WEBVTT - Using the Science of Finance for Better Retirement

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Hey, Money Magic,

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<v Speaker 1>it's a new book out that may make you think

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<v Speaker 1>twice about the conventional thinking with that we've really heard

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<v Speaker 1>about for decades when it comes to financial advice. And

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<v Speaker 1>that includes areas like home ownership, life insurance, cashing at

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<v Speaker 1>your ira A to pay off your mortgage, and why

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<v Speaker 1>you might want your daughter's son to grow up to

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<v Speaker 1>be plumbers rather than head to a pricy private college something,

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<v Speaker 1>and think about you think about for your own I've

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<v Speaker 1>I've heard some of this before. Plumber owned so much

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<v Speaker 1>real estate and retired really early. Yeah, well I just

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<v Speaker 1>paid up, you know, a lot of money to get

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<v Speaker 1>a drain cleared. So I'm rethinking my profession as well.

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<v Speaker 1>Lawrence Lakoff is professor of economics at Boston University. Larry

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<v Speaker 1>joins us on the phone from Boston. Larry, how are

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<v Speaker 1>you great? Thanks to me, Thanks for having you guys. So,

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<v Speaker 1>what is the biggest thing that we're getting wrong when

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<v Speaker 1>it comes to conventional wisdom when thinking about retirement. Well,

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<v Speaker 1>there's so many things we're going wrong. We're not saving

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<v Speaker 1>it up. We're not we're retiring to earlier. We're taking

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<v Speaker 1>street to early. We're we think we should get out

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<v Speaker 1>of the stock market in old age, when economics actually

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<v Speaker 1>says you should. As you're going through retirement, you should

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<v Speaker 1>be putting a larger and larger share of your dwindling

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<v Speaker 1>retirement assets fungible assets into stocks. Tim and I were

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<v Speaker 1>just talking about this. Remember when it used to be

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<v Speaker 1>like your age minus and that would you know, figure

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<v Speaker 1>out how much should be in fixed income versus the

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<v Speaker 1>equity markets? Um? Anyway, please continue? That's yeah, that's another

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<v Speaker 1>one of the rules of dumb of the financial conventional

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<v Speaker 1>financial planning the the But we also need to understand

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<v Speaker 1>that we should be timing the market for risk when

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<v Speaker 1>things are riskier like they are right now. We don't

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<v Speaker 1>know what, uh where the economy is going to be

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<v Speaker 1>able to absorb all the illness from a macron even

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<v Speaker 1>though you know, any one person may not be as

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<v Speaker 1>likely to die. You know, that's more risks. So we

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<v Speaker 1>should be cutting back on our stock holdings in times

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<v Speaker 1>of risk. So that's actually what we see happening. Yeah,

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<v Speaker 1>and we do, right, We've seen a fair amount of

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<v Speaker 1>money pulled out in a big way. Uh, certainly when

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<v Speaker 1>we talk about the the trillion dollar route that we've

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<v Speaker 1>seen in a lot of those technology names. Just in

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<v Speaker 1>this first week of UM, when you sat down to

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<v Speaker 1>write this book, why did you want to do it

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<v Speaker 1>specifically because you you really talk about when it comes

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<v Speaker 1>to living standards and that these financial decisions that we

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<v Speaker 1>can make can really impact our living standards going forward. Yeah. Well,

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<v Speaker 1>Street is focused on our wealth, and economists are focused

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<v Speaker 1>on our welfare. Our welfare connects tour what we get

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<v Speaker 1>to spend, our living standards, and the economists have been

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<v Speaker 1>working on personal finance for a hundred years, starting with

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<v Speaker 1>a worker, Birving Fisher in the n Yale professor um So,

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<v Speaker 1>I got into grad school of economics because I wanted

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<v Speaker 1>to help. I thought it could be a field that

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<v Speaker 1>could help society. And I realized working a lot on

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<v Speaker 1>personal financial financial issues, that what was being conveyed to

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<v Speaker 1>the public as advice was complete, uh right, angles, completely

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<v Speaker 1>at odds with what economics was recommending on every every

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<v Speaker 1>in every area, whether how much to save, when to retire,

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<v Speaker 1>when to take so security, how to think about your

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<v Speaker 1>longevity risk, just completely across the board. It was all

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<v Speaker 1>oriented towards product sales when it come from conventional planning economics.

