Speaker 1: You're listening to Bloomberg Business Week with Carol Messer and
Speaker 1: Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Hey, Money Magic,
Speaker 1: it's a new book out that may make you think
Speaker 1: twice about the conventional thinking with that we've really heard
Speaker 1: about for decades when it comes to financial advice. And
Speaker 1: that includes areas like home ownership, life insurance, cashing at
Speaker 1: your ira A to pay off your mortgage, and why
Speaker 1: you might want your daughter's son to grow up to
Speaker 1: be plumbers rather than head to a pricy private college something,
Speaker 1: and think about you think about for your own I've
Speaker 1: I've heard some of this before. Plumber owned so much
Speaker 1: real estate and retired really early. Yeah, well I just
Speaker 1: paid up, you know, a lot of money to get
Speaker 1: a drain cleared. So I'm rethinking my profession as well.
Speaker 1: Lawrence Lakoff is professor of economics at Boston University. Larry
Speaker 1: joins us on the phone from Boston. Larry, how are
Speaker 1: you great? Thanks to me, Thanks for having you guys. So,
Speaker 1: what is the biggest thing that we're getting wrong when
Speaker 1: it comes to conventional wisdom when thinking about retirement. Well,
Speaker 1: there's so many things we're going wrong. We're not saving
Speaker 1: it up. We're not we're retiring to earlier. We're taking
Speaker 1: street to early. We're we think we should get out
Speaker 1: of the stock market in old age, when economics actually
Speaker 1: says you should. As you're going through retirement, you should
Speaker 1: be putting a larger and larger share of your dwindling
Speaker 1: retirement assets fungible assets into stocks. Tim and I were
Speaker 1: just talking about this. Remember when it used to be
Speaker 1: like your age minus and that would you know, figure
Speaker 1: out how much should be in fixed income versus the
Speaker 1: equity markets? Um? Anyway, please continue? That's yeah, that's another
Speaker 1: one of the rules of dumb of the financial conventional
Speaker 1: financial planning the the But we also need to understand
Speaker 1: that we should be timing the market for risk when
Speaker 1: things are riskier like they are right now. We don't
Speaker 1: know what, uh where the economy is going to be
Speaker 1: able to absorb all the illness from a macron even
Speaker 1: though you know, any one person may not be as
Speaker 1: likely to die. You know, that's more risks. So we
Speaker 1: should be cutting back on our stock holdings in times
Speaker 1: of risk. So that's actually what we see happening. Yeah,
Speaker 1: and we do, right, We've seen a fair amount of
Speaker 1: money pulled out in a big way. Uh, certainly when
Speaker 1: we talk about the the trillion dollar route that we've
Speaker 1: seen in a lot of those technology names. Just in
Speaker 1: this first week of UM, when you sat down to
Speaker 1: write this book, why did you want to do it
Speaker 1: specifically because you you really talk about when it comes
Speaker 1: to living standards and that these financial decisions that we
Speaker 1: can make can really impact our living standards going forward. Yeah. Well,
Speaker 1: Street is focused on our wealth, and economists are focused
Speaker 1: on our welfare. Our welfare connects tour what we get
Speaker 1: to spend, our living standards, and the economists have been
Speaker 1: working on personal finance for a hundred years, starting with
Speaker 1: a worker, Birving Fisher in the n Yale professor um So,
Speaker 1: I got into grad school of economics because I wanted
Speaker 1: to help. I thought it could be a field that
Speaker 1: could help society. And I realized working a lot on
Speaker 1: personal financial financial issues, that what was being conveyed to
Speaker 1: the public as advice was complete, uh right, angles, completely
Speaker 1: at odds with what economics was recommending on every every
Speaker 1: in every area, whether how much to save, when to retire,
Speaker 1: when to take so security, how to think about your
Speaker 1: longevity risk, just completely across the board. It was all
Speaker 1: oriented towards product sales when it come from conventional planning economics.
