Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at firstname.lastname@example.org . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!
I had the opportunity recently to catch up with Larry Kotlikoff, professor of economics at Boston University. He has written 19 books and hundreds of professional articles and Op Eds on the topics of finance and economics. He’s a New York Times bestselling author and a frequent television and radio guest. His columns have appeared in the New York Times, Wall Street Journal, the Financial Times, the Boston Globe, Bloomberg, Forbes, Yahoo Finance, Fortune, and other major publications. In 2014, The Economist named him one of the world’s 25 most influential economists, quite an honor. It was a very interesting conversation with Doctor Kotlikoff. We talked a lot about inflation. That’s a hot topic these days as people are trying to figure out what it means, not only for their own planning but their retirement income. And all ages of life are impacted by this. I think you’re going to find it very interesting to hear what’s happening now and what may be happening in the future. Also, we talked about the retirement income conundrum that a lot of people face as they’re planning for retirement and how to convert that into an income stream that they will not outlive. And finally, we talked about why Larry never wants to retire. I think you’ll enjoy the conversation. God bless.
Josh: Welcome, Larry.
Larry: Great to be with you.
Josh: It’s been quite a year the last 14 months or so. Probably different than we’ve ever had before.
Larry: Yeah, I’ve been teaching remotely. We’ve all been in prison for almost a year, so it’s amazing that we’re coming out from this and interacting and actually hugging people for the first time in a while.
Josh: Absolutely yeah, shaking hands. Over the last couple of months you weren’t sure if you were supposed to shake people’s hands. Now everything is starting to feel a little bit more normal.
Larry: I just would like to encourage everybody to get vaccinated. And you know you’re seeing the economy picking up, and a lot of pent up demand is coming out. That’s leading to these big price increases. We see this in lumber, where people think it’s safe to have workers inside their house and carpenters—and now the price of lumber is going sky high. All kinds of other things that will potentially lead to pretty high inflation this year, which could get into people’s minds and change expectations which could bring on long term consequences. Because once we get inflation into our psyche, companies start to say, “Well, this is probably a good time to raise my prices because everybody else is raising their prices, so my customers aren’t going to be so upset with me.”
Josh: You know, a lot of people living today, myself included, don’t really remember inflation being a problem. Because it goes back to the late 70s and early 80s. We just heard our parents talking about it.
Larry: Yeah, I’m one of those parents. I was around in the 70s. I was in grad school and prices were going up 10%. Interest rates got up as high as 20%. Carter put price controls on gas and we had people waiting in line for hours, like 3 hours to fill up their tank. I gauge inflation based on ice cream costs. So I go to my favorite place now and it’s $4.95 for a tiny cone of ice cream. One child size scoop.
Josh: Yeah, that’s an interesting observation too, that in some cases it may not actually be the underlying commodity itself; it may just be business owners saying, “Hey, I haven’t been able to really raise prices for a while, and this could be my opportunity.”
Larry: The history of inflation and hyperinflation is very much connected to expectations. In the 20s when Germany was running hyperinflation, the German government got together and said, “OK, we’re not going to print money in the future. We’re going to be fiscally responsible. We’re going to raise taxes to pay for things. We’re going to cut spending.” And everybody believed it, but if you look at what the German Central Bank actually did—it kept printing money like crazy at an even faster rate. But prices came down because people expected this to work. So expectations have a powerful role in what happens. And that’s something that our Federal Reserve can’t necessarily control. Jerome Powell is our chairman of the Federal Reserve, and he talks a great game about controlling inflation, but it can get out of control like it did in the 70s. Back then we had Paul Volcker as the chairman of the Fed. At the time, he stepped on the gas. Get this: He comes out in 1979 when inflation is around 10% and says, “I’m not gonna print money at the same clip as I have.” And everybody believes him. That minute, interest rates go sky high, the economy starts going into recession. Price increases drop. Those were all the targets that he set for the three different money supplies he was tracking. Nothing had changed policy-wise. It was all based on what he said and what got into people’s heads. They changed the price setting behavior of the companies.
Josh: And that’s the trillion dollar question right now. Where do you see things going? What do you think is going to happen with inflation? At what point is the Fed going to feel like they have no choice but to start tightening?