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<v Speaker 1>And then you had economists basically never talking to the

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<v Speaker 1>public because uh they didn't have what you know, a

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<v Speaker 1>clear idea of what precisely to say, and they didn't

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<v Speaker 1>think it was their job to actually prescribe solutions. But

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<v Speaker 1>I've been working in developing personal financial software. We have

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<v Speaker 1>a tool called maxifi dot com uh m, a x

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<v Speaker 1>i fi dot com that I've been working on for

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<v Speaker 1>thirty years, developing the software which does deliver the economics

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<v Speaker 1>the solution I but no, most people don't want to

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<v Speaker 1>run software. So I said, let me take everything I've

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<v Speaker 1>learned over the years from economists, from the software, from

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<v Speaker 1>my own research, put it into this book. And that's

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<v Speaker 1>where I'm coming from to help people. So I'm just

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<v Speaker 1>at max I'm looking at the planner right now. It's

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<v Speaker 1>it's it's it's really interesting, Larry. I'm I'm wondering, you know,

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<v Speaker 1>how how people can put your lessons into practice. I mean,

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<v Speaker 1>what's what's a practical way to think about the advice

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<v Speaker 1>that you've learned over your career? Well, I mean the

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<v Speaker 1>book you know, if they bought the book. Uh, if

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<v Speaker 1>they don't want to actually you know, run the software.

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<v Speaker 1>They buy the book, the lessons from the software are

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<v Speaker 1>you know, mostly in the book. Uh. So, you know,

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<v Speaker 1>if we're trying to figure out in economics is how

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<v Speaker 1>to have a smooth living standard, how to raise your

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<v Speaker 1>living standard safely, like doing smart things with respect to

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<v Speaker 1>so security and retirement accounts to lower your lifetime taxes.

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<v Speaker 1>How the price decisions. If I'm thinking about buying a

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<v Speaker 1>a new boat, how much is that going to cost

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<v Speaker 1>me a big boat? Not a new boat, but a

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<v Speaker 1>big big boat. How much do you really going to

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<v Speaker 1>cost me in terms of my ongoing living standards? So

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<v Speaker 1>I need to understand that trade off in order to

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<v Speaker 1>decide whether it's worth it to me. Uh So, pricing risk,

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<v Speaker 1>but also when it comes to investment, understanding the range

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<v Speaker 1>of my living standard outcomes. Wall Street is focused on, Uh,

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<v Speaker 1>you're saving what you're currently saving, You're spending some targeted

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<v Speaker 1>amount that has no connection to what you're actually afford

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<v Speaker 1>and and they're accumulating this stuff up on the Monte

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<v Speaker 1>Carla simulation simulating whether or not you run out of money.

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<v Speaker 1>But Economics says you're going to adjust. You're spending all

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<v Speaker 1>the time, and so therefore we have to look at

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<v Speaker 1>the trajectory of your living standard path. Larry, you've just

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<v Speaker 1>got about a minute and a half and then we'll

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<v Speaker 1>come back and continue with you. But you go through

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<v Speaker 1>so many conventional you know, with so much conventional wisdom

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<v Speaker 1>when it comes to financial planning. Give us one thing

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<v Speaker 1>that you think might just shock people, that they're told

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<v Speaker 1>to do but we shouldn't be doing, or that they

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<v Speaker 1>should do that we shouldn't be doing. Well, I cash

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<v Speaker 1>out your IRA that might be in the stock market

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<v Speaker 1>right now, and use it to pay off your student loans,

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<v Speaker 1>your credit card bills, or uh your debts or your mortgage.

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<v Speaker 1>That's unusual advice, but that can make a middle coast

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<v Speaker 1>household a hundred thousand dollars in lifetime present value increased spending.

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<v Speaker 1>There's just one chakra after the next in this book,

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<v Speaker 1>because so much of conventional wisdom is so far from

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<v Speaker 1>um appropriate. But if you catch out your IRA A

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<v Speaker 1>you face penalties, right, you face stuff penalties, not just

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<v Speaker 1>in taxes. But yeah, so I'm talking about Yeah, so

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<v Speaker 1>there's an issue. It's not not for everybody, and I

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<v Speaker 1>talked about that. But if you're in a maybe even

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<v Speaker 1>furloughed maybe over fifty nine and there's no penalty, but uh,

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<v Speaker 1>yeah you are. You know you're gonna have to pay

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<v Speaker 1>taxes on it. But the advantage of uh uh once

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<v Speaker 1>you risk adjust the stock markets return, it's just the

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<v Speaker 1>bond market return, and therefore there's a clear arbitrage opportunity.

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<v Speaker 1>You said that the long term treasury was like to

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<v Speaker 1>one seven percent, right, Well, it's a mortgage rate is

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<v Speaker 1>three and a half percent. There's a differential there. You

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<v Speaker 1>can make pick up with no problem, uh with complete

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<v Speaker 1>so one you risk just the stock market, it's really

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<v Speaker 1>one point seven percent you're earning in the market. Uh.

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<v Speaker 1>So that's that's why we need to do an Apple's

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<v Speaker 1>apples comparison when we're thinking about these kinds of things.