Speaker 1: And then you had economists basically never talking to the
Speaker 1: public because uh they didn't have what you know, a
Speaker 1: clear idea of what precisely to say, and they didn't
Speaker 1: think it was their job to actually prescribe solutions. But
Speaker 1: I've been working in developing personal financial software. We have
Speaker 1: a tool called maxifi dot com uh m, a x
Speaker 1: i fi dot com that I've been working on for
Speaker 1: thirty years, developing the software which does deliver the economics
Speaker 1: the solution I but no, most people don't want to
Speaker 1: run software. So I said, let me take everything I've
Speaker 1: learned over the years from economists, from the software, from
Speaker 1: my own research, put it into this book. And that's
Speaker 1: where I'm coming from to help people. So I'm just
Speaker 1: at max I'm looking at the planner right now. It's
Speaker 1: it's it's it's really interesting, Larry. I'm I'm wondering, you know,
Speaker 1: how how people can put your lessons into practice. I mean,
Speaker 1: what's what's a practical way to think about the advice
Speaker 1: that you've learned over your career? Well, I mean the
Speaker 1: book you know, if they bought the book. Uh, if
Speaker 1: they don't want to actually you know, run the software.
Speaker 1: They buy the book, the lessons from the software are
Speaker 1: you know, mostly in the book. Uh. So, you know,
Speaker 1: if we're trying to figure out in economics is how
Speaker 1: to have a smooth living standard, how to raise your
Speaker 1: living standard safely, like doing smart things with respect to
Speaker 1: so security and retirement accounts to lower your lifetime taxes.
Speaker 1: How the price decisions. If I'm thinking about buying a
Speaker 1: a new boat, how much is that going to cost
Speaker 1: me a big boat? Not a new boat, but a
Speaker 1: big big boat. How much do you really going to
Speaker 1: cost me in terms of my ongoing living standards? So
Speaker 1: I need to understand that trade off in order to
Speaker 1: decide whether it's worth it to me. Uh So, pricing risk,
Speaker 1: but also when it comes to investment, understanding the range
Speaker 1: of my living standard outcomes. Wall Street is focused on, Uh,
Speaker 1: you're saving what you're currently saving, You're spending some targeted
Speaker 1: amount that has no connection to what you're actually afford
Speaker 1: and and they're accumulating this stuff up on the Monte
Speaker 1: Carla simulation simulating whether or not you run out of money.
Speaker 1: But Economics says you're going to adjust. You're spending all
Speaker 1: the time, and so therefore we have to look at
Speaker 1: the trajectory of your living standard path. Larry, you've just
Speaker 1: got about a minute and a half and then we'll
Speaker 1: come back and continue with you. But you go through
Speaker 1: so many conventional you know, with so much conventional wisdom
Speaker 1: when it comes to financial planning. Give us one thing
Speaker 1: that you think might just shock people, that they're told
Speaker 1: to do but we shouldn't be doing, or that they
Speaker 1: should do that we shouldn't be doing. Well, I cash
Speaker 1: out your IRA that might be in the stock market
Speaker 1: right now, and use it to pay off your student loans,
Speaker 1: your credit card bills, or uh your debts or your mortgage.
Speaker 1: That's unusual advice, but that can make a middle coast
Speaker 1: household a hundred thousand dollars in lifetime present value increased spending.
Speaker 1: There's just one chakra after the next in this book,
Speaker 1: because so much of conventional wisdom is so far from
Speaker 1: um appropriate. But if you catch out your IRA A
Speaker 1: you face penalties, right, you face stuff penalties, not just
Speaker 1: in taxes. But yeah, so I'm talking about Yeah, so
Speaker 1: there's an issue. It's not not for everybody, and I
Speaker 1: talked about that. But if you're in a maybe even
Speaker 1: furloughed maybe over fifty nine and there's no penalty, but uh,
Speaker 1: yeah you are. You know you're gonna have to pay
Speaker 1: taxes on it. But the advantage of uh uh once
Speaker 1: you risk adjust the stock markets return, it's just the
Speaker 1: bond market return, and therefore there's a clear arbitrage opportunity.
Speaker 1: You said that the long term treasury was like to
Speaker 1: one seven percent, right, Well, it's a mortgage rate is
Speaker 1: three and a half percent. There's a differential there. You
Speaker 1: can make pick up with no problem, uh with complete
Speaker 1: so one you risk just the stock market, it's really
Speaker 1: one point seven percent you're earning in the market. Uh.
