while the debt sailing to go up. That could turn ugly. We have this issue of whether we’re going to actually invest in infrastructure in our country or not.
	So there’s a bunch going on with politics, but then we’ve got inflation taking off. And a lot of people think it’s due to bottlenecks. I’m a little bit more concerned about this getting into the heads of the minds of people that set prices. I have a software company, we do financial planning software when, our tool’s MaxiFi Planner at MaxiFi.com, we just took a price increase. We hadn’t done that in five years. And I had to do it because price are going up and I have to pay my workers more money. And I’m thinking, gee, I’m unlike other retailers. Yes, I’m a professor, but on the side of this company. And the reason I haven’t raised prices in the past is I was worried that my customers would be angry. But if I see everybody else raising prices, now I don’t have to worry about that because I know my customers are going to understand why I did this. So that psychology can lead to multiple rounds of price increases and we can have price inflation takeoff, and it can have a will of its own, a mind of its own.
	It’s not like the government has control over a hundred million different companies who are setting prices. We just don’t. So that’s what I’m really worried about, that inflation is really going to take off and that’s going to hurt a lot of people who have invested in bonds. So I’d be very careful. So here’s one of the things I would tell your 50 year olds, I would stay away from the long term bonds. I think inflation is coming, if not right away through time, because our government is so broke, we have so many liabilities on the books, not just the official debt, but so much more off the books, like social security, Medicare, defense spending, that we’re going to be forced to print money. And I think we are already printing money to pay for the bills. And when countries do that, they end up with very high price increases, if not hyperinflation. So I would stay clear of things that are inflation sensitive.
Radon Stancil:	Yeah, yeah. Interestingly, as we were talking a little bit just briefly and I’d gotten a couple of emails about you, you do have, as you said, the financial planning software. You’ve got to Maximize My Social Security, which I’m assuming is a software as well that helps with that. So it sounds like to me that you kind of work in the area of folks that are close to or already in retirement, like we do, like our listeners are. Could you just give us a little bit of a synopsis of maybe your background and how you got into that particular part, what interested you in building a software program or into social security and all those kind of things?
Larry Kotlikoff:	Yeah, it’s a really good question. In grad school I worked on social security’s impact on the economy through time. So that would mean into think about dynamic issues like carbon taxation as a dynamic question. But then I also started looking at, as part of my thesis work, on whether people were saving adequately. And of course, to think about that question, you had have to put together a model of what people should be saving so you can compare with what they are saving. Same thing with life insurance. Are they insuring enough? So through time as I was improving with co-authors the software I was using for academic studies that occurred to me that gee, I could take the software I was writing in Fortran, in an ancient language, and convert this into a product for the public that the public could use to figure out could they afford to retire early, should they downsize their home, how much will it gain them, how much should they be saving, how much should they be spending to have a smooth living standard?
	What if they move, switch jobs, switch careers, will that pay off? So there’s a zillion things that the software that we’ve developed, and we started 28 years ago developing the software through my company, can do. But I also realize that a lot of people, not everybody wants to use software, not everybody’s up for that. So I just wrote a book. I wrote one book called with the co-authors called, Get What’s Yours about social security. And was a New York Times best seller for 11 months or so, and a number one best seller for many days. And then I just wrote another book that I’m just going to brag about for a second.
	It’s called Money Magic. This is the galley, it’s not out yet. It’s coming out January 4th, you can pre-order it. But anyway, it’s called Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life. So I took everything I learned from running our software and put it into that book for people that don’t want to run software. And most people don’t, they just want to get the answer. So I try to present enough cases for people to see, “Hey, I fit into this situation, this is what I should do.” But there’s lots of ways to safely raise your living standard. There’s when to take social security. One of the big things is being patient about taking social security, because you can get a 76% higher annual benefit if you wait until 70 versus taking a retirement benefit at 62 timing. Timing, when you should take your retirement account withdrawal, you can save a lot of taxes. Downsizing your home, making sure you don’t have your equity trapped in your home.
	All the things that you guys are focused on the program is kind of quantifying. Should I leave my friends, my neighbors of 20 years, move to Arizona, which is maybe like one ninth as expensive as Boston per square foot and downsize, go from a four bedroom to a two bedroom, and have all that extra money to fly my kids to Arizona for the holidays. I’m not seeing them anyway all the time or I can fly to see them. Is it really worth it? And how often do I see my neighbors? I can fly them for a party for weekends too. So that’s the kind of thing that we’re trying to do with change people’s perception, open their minds to options.
