Yahoo! Personal Finance: Ca..


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Yahoo! Personal Finance: Ca..

  1. 1. Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More 1 of 5 7/3/2008 8:58 AM
  2. 2. Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More ADVERTISEMENT Laura Rowley Money & Happiness A One-Man Revolt Against the Financial Services Industry by Laura Rowley Posted on Wednesday, July 2, 2008, 12:00AM Larry Kotlikoff hates conventional wisdom. In his new book, "Spend 'til the End: The Revolutionary Guide to Raising Your Living Standard --Today and When You Retire," the Boston University economist declares war on the financial services industry and its traditional advice. Striking a Balance It's an appropriate read for the Fourth of July weekend, because it demands a revolution in thinking about monetary decisions -- from where to live to how much to save for retirement to whether you should pay off your mortgage early. "This was supposed to be a complete demolishing of conventional personal finance, because the standard advice is so at odds what economic science says," Kotlikoff says. "Spend 'til the End," co-authored with syndicated columnist Scott Burns, advocates consumption smoothing -- adjusting your spending, saving, insurance, and asset holdings on an ongoing basis to maintain a stable living standard. The idea is to strike a balance between living it up now and starving in retirement, and sacrificing fun now to scrimp for the SPONSORED LINKS future, ending up with a mountain of cash you're too old to enjoy. Earn From 3.04% to 3.35% Addressing Personal Finance Malpractice With AAA rated, GE Capital Corp. Not an offer of securities for sale. The book suggests that the choices you make about education, career, job, housing, retirement accounts, and insurance, among other areas, provide more money for the same effort. Forex Currency Trading Trade Forex Online with GFT. Free Practice "People are making mistakes on both sides -- 40 percent are under-saving and 30 percent Account. Try Risk-Free Now. are over-saving," says Kotlikoff, who has developed dynamic programming software called ESPlanner that makes consumption recommendations based on dozens of criteria. (I've tried it; I'm an over-saver.) Countrywide® Home Loans No Closing Cost Refi Options. No Points or "I'm not making a living selling software," Kotlikoff insists. "I got into this because I got Processing Fees. Call Now. pissed off at seeing industry malpractice left and right." How Much Do You Need to Retire? Try Forex Currency Trading at Free $50,000 practice account with real-time charts, In particular, Kotlikoff condemns income-replacement formulas suggesting you save news and research. enough to retire on 85 percent of your income. That number comes from a study sponsored by the insurance company Aon and is common in financial calculators, such as Fidelity's MyPlan. Free 3 in 1 Credit Report Free 3-bureau Credit Report - includes Transunion, "The right replacement rate could be 45 percent, not 85 percent," Kotlikoff argues. "That Equifax, Experian. ratio is extremely sensitive to [the individual's situation], whether you have two kids or one, how old the kids are, whether your spouse works or whether you downsize your home in retirement. They all make a huge difference to the appropriate spending paths over a Online College Programs - US Residents lifetime." Get matched with up to 5 colleges with 1 form. Serious inquiries only. Parents who are paying college tuition at age 60, for instance, won't be doing that in their 80s, he points out. Pimping Risk Exaggerated savings goals lead to what Kotlikoff calls "pimping risk." "The industry sets targets that are far too high and then says, 'Gee let us help you hit that target -- put your money in stocks,'" he says. "It is true that the probability of making your target will go up, but the probability of having a really bad outcome -- like losing your principal -- will also go up, and so will the fees charged for management." Noting that three-quarters of active money managers don't beat the market's returns, Kotlikoff and Burns' book recommends that investors choose only low-cost, highly diversified domestic and international index funds -- and be prepared to stomach the market's ups and downs. "Don't try to time the market because you don't have enough knowledge to do that, and even people with knowledge get burned," says Kotlikoff. "If you're really terrified about the market, buy TIPS [Treasury inflation-protected securities]. You won't do as well over time, but you won't lose your principal." Asset Diversification vs. Resource Diversification Meanwhile, if you do hold stocks, age-based allocation strategy scenarios suggest you hold more while you're young, because you have time to ride out the markets ups and downs, and then shift into safer assets like bonds as you age. Popular life-cycle and target- strategy mutual funds are based on this principle. But Kotlikoff and Burns argue that investors should focus on diversifying their overall resources, not just their assets. Consider a 60-year-old who has $20,000 in assets and $20,000 a year in Social Security income. The latter is equivalent to holding $1 million in 2 of 5 7/3/2008 8:58 AM
  3. 3. Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More inflation-indexed bonds, with a guaranteed annual income stream of 5 percent of the principal, Kotlikoff notes. "If you take the $20,000 in assets and concentrate it into stocks you will still be highly undiversified -- you are wildly into bonds," he argues. "So concentrating your assets in stocks is the thing to do." Thus the 60-year-old with guaranteed Social Security payments should hold more stock than someone like me (in my 40s), because as a freelancer my income is more uncertain and I also face more potential liquidity constraints, Kotlikoff says. In their late retirement years, people should dramatically cut back on stocks, because that's when health care expenditures are most uncertain, he adds. Critical Choices "Spend 'til the End" also recommends people "price their passions," or calculate the living- standard effect before they get married, have multiple children, divorce, or move to a big city. For instance, the book extols the virtues of living in Cedar Rapids, Iowa (advice clearly conceived before the recent floods), because its low-cost environment provides a 78 percent higher standard of living than Seattle, and 34 percent higher than Tampa. (Stronger housing appreciation in the latter cities doesn't offset other costs, the calculations show.) "It's important to make these choices ahead of time, to think about what really makes sense in terms of everything you want, because people do make critical, life-altering geographic decisions," Kotlikoff says. I've actually thought of moving to Iowa (usually after my property tax bill arrives) because I have family there. My husband and I could probably retire 10 years earlier if we sold our home and headed to the Midwest. But living near New York City is an important part of our emotional living standard -- we have family here, too. And I can't fathom the rise in living standards required to get my husband to give up his Giants tickets. Sometimes, maximizing your self-interest goes beyond calculators. In this case, I'd prefer to leave the price of my passion out of the equation. 