Speaker 1: So that's that's why we need to do an Apple's
Speaker 1: apples comparison when we're thinking about these kinds of things.
Speaker 1: I'm gonna toss it over to Tim because we've been
Speaker 1: having a conversation about what you just said, um for
Speaker 1: some of our audience, and let's remind Yeah, so, so
Speaker 1: remind you. Carrol asked you about something that was provocative
Speaker 1: that's in the book, and you certainly delivered, and you
Speaker 1: talked about cashing out your IRA to pay off a mortgage,
Speaker 1: and I guess I'm having trouble making the math work
Speaker 1: because if I if I'm understanding the logic here, you're,
Speaker 1: you know, taking money from UH, your IRA, You're taking
Speaker 1: it out of the stock market or asset allocation that
Speaker 1: includes a stocks and fixed income, and you're putting it
Speaker 1: into a different asset that you're paying off a small
Speaker 1: portion of each and every month at an interest rate
Speaker 1: that is really really low by historical standards. I don't understand,
Speaker 1: really really high. It's really really high compared to the say,
Speaker 1: rate of return you can earn in the market right now,
Speaker 1: which you said just on the show is one point
Speaker 1: seven percent, because on a tenures and or thirty years
Speaker 1: I forget what you said thirty year bonds. So if
Speaker 1: you've got a thirty year mortgage and you're comparing that,
Speaker 1: you know, maybe bart at three dur and a half
Speaker 1: percent versus you can invest at one point seven percent.
Speaker 1: There's an arbite rge opportunity here. So why should why
Speaker 1: am I focused on one point seven Becuase you can
Speaker 1: risk you have to risk adjust the stock market return.
Speaker 1: The stock market historically is yield about you know, eight
Speaker 1: eight or so percent above inflation. Uh and uh, yeah,
Speaker 1: that's a long way away from what you can earn on.
Speaker 1: But that's just an average. There's a huge standard deviation
Speaker 1: of the stock markets, huge fluctuations. So people are saying
Speaker 1: this thing is too If it was perfectly safe to
Speaker 1: be in the stock market, nobody would be investing in
Speaker 1: the bond market at this ridiculously low rate. So that's
Speaker 1: why you need a risk adjust so we can do
Speaker 1: apples apples. So tell us about some of the other thinkings, um,
Speaker 1: that you get into your book and you talk about specifically,
Speaker 1: you know, get into social security, you talk about you
Speaker 1: know something that Tim and I have talked a lot about.
Speaker 1: I just sent a daughter off to college. Um, and
Speaker 1: you know, higher education, especially from private institutions, it's really expensive.
Speaker 1: You're talking seventy eight dollars a year. Yeah. Yeah, And
Speaker 1: I say, you know, I have a chapter entitled don't
Speaker 1: Borrow for college. Uh. There's a chapter on you know,
Speaker 1: married for money. There's a chapter title about divorce, like
Speaker 1: and I basically you know how a divorce without going
Speaker 1: to divorce war. So the book really covers the entire
Speaker 1: gamut of personal financial decisions. As for college, you know,
Speaker 1: there's evidence that going to Harvard relative to some other
Speaker 1: university is uh not gonna matter much to your career
Speaker 1: earnings because it's how hard, how well you you work,
Speaker 1: and how diligently and how creative you are. I mean,
Speaker 1: Harvard collects really uh you know, special people who are
Speaker 1: very good at working very hard and also you know,
Speaker 1: talented in other ways. But it doesn't necessarily add any
Speaker 1: value to them. So why should you pay for you know,
Speaker 1: seventy thousand dollars a year when you can you know,
Speaker 1: have the same career if you go to Wake Forest
Speaker 1: that will make much lower price. I'm not sure to
Speaker 1: Wake Forest is cheaper actually, so I'm just throwing thatamp.