Larry: It’s 2008; it’s come in and try to rescue the economy twice by printing lots and lots of money. So we have a basic money supply. It’s called base money. You can just literally think about how many dollar bills have been printed. It’s not really physical currencies so much as electronic currency, but it’s increased by a factor of six. And then the speed at which money is circulating has fallen by a factor of one half. So if we put those two things together, we have the wherewithal right now, given the Fed’s actions, to have price increases by a factor of 12. That’s today, not talking about anything the Fed does tomorrow or in the future. So we could have what for us would be hyperinflation in our country just based on the Fed’s actions up to this day from 2008. That is, I think, a very dangerous situation. The Fed says, “Well, we have control. We kept inflation low.” But how have they done it? They’ve told us prices aren’t going to go up. And firms have accepted that and tried to keep their price increases in line. But we’ve had a 5% increase in prices since this time last year. And I’d say it’s on a track to be 7% this month. Let’s just suppose it’s 7 or 8%. Well, then people stop listening to Jerome Powell and start deciding what to do on their own. And we’re off to the races.
I would be very careful about holding long term government bonds or long term corporate bonds because they’re paying very little. They’re paying like two to two and a half percent nominal. What happens if the prices go up 10 percent and your bond is expecting the prices go up two or two and a half percent? And you’re going to pay 10%. Well, you lost like 8% of your money in one year. So be very careful about getting locked into long term, fixed dollar payouts on anything, whether it’s an annuity or a bond, because inflation can bite you.
There is one good thing that you could do with your mortgage. You could take out a bigger mortgage or just don’t pay off your mortgage because that’s kind of a natural inflation hedge. It’s tricky to invest in stocks because stocks are very highly valued and it’s tricky to invest in bonds. And Bitcoin we know is crazy. So here’s what I would say is the safest best investment which is paying off short term debts like student loans and credit card bills. Because there you get high safe return, much higher than inflation, and that’s the single best, safest investment—going with the highest yield. Just paying off your debts.
Josh: This segues into a lot of the work you’ve done as far as retirement income. That’s oftentimes the question people are really asking. It isn’t just, “Should I be concerned about inflation for my portfolio, but what does that mean for my retirement income, and how do I know if I have enough money set aside for retirement?” Talk a little bit about the work that you’ve done with retirement income. You approach it a little bit differently.
Larry: Having focused on personal finance since around 1920, an economist by the name of Fisher developed something known as the life cycle theory of saving with a principle known as consumption smoothing. Here’s the idea: If you’re age 40 and you have, let’s say, all the money you’re ever going to have, and you have to make it to maybe age 100, you have 60 years to go. So Fisher said, “Well, what you’re going to want to do is spread that money out so you’re not starving when you’re 80, right?” This is why we save for retirement. So this idea of consumption smoothing is that we’re happier at a steady pace rather than splurging today and starving tomorrow. So what I’ve been developing is a software tool we sell to the public and to financial planners called Maxifi Planner, M-a-x-i-f-i Planner. It figures out how to do that consumption smoothing; how to come up with a path of spending and saving and insurance so that you (and your survivors if you pass away), get to maintain your living standard. Because that’s really all of us basically want to do. So it’s not like saying you can hit some arbitrary spending target. You know, a lot of people ask “Well, how much would you like to spend in retirement?” My answer is a billion dollars a day, but I can’t afford it, right? I can only afford what I’ve got resources for, and how much I’m going to earn through the rest of my days. That’s my budget.
And now the question is how to raise it safely. So the software figures out how to deal with Social Security to get the highest lifetime benefits; how to deal with Roth conversions; when to start your retirement account withdrawals; whether to pre-pay your mortgage; what state to live in; whether to downsize your home, and when to retire. All these things can materially raise your living standard, and then you get to see the cost of things. If I work for a couple more years, how much more will I get to spend after taxes, after paying maybe higher taxes on my Social Security benefits because they may be subject to taxation because there’s an interaction between earnings, Social Security, and taxes. And what happens if I have to pay more on my Medicare Part B premiums? All these things are interconnected and that’s why you need super smart software to get all this stuff straight. And we’ve spent 28 years developing super smart software. It’s kind of beyond belief how fast it works and how it incorporates all these factors. So for a typical household you can get it for 99 bucks, which can raise your lifetime spending by tens to hundreds of thousands of dollars.
Social security alone can be a goldmine. Most people are taking it as soon as they retire, but most people should be taking it at 70 when the benefit is 76% higher than it is at age 62, which is the earliest age you can take it. It’s adjusted for inflation. You want to have the highest living standard, the smoothest living standard, and the safest living standard. But you don’t want to be so safe that you can’t take advantage of the stock market which has been yielding historically a very high return. So you’re willing to take some risk, but you want to understand how big that risk is. You want to understand, “Gee, if I invest this way, what are the chances my living standard will go down the tubes versus being super high in the future? What’s my living standard trajectory? How do they spread out based on what returns I could get and how is that affected by how aggressively I invest, but also how aggressively I spend?” So the software helps you see those paths that you would experience if you do it this way versus that way. And that’s very different from conventional planning, which says, you know, “Tell me how much you would like to spend.” And again, my answer is a billion dollars a day.