Murs Tariq:	Gotcha. Yeah. And you mentioned the social security aspect of it and that’s always, I had a conversation with someone today about how social security works, when do I take it, what’s the most optimal time to take it. And I’m going to ask you, it’s not as cut and dry as waiting until 70, right? Obviously if make it to 70, that is going to be the best or the highest payout that you’re going to receive from social security. But in the software and in your brain, in the book, what are some of the other things that we’re looking at when it could come to, I guess, optimizing, but also answering the question of when is the best time for me to start the income from social security?
Larry Kotlikoff:	Probably about 75% of people should wait till 70 to take their retirement benefit. Only about 6% are doing that. Now a lot of people were forced to take the benefit early because is they just have no other money to live on. But if you can beg, borrow, or steal to be able to wait to get this much higher number. For example, you can borrow money maybe from your kids and say, I’ll pay you back out of my social security check, or take your kids into your house and have them pay the housing expenses. There’s things you can do, even if you’re retired. And if you’ve taken your social security early, by the way, let’s say you took your social security at 62 and you’re now you’re at full retirement age and you could afford to suspend it until 70, you’ll get a 8% per year higher value, higher number when you restart it.
	Who should not take social security early? Well, if you know for sure you’re going to die at 80, you don’t want to be waiting until 70 to take your social security, except that if you have a spouse or an ex-spouse who’s going to be able to collect a widow’s benefit or divorce widow benefit on your record, you may want to wait till 70 because the benefits to them may be more important than the benefits to you. Now you may also have disabled children, or child. They can’t start getting a benefit on your record until you start collecting your own retirement benefit. And you might have a spouse taking care of your disabled child. They can get what’s called a Child-In-Care Spousal Benefit. So some people may want to go early and the software would tell them what’s best to activate benefits for their dependents.
	But then you’ve got people that are widowed, who are coming, let’s say who are 62 and thinking, should I take my benefit now or wait? Well, they’ve got two benefits that they can take if they’re widowed. If they were married for 10 years in their widowed, their ex has died, they can get a divorce widow benefit. There’s like 13 different benefit. People need to know about that’s part of what in the book and this what the software’s covering. So anyway, here you are 62, you can take your widow benefit, you can take your retirement benefit. You want to take one of the two, but you don’t want to take both of them at the same time, because that will just cost you money and it could cost you a ton of money.
	So it turns out you want to take, I can’t give you a general rule of thumb, but for some people it’s optional to take the retirement benefit first and then take the widow’s benefit either at retirement age or before. And for other people, it’s better to take their widow’s benefit first right away. And you can start that actually at 60 and wait till 70 to take their retirement benefit. So there’s a lot of money on the table here. We’re talking about could be $100,000, $150,000 at play here just for those people who got it right. So it’s not one size fits all with social security. And then you’ve got to also think about these decisions about social security as being interconnected with retirement account, things like a Roth conversion. If I’m thinking about, maybe I’m 63, I’ve taken my social security and now I should I Roth convert, take my traditional IRA and turn it into a Roth.
	Well, that might kick up my social security benefit taxation. It may also kick up my Medicare part B premiums because when I hit 65 and start taking Medicare, those premiums are going to be connected to my taxable income back two years earlier. That’s the way it works. You guys probably know about the provisions. So all these things, a lot of the stuff needs to be calculated by a computer, or at least we need to know in our brain the general story so we can figure out generally what to do.
Radon Stancil:	Yeah, I was going to say, I think what you’re doing is you’re doing a really nice job of illustrating exactly what we teach people. And that is, there’s not a real easy answer to this. It does take what you said, it takes a good software program and an individualized position to say, this is what I need to do. Doing that on paper or on a gut feeling is probably not going to be the answer that you really need. I do have a question. Oh, go ahead, I’m sorry.
Larry Kotlikoff:	Yeah, I agree with you. What your brother did is not what you should do.
Radon Stancil:	Exactly.
Larry Kotlikoff:	It’s day and night.
Radon Stancil:	Yeah. So I know that you’ve dealt with just a ton of different things over your lifetime of doing what you’ve been doing here with all these different things. But if you had to break it down for individuals and families that are planning for retirement and trying to get ready for retirement, what would you say are some of the largest, most impactful decisions, financial strategies, whatever it might be that they need to implement? What would you say those things are?