Speaker 1: But that's the idea. Let's chop around for a school
Speaker 1: that's affordable. The kids that go to college never end,
Speaker 1: never finished. So if you borrow for the luxury of
Speaker 1: dropping out of college, this is crazy. Who invests? Who
Speaker 1: bars money to invest in something where they know right
Speaker 1: at the tecko chance of getting nothing. That's why there's
Speaker 1: a chapter called don't Borrow for College. It's very strong,
Speaker 1: uh strong language worrying people off from this. You know
Speaker 1: somee thing that I've been thinking a lot about is
Speaker 1: what the present environment means for people who are early
Speaker 1: in their careers right now, people in their twenties and thirties,
Speaker 1: because we have seen really historically high returns in the
Speaker 1: s and P five hundred in the last three years,
Speaker 1: and how people should be thinking about retirement. So so,
Speaker 1: what advice would you have for people who are in
Speaker 1: the earlier part of their careers. Maybe they don't own
Speaker 1: homes yet, maybe they are still at the beginning of
Speaker 1: of of saving for retirement and and planning their financial futures.
Speaker 1: What should they be doing that Conventional wisdom says they
Speaker 1: shouldn't be doing. Okay, so the stock market is has
Speaker 1: done fantastically of late, but it's also done fantastically poorly
Speaker 1: over the you know, in the Great Depression with went
Speaker 1: down to the percent or more and Great Depression and
Speaker 1: a Great recession. You know, it's had bad times. And
Speaker 1: uh so I would say, look, if you're starting out,
Speaker 1: make sure you put enough in her four one kay
Speaker 1: to the kids, the employer's match. That's free money. After that,
Speaker 1: pay off any student loans, any credit card, carry roun
Speaker 1: large credit card bills, uh and uh and then by
Speaker 1: uh my house with as much cash as possible, because
Speaker 1: you know, engage in safety first behavior and then beyond that, uh,
Speaker 1: invest in the in the stock market in a diversified
Speaker 1: way as well as other things like reads and bonds.
Speaker 1: Would be very careful about inflation. I think I think
Speaker 1: this government is so broke beyond belief that we're going
Speaker 1: to have inflation at the wazoo through time to pay
Speaker 1: off the governments. You know, for the government is going
Speaker 1: to print money to cover spending the quotes. This is
Speaker 1: what governments that are broke to in our country is
Speaker 1: as broke as any country in the world that's developed.
Speaker 1: We're not Zimbabwe but or Veezuela at this point, but
Speaker 1: we're in very bad long term shape as we're speaking.
Speaker 1: It's this is I'm so interested in your book. One
Speaker 1: of the other things you find out and and here's
Speaker 1: a line everyone that will make you probably want to
Speaker 1: just read the whole book. Um, you can't count on
Speaker 1: dying on time. Longevity is likely your greatest financial risk.
Speaker 1: I mean, we really need to think about this. Larry.
Speaker 1: I have a brother who was like, how do I
Speaker 1: know enough is enough? Like when do I know enough
Speaker 1: is enough? Because he had an advised he said, you're good, um,
Speaker 1: but it's tough. It is tough. I mean, let me
Speaker 1: just give you. It's one of the things I talked
Speaker 1: about in my books, buying an annuity from my mom,
Speaker 1: which was eight. So my mom was you know, my
Speaker 1: brother and sister. My brothers uh, my my sister around
Speaker 1: a bunch of major companies, and my my brother is
Speaker 1: the progress at Cornell. Both of them thought buying an
Speaker 1: annuity from my mom at eighty eight was crazy. I
Speaker 1: went to the Principal Life insurance company said they've never
Speaker 1: sold an annuity to anybody that's old. So I got
Speaker 1: an inflation index annuity for her, and they said, she's
Speaker 1: not to make me on four years, and she did.
Speaker 1: She made it. It was great that we that she
Speaker 1: made it, and I was great that we we had
Speaker 1: the annuity to help with that. Well, we could talk
Speaker 1: and forgive me. I were running out of time, and
Speaker 1: I wish, you know, hopefully you can come back at
Speaker 1: another time, because I think this is really provocative and
Speaker 1: and any time. Larry, good luck with the books. Larry Lakoff,
Speaker 1: he's professor of economics at Boston University's Your book is
Speaker 1: Money Magic