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<v Speaker 1>I'm gonna toss it over to Tim because we've been

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<v Speaker 1>having a conversation about what you just said, um for

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<v Speaker 1>some of our audience, and let's remind Yeah, so, so

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<v Speaker 1>remind you. Carrol asked you about something that was provocative

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<v Speaker 1>that's in the book, and you certainly delivered, and you

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<v Speaker 1>talked about cashing out your IRA to pay off a mortgage,

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<v Speaker 1>and I guess I'm having trouble making the math work

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<v Speaker 1>because if I if I'm understanding the logic here, you're,

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<v Speaker 1>you know, taking money from UH, your IRA, You're taking

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<v Speaker 1>it out of the stock market or asset allocation that

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<v Speaker 1>includes a stocks and fixed income, and you're putting it

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<v Speaker 1>into a different asset that you're paying off a small

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<v Speaker 1>portion of each and every month at an interest rate

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<v Speaker 1>that is really really low by historical standards. I don't understand,

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<v Speaker 1>really really high. It's really really high compared to the say,

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<v Speaker 1>rate of return you can earn in the market right now,

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<v Speaker 1>which you said just on the show is one point

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<v Speaker 1>seven percent, because on a tenures and or thirty years

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<v Speaker 1>I forget what you said thirty year bonds. So if

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<v Speaker 1>you've got a thirty year mortgage and you're comparing that,

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<v Speaker 1>you know, maybe bart at three dur and a half

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<v Speaker 1>percent versus you can invest at one point seven percent.

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<v Speaker 1>There's an arbite rge opportunity here. So why should why

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<v Speaker 1>am I focused on one point seven Becuase you can

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<v Speaker 1>risk you have to risk adjust the stock market return.

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<v Speaker 1>The stock market historically is yield about you know, eight

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<v Speaker 1>eight or so percent above inflation. Uh and uh, yeah,

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<v Speaker 1>that's a long way away from what you can earn on.

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<v Speaker 1>But that's just an average. There's a huge standard deviation

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<v Speaker 1>of the stock markets, huge fluctuations. So people are saying

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<v Speaker 1>this thing is too If it was perfectly safe to

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<v Speaker 1>be in the stock market, nobody would be investing in

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<v Speaker 1>the bond market at this ridiculously low rate. So that's

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<v Speaker 1>why you need a risk adjust so we can do

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<v Speaker 1>apples apples. So tell us about some of the other thinkings, um,

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<v Speaker 1>that you get into your book and you talk about specifically,

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<v Speaker 1>you know, get into social security, you talk about you

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<v Speaker 1>know something that Tim and I have talked a lot about.

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<v Speaker 1>I just sent a daughter off to college. Um, and

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<v Speaker 1>you know, higher education, especially from private institutions, it's really expensive.

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<v Speaker 1>You're talking seventy eight dollars a year. Yeah. Yeah, And

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<v Speaker 1>I say, you know, I have a chapter entitled don't

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<v Speaker 1>Borrow for college. Uh. There's a chapter on you know,

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<v Speaker 1>married for money. There's a chapter title about divorce, like

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<v Speaker 1>and I basically you know how a divorce without going

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<v Speaker 1>to divorce war. So the book really covers the entire

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<v Speaker 1>gamut of personal financial decisions. As for college, you know,

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<v Speaker 1>there's evidence that going to Harvard relative to some other

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<v Speaker 1>university is uh not gonna matter much to your career

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<v Speaker 1>earnings because it's how hard, how well you you work,

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<v Speaker 1>and how diligently and how creative you are. I mean,

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<v Speaker 1>Harvard collects really uh you know, special people who are

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<v Speaker 1>very good at working very hard and also you know,

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<v Speaker 1>talented in other ways. But it doesn't necessarily add any

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<v Speaker 1>value to them. So why should you pay for you know,

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<v Speaker 1>seventy thousand dollars a year when you can you know,

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<v Speaker 1>have the same career if you go to Wake Forest

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<v Speaker 1>that will make much lower price. I'm not sure to

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<v Speaker 1>Wake Forest is cheaper actually, so I'm just throwing thatamp.

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<v Speaker 1>But that's the idea. Let's chop around for a school

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<v Speaker 1>that's affordable. The kids that go to college never end,

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<v Speaker 1>never finished. So if you borrow for the luxury of

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<v Speaker 1>dropping out of college, this is crazy. Who invests? Who

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<v Speaker 1>bars money to invest in something where they know right

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<v Speaker 1>at the tecko chance of getting nothing. That's why there's

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<v Speaker 1>a chapter called don't Borrow for College. It's very strong,

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<v Speaker 1>uh strong language worrying people off from this. You know

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<v Speaker 1>somee thing that I've been thinking a lot about is

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<v Speaker 1>what the present environment means for people who are early

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<v Speaker 1>in their careers right now, people in their twenties and thirties,

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<v Speaker 1>because we have seen really historically high returns in the

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<v Speaker 1>s and P five hundred in the last three years,

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<v Speaker 1>and how people should be thinking about retirement. So so,

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<v Speaker 1>what advice would you have for people who are in

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<v Speaker 1>the earlier part of their careers. Maybe they don't own

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<v Speaker 1>homes yet, maybe they are still at the beginning of

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<v Speaker 1>of of saving for retirement and and planning their financial futures.