Larry Kotlikoff:	I would say work as long as you possibly can. You could live to a 100, a lot of people are doing that. My mom passed away in 98. So you could end up being retired longer than you worked. So be very careful about when you retire. Wait as long as you really can, I think. Play it safe, play everything safe. Be careful about the stock market. Make sure you realize that the stock market’s very risky and as it starts to fall, you could panic and sell at the bottom. And there’s a no guarantee it’s going to come back anytime soon or forever, ever. There’s nothing in economics that says it will necessarily come back.
	I would be careful about spending too much on housing late in life, because that can be a huge sink. And there’s lots of housing markets that are a whole lot cheaper probably than where you live. So look around on the housing. Retirement accounts, are you making sure to take advantage so that you withdraw money at points in time when your tax bracket is low? But then you got to be careful about kicking up your social security benefit taxation and your future Medicare premiums. So all these things, I would be careful about inflation.
	A lot of people take their social security money first and their retirement money second, because they’re sure they’re going to make a killing on the stock market. Well, if you adjust the stock market for its risk, it’s yielding a negative return right now. So once you adjust for risk, social security is a much better deal. You definitely want to be patient on social security compared to you want to take social security second, not first. You want to take retirement money first because after you adjust for the riskiness of it, it’s not a good deal. It’s not a particularly good investment and you can’t count on it. So yes, the market’s done well, but there’s been, in last 12 years or so, but there’s no guarantee it’s going to continue. And then, where can you get a good return these days? Well, paying off debts, if you have any. There’s a lot of people in your audience who still have student loans paying 5%. So maybe even 7%. Pay those off.
	If you can get money out of your retirement account, if you’re beyond 59 and a half, take money out of your retirement account and pay taxes on it and use the money to pay off your student loans. That may be a huge win financially for you, or pay off your mortgage. Especially if you have money in a Roth account where you don’t have to pay taxes when you withdraw it. If you’re earning a safe return, that’s really low, which is what you can only earn right now in the market, but you’re paying 5%, you can earn 2% long term and treasuries right now, and long term treasuries nominal, you can earn 5% by paying off your student loan. Pay off your student loan, there’s a pure arbitrage there.
	Pay off your credit card, debt, pay off your auto loans, if you have, if they’re entailing high interest rates. Pay off your mortgage, if you’re stuck with a high mortgage and you haven’t been able to refinance. So all this stuff, there’s lots of little things you can do that seem little, they all add up to a big win.
Radon Stancil:	Yeah, I was going to say, and I know Murs has probably another question, but I was just going to say, we agree with you on that is that being able to deal with the risk in the market is something we teach all the time. We’re not people who say don’t be in the stock market. We’re just saying, hey, if you want to call it what you said, risk adjust the market. And so that’s one of the biggest things that Murs and I teach is, is don’t just put your money in the market and not have a plan, make sure that there’s an actual plan there. And that’s kind of how we manage money in that arena. But we also believe in diversifying it over in the safety so that we don’t have just that exposure there. So I think we’re aligned on that. I’m sorry, Murs, I didn’t mean to cut you. I just wanted to agree with him.
Murs Tariq:	I think that that list of everything that you listed off was, that’s all great, great strategies to employ, to make life a little bit easier. If you’re able to be in a position to pay off some of those debts, it certainly makes retirement a lot smoother. And then it takes you down to the nitty gritty of figuring out, well, how much do I need to live off of if I don’t have these certain debts? So I think that’s all great. Tell us, I know you mentioned your new book coming out at the beginning, but tell us again, the concept for the book and then when it comes out so that if our listeners are interested, that they can be looking for it when it does come out.
Larry Kotlikoff:	Okay. So, easy title to remember, Money Magic. I think there might be another book coming out called Money Magic, but this one’s by an economist. The basic story, Murs, is that economics has a different approach to financial planning than conventional financial planning because we’re focused on kind of what you can actually afford to spend on a sustainable basis. That’s what we call consumption smoothing. That’s what people are interested. That’s why they say for retirement, they don’t want to be eating cat food. So they want to have a smooth ride to the living standard. So what we economists are focused on is, hey, given your resources, given how long you’re going to work and given the taxes you’re going to face, what can you spend and keep on spending it, adjusted for inflation, and then what kind of steps can you take to get that number higher?