There’s this real disconnect between what economists are thinking and studying in personal finance and what the profession is out there doing. There’s no conventional financial planning course that teaches anything about economics-based financial planning. So the two worlds are completely apart.
Josh: The reason people are putting money away to begin with almost always is because they want income at some point, and they want to be able to spend as much as they can. So it sounds like the software really accounts for that we don’t want to leave money on the table. We want to make sure we’re really maximizing what we can get and do it in a safe way. That’s the number one fear of retirees. We’ve been told over and over that the number one fear of retirees is running out of money too early in their retirement.
Larry: And for retirees who don’t have the security of being able to continue working, there are riskier situations, so that would argue they should be more cautious when it comes to how they invest. Make sure they have their housing secure by owning something where the rent can’t go up on you. If you own a house and the price of houses go through the roof or they drop down to nothing, you’re protected because you’re sitting in your house. You’re getting the same services. On the one hand you’re poorer. On the other hand, the cost of your housing is cheaper because you’re sitting in something that can’t run up higher costs. And if it goes the other way, you’re wealthier but the cost of sitting in your house is higher. So these two things cancel each other out, and you’re not affected because you’re just living in your house. That’s a foundation in your living standard. Social Security is another foundation. What you want to do is build a floor to your living standard. Social Security is a floor and your housing is a floor. Then any investing you can do. You could buy inflation indexed bonds—which unfortunately right now are paying zero after inflation, but they are a way of keeping your money safe. I mean getting zero rather than getting negative—you know, putting into the stock market and possibly losing 50%. This is the way to do it. Inflation indexed bonds, long term bonds, and then don’t worry about it.
People think that a super-rich person doesn’t have to worry much about investing in the market. They should be real risk takers, but actually it’s the other way around. They have the most to lose. There’s no guarantee the market is going back up. They should realize that. They pull out sometimes at a point where they’ve lost half their wealth, maybe in 10 months.
Josh: In those times like the fall of 2008 and during the dot com crash, or even last spring in the early days of covid when the market was down over 30%, most of our clients we hope are conditioned to know what to do and what not to do. But when panic sets in or when people’s emotions get the better of us, it can really just happen in an instant. They can derail a great portfolio. Maybe it’s a beautiful, diversified portfolio, but that whole thing could be derailed and make a critically bad mistake at the wrong time.
Larry: Yeah, so economics has all these paradoxes. Surprising things that nobody would believe or that make any sense. Like the rich should be investing in safe assets, not stocks, not risky assets. They should be investing safer than the poor because if you’re poor, let’s say you’ve got $1000 a month in Social Security benefits. That’s your entire income, and you have $10 in assets. Well, you want to invest the $10 in the stock market. Put it all on red #6 at the roulette wheel. Why? Because you have nothing to lose. Your downside is perfectly protected. You only have upside risk, but if you have no Social Security, no floor, and you have $10 million, you could lose half of it pretty quickly. Then you want to be very cautious. So there are these surprising twists of logic when it comes to economics.
I’m writing a book called Money Magic which describes all the tricks economists have or economics has to help us with personal finances. And one of these tricks is that if you’re rich, be much more careful about how you’re investing. As you get older and as you’re working down your assets, now you’re moving toward the person who’s got the 10 bucks and the Social Security benefits, right? So actually economics says that as your assets get lower and lower, you should put a bigger share of them in stocks. That’s contrary to conventional advice. So now you gotta float your living standard, and if you take some money and put it in the stock market and say, “Well, I’m not going to spend any out of this when I’m 60. I’ll wait till I’m 80 and if there’s anything there I’ll start gradually converting it to safe assets and that’ll just be my upside and that’ll help me with risks of out of pocket health expenses. But at least my living standard will be secured by these other actions.
Josh: Another thing I wanted to touch on is on the other end of the spectrum we’ve been talking about, which is people that are approaching retirement or already in retirement. What about a young, hungry, recent college grad? You know a lot of them, right? You end up talking to a lot of them, so I’m sure this is not an unusual part of the conversation. But what advice would you give them as far as how to start out in the world, knowing the world that we’re in right now? What can they do to put themselves at the best advantage?