15 COMMENTS Showing comments 1-15 of 15 Sort: first to last Matt - Thursday, July 3, 2008, 8:53AM ET Report Abuse Overall: The author gets 1 star for stating that saving to much money is bad advice. It instantly made the rest of his points suspect and I highly doubt he has any significant research that supports any of his conclusions. To much money in retirement? Ahahahahahahaha. Ya ok. Yahoo! Finance User - Thursday, July 3, 2008, 8:37AM ET Report Abuse Overall: Ah, authors touting their book. My way is better than all the others. I tried Extrasensory Planner for a few weeks -I got it free- and then wiped it out. It was totally useless! passionatefocus - Thursday, July 3, 2008, 8:21AM ET Report Abuse Overall: Stupid, waste of time. (I'm an over-saver) you needed to use software to figure this out and you write for a financial section. Ah, so if someone came to your for adive you plug their numbers in a program and give them the answer. geomann1 - Thursday, July 3, 2008, 8:19AM ET Report Abuse Overall: There is no shortage of experts who know more than the other dishonest experts who are telling you the real truth!!! I pity anyone whos 'emotional living standard' is tied to where one lives - Laura you come off as being really shallow on this one. I do agree that the 80% rule is nonsense, especially if a good part of ones current income goes to savings and children's expenses. Yahoo! Finance User - Thursday, July 3, 2008, 8:18AM ET Report Abuse Overall: Wouldn't $20,000 of Social Security income be the equivalent of a $400,000 nest egg at 5% return per year? $1,000,000 would produce $50,000 in income at 5%. aco24tic - Thursday, July 3, 2008, 7:20AM ET Report Abuse Overall: When I have accumulated too much money, I'll send Mr. Kotlikoff a postcard and let him know. 3 of 5 7/3/2008 8:58 AM
  4. 4. Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More cowboy47201 - Thursday, July 3, 2008, 7:19AM ET Report Abuse Overall: I always disliked that 80% of income for retirement. When I worked I made a good living and saved over half of my income. I retired on 30% of my income, partly because I downsized my house and paid off the mortgage. So much for the 80 rule. It is totally individual to income, life style, spending habits, and especially level of debt. Yahoo! Finance User - Thursday, July 3, 2008, 7:18AM ET Report Abuse Overall: Seldom is there talk of diversifying out of the very system which is sapping the wealth and productivity of the working class. This wealth-draining system has been in force to increasing degrees beginning in 1913 and the unwashed still don't get it. Even gold's 20% annual appreciation since 2001, the beginning of the average 15 year commodity cycle, hasn't registered because the very financial advisors criticized in this article are not pushing the lemmings into it. Even the author of this useless jumble stays away from the topic...the topic of storing one's wealth out of manipulated and dying paper money. Yahoo! Finance User - Thursday, July 3, 2008, 7:02AM ET Report Abuse Overall: The title of this article and book should be "spend, spend, spend today, for tomorrow may never come". This is exactly the "modern economic thinking" that got us and the government into problems from the beginning. The guy that wrote this book should run for congress his spend attitude would fit right.This was not only a very poor article but the message it sends was even poorer. Or should I say, will make those who follow it even poorer. taopraxis - Thursday, July 3, 2008, 6:54AM ET Report Abuse Overall: I'd agree with the author's approach if we were in a healthy financial environment. How about something to help people manage their money in a hyperinflationary depression, though. Yahoo! Finance User - Thursday, July 3, 2008, 5:37AM ET Report Abuse Overall: some people who over-save are thinking of leaving something for their children....its not all about ourselves which is the common theme these days leecoop.geo - Thursday, July 3, 2008, 5:15AM ET Report Abuse Overall: From time to time, I wonder where is that sweet spot between over-saving and over-spending. That book is a good starting point! Yahoo! Finance User - Thursday, July 3, 2008, 4:47AM ET Report Abuse Overall: LR is young, per se. Wait until she is old and see how much Giant tickets are really worth. I work with Gen Y who say, "I may not be alive tomorrow, so live for the day." Yes, Carpe Diem, but don't pay for today with tomorrow's dollars, Laura! Your husband can learn to love the Giants from home, with a better view at a much lower cost. I could explain Sport's Psychology to you, but you may be to myopic to understand it. You and your husband identify yourselves by where you live, what you attend and what you do in life. Get off of your high-horse and stop thinking off yourself as a cast member from "Sex in the City." Perhaps it's time you grew up. Yahoo! Finance User - Thursday, July 3, 2008, 4:39AM ET Report Abuse Overall: Once again with this author, what in the world was this article about???? Would u please publish an article that the average american can actually USE??? heroineworshipper - Thursday, July 3, 2008, 12:36AM ET Report Abuse Overall: I don't have to sacrifice living standards because of the whims of a man, heh. Your first 50 years of income go to inflation. Only the last 10 years count. Showing comments 1-15 of 15 4 of 5 7/3/2008 8:58 AM
  5. 5. Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More The columns, articles, message board posts and any other features provided on Yahoo! Finance are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author's own and not necessarily those of Yahoo! and there is no implied endorsement by Yahoo! of any advice or trading strategy. Copyright © 2008 Yahoo! Inc. All rights reserved. | Copyright/IPPolicy | Terms of Service | Help | Send Feedback NOTICE: We collect personal information on this site. To learn more about how we use your information, see our Privacy Policy Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Hemscott Americas. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein. Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer. 5 of 5 7/3/2008 8:58 AM