	You’re think about taking social security at 62. Explore taking at 70 and think about, and you’ll see that your sustainable living standard’s going to go up by maybe 15%, starting now, starting here at age 50. Because you won’t have to save as much because you’re going to have this basically huge amount of money coming in, starting at 70. It may seem like you’ll never get to 70, but you can’t count on dying. Your life expectancy might be 85, but you can’t count on dying in 85. You got to worry about dying at 100. And social security keeps paying off no matter how long you live and it’s adjusted for inflation. It’s inflation index. So basically economics approach works at any age.
	So the book is focused on young people, career choice, college choice, should they borrow for college? It’s about divorce and marriage. Just tell you some of the chapter titles, one of the chapter titles is Don’t Borrow For College. I don’t think any economists has come out and strongly said, “Do not borrow for college.” I’m saying that, pounding the table, it’s way too risky. I’m saying marry for money. Who writes a book that says marry for money, right? It’s a little bit out there, right? Okay. There’s a chapter called Marry for Money. And why not? Other things equal, why not find somebody that can make your life easier rather than harder? Divorce.
	We have 4,000 people getting divorced every day. How can you do that the way an economist would do it without having a divorce war, without spending all this money on lawyers? Well, there’s some simple tricks here that are in the book. And then career choice. What sources are there? Do you know that you could make a ton more money fitting people with artificial limbs than fitting people with hearing aids? Well, that’s part of the chapter on career choice. And the way I wrote the book was try and make it funny. Okay? I’m an economist, we’re not supposed to be very funny or humorous, but people seem to think I have a good sense of humor when it comes to writing these books. And that’s why the social security book became a New York Times bestseller. Well, maybe it was my co-authors too, are pretty funny, but we try to make the whole thing humorous, not boring.
	So it’s a lively read. And then there’s investment strategies, like playing the stock market, like the casino, like you would play the casino. When you go to the casino, most people go, I’m sure you guys do the same thing if you ever go to the casino, you leave your wallet in the hotel room. And literally, the last time I went to this casino in Vegas, I left my wallet. I took $100, my wife took $100. We went to the casino and we said, when that’s gone, we’re leaving. And if you play the stock market this way, if you say I’m only going to put in money in the stock market that I’m prepared to lose because it’s highly risky, then you can, in effect, set a floor to your living standard because you can operate based on what you don’t have in the stock market and say, okay, if I invest that in a safe way, what can I afford to spend on an ongoing basis? That’s my living standard floor.
	And then, of course the stock market has a much better return than the casino. So on average, you’re going to get something positive back from the stock market investment. And then at that point, once you’ve converted that money, taken it out of the casino, made it safe, now you can have a higher living standard. So this is called upside investing. So there’s a whole discussion about that in a book. There’s all kinds of things. There’s financial shockers. Economics has a lot of things to say a that are just going to shock the pants off of people. I think this book is going to change people’s perceptions dramatically about how to think about their finances and how much fun they can have thinking about their finances. Because if you can figure out ways to raise your living standard without working more, without working longer, gee, why not? That becomes fun. That becomes like a fun puzzle with a payoff.
Radon Stancil:	And when is the books supposed to come out?
Larry Kotlikoff:	January 4th. Little, Brown Spark is the publisher and called Money Magic.
Radon Stancil:	All right. Very good. And if somebody wanted to learn more, I guess they can just go and go to the Maximize My Social Security and they’ll be able to find out information there about you. And then I know that there’s MaxiFi as well. So all those things-
Larry Kotlikoff:	Maybe the main place would be kotlikoff.net, which is my main website. There are links to these other sites. And if you wanted to pre-buy it, buy the book in advance, you could do that. But I read a lot of articles, a lot of columns for the public, on all kinds of topics, including personal finance, but also other topics and also write articles. So people might be interested to see what this particular economist has to say about lots of different topics.
Radon Stancil:	Well, if anybody has a problem spelling Kotlikoff, we have it on the website. We’ll have it in the show notes and we’ll have a link to that particular site there. So thank you very much. We know that you got a very busy schedule, so we appreciate you buying out time to come on and talk with us on our podcast. And I’m sure that many can find your information to be very helpful. So thank you so much. We appreciate it.
Larry Kotlikoff:	A lot of fun with you guys, and we’ll do it again. Okay?