Larry: Well, I would say not to get into debt. One of the chapters in this book is Don’t Borrow for College, because when you look at the share of young people that start college and don’t finish college, it’s like 40% of the kids who enter their freshman year don’t actually graduate. So I think it’s way too risky to be going to an expensive school and thinking you’re going to get a great job because you have something like Cornell University on your sweater. That’s going to maybe help you with your first job, but not through time. So make sure you keep the safety net and make sure you have your options open. Make sure you don’t get overloaded with housing costs. Check up with your mom if you need to and just also have a good time. I mean, life is not just about working and money. It’s about taking enough time to go play guitar. Don’t get into a rat race so much.
Josh: That’s good advice. A lot of us, yourself included who are very good at achieving, very good at building wealth and building a career and so forth, but the thing that’s more elusive for a lot of folks is the fulfillment side of retirement. In other words, once we’ve ascertained with your tool or any other tool that, “Hey, I’m financially secure. I’ve got enough wealth to make this happen,” there’s the whole fulfillment side of retirement, and sometimes we find that people struggle with that. They struggle once they leave their career and enter “retirement” or whatever term they like to use for it. They really struggle emotionally to move on to that next step of their life. Any advice for them for after they’ve figured out the dollars?
Larry: I think, keep your mind active. Try to learn something new every day. And you know, retirement actually scares me. I’m working more intensely than I ever have in my life, right now.
Josh: And you’re enjoying it.
Larry: I’m enjoying it, and I would say, don’t retire early. I think retirement is early death.
Josh: We definitely see that too where people retire and then they don’t live that long if they don’t have that new purpose—what you just said as far as learning and growing and not hanging it up and saying, “Well, that’s it.” It seems like people that are still active, learning, growing, contributing well beyond their earning years still end up being really happy and fulfilled.
Larry: I’ve been trying to find something that will engage mine. It may be charity work, or public service; it may be going into politics. I ran for president in 2016 as a write-in candidate against Trump and Clinton. I did it to lay out what economists think and I talked to a lot of economists in a platform about what we should be doing in this country. On my website kotlikoff.net there is a book called You’re Hired, which was my platform basically. It’s a free download. But I realized that I was too young.
Josh: I bet that was quite an experience. Certainly, we need more people that can think rationally. We’ve had a number of years of politicians on both sides of the aisle who tend to get caught in polarization. It doesn’t end up being productive; it’s more self-serving than anything.
Larry: The underlying story–we talked about the dangers of inflation, but the danger of all this debt that we’re building up is important to think about. Not that we didn’t need to bail out people who were terribly hurt by the pandemic, but we didn’t have to leave the entire bill to our kids. We could have taxed rich people, richer people like me and you to pay for the people who lost their jobs. I think you know we’re going to go from a country that had a debt to GDP ratio around one third back in 2010, to 110% of GDP probably by the end of this year. And that’s not counting all the debt that’s off the books—our unfunded Social Security and health care systems. And so if you put everything together, our country is probably in worse fiscal shape than any developed country in the world. So we have a serious, serious long term fiscal problem. We’re having a non-discussion of our fundamental problem. Each group just wants to last their term and spend as much money as possible and leave the bills to our kids.
So that’s the other thing I would say to young people. You’ve been left a huge financial tax bill coming down the road. So think about that your taxes are likely to go up. Your benefits are likely to go down. You’re facing some real financial insecurity due to an entire post war economic history of taking from young people and giving to old people and telling young people, “Hey, don’t worry, when you’re old you’ll have your opportunity.” We’ve been engaging in an ongoing Ponzi scheme at the national level for now 70 years. So I do fear for our kids and our country.
Josh: I think that puts even more pressure on younger people to really get engaged in their financial planning early. A lot of the people that we end up talking to don’t get real serious about planning for their future until they get into their 30s, if not 40s and beyond. It should scare people a little bit. Those problems are going to come to a head at some point, and they’re probably going to negatively affect you. I think it’s that much more of a plug to make sure that you’re doing proactive planning, which is of course what we’re doing with our clients. All right, tell me again the title of the book that comes out in January, correct?
Larry: Money Magic. One of the chapters is called Married for Money. One of the chapters is called Don’t Borrow for College. I’m trying to shake people up, get them to think out of the box with this book, so hopefully we’ll see if that works.
Kotlikoff.net is my main website. I post all the articles I write and all the columns are right there. There are also links to my company software and books.
Josh: This has been great. Thank you Larry, I appreciate it.
Keystone Financial Services and Lawrence Kotlikoff are separate and unaffiliated parties. Keystone Financial does not endorse or receive compensation from Lawrence Kotlikoff. The views expressed represent the opinions of Lawrence Kotlikoff. Views are subject to change and not intended as a forecast or guarantee of future results.
The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.