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<v Speaker 1>What should they be doing that Conventional wisdom says they

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<v Speaker 1>shouldn't be doing. Okay, so the stock market is has

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<v Speaker 1>done fantastically of late, but it's also done fantastically poorly

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<v Speaker 1>over the you know, in the Great Depression with went

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<v Speaker 1>down to the percent or more and Great Depression and

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<v Speaker 1>a Great recession. You know, it's had bad times. And

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<v Speaker 1>uh so I would say, look, if you're starting out,

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<v Speaker 1>make sure you put enough in her four one kay

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<v Speaker 1>to the kids, the employer's match. That's free money. After that,

0:11:43.600 --> 0:11:46.839
<v Speaker 1>pay off any student loans, any credit card, carry roun

0:11:47.080 --> 0:11:51.440
<v Speaker 1>large credit card bills, uh and uh and then by

0:11:51.559 --> 0:11:54.520
<v Speaker 1>uh my house with as much cash as possible, because

0:11:55.280 --> 0:12:01.240
<v Speaker 1>you know, engage in safety first behavior and then beyond that, uh,

0:12:01.360 --> 0:12:04.559
<v Speaker 1>invest in the in the stock market in a diversified

0:12:04.559 --> 0:12:09.480
<v Speaker 1>way as well as other things like reads and bonds.

0:12:09.480 --> 0:12:12.200
<v Speaker 1>Would be very careful about inflation. I think I think

0:12:12.200 --> 0:12:15.640
<v Speaker 1>this government is so broke beyond belief that we're going

0:12:15.679 --> 0:12:19.920
<v Speaker 1>to have inflation at the wazoo through time to pay

0:12:19.920 --> 0:12:22.000
<v Speaker 1>off the governments. You know, for the government is going

0:12:22.040 --> 0:12:24.960
<v Speaker 1>to print money to cover spending the quotes. This is

0:12:25.000 --> 0:12:26.920
<v Speaker 1>what governments that are broke to in our country is

0:12:26.960 --> 0:12:29.840
<v Speaker 1>as broke as any country in the world that's developed.

0:12:30.559 --> 0:12:33.680
<v Speaker 1>We're not Zimbabwe but or Veezuela at this point, but

0:12:34.200 --> 0:12:36.480
<v Speaker 1>we're in very bad long term shape as we're speaking.

0:12:36.840 --> 0:12:39.679
<v Speaker 1>It's this is I'm so interested in your book. One

0:12:39.720 --> 0:12:42.240
<v Speaker 1>of the other things you find out and and here's

0:12:42.240 --> 0:12:45.000
<v Speaker 1>a line everyone that will make you probably want to

0:12:45.000 --> 0:12:48.080
<v Speaker 1>just read the whole book. Um, you can't count on

0:12:48.200 --> 0:12:52.000
<v Speaker 1>dying on time. Longevity is likely your greatest financial risk.

0:12:52.440 --> 0:12:54.600
<v Speaker 1>I mean, we really need to think about this. Larry.

0:12:55.360 --> 0:12:56.640
<v Speaker 1>I have a brother who was like, how do I

0:12:56.679 --> 0:12:58.840
<v Speaker 1>know enough is enough? Like when do I know enough

0:12:58.880 --> 0:13:03.240
<v Speaker 1>is enough? Because he had an advised he said, you're good, um,

0:13:03.280 --> 0:13:06.720
<v Speaker 1>but it's tough. It is tough. I mean, let me

0:13:06.760 --> 0:13:08.320
<v Speaker 1>just give you. It's one of the things I talked

0:13:08.320 --> 0:13:10.800
<v Speaker 1>about in my books, buying an annuity from my mom,

0:13:10.840 --> 0:13:14.800
<v Speaker 1>which was eight. So my mom was you know, my

0:13:14.840 --> 0:13:19.040
<v Speaker 1>brother and sister. My brothers uh, my my sister around

0:13:19.080 --> 0:13:22.040
<v Speaker 1>a bunch of major companies, and my my brother is

0:13:22.080 --> 0:13:24.400
<v Speaker 1>the progress at Cornell. Both of them thought buying an

0:13:24.400 --> 0:13:26.800
<v Speaker 1>annuity from my mom at eighty eight was crazy. I

0:13:26.880 --> 0:13:28.920
<v Speaker 1>went to the Principal Life insurance company said they've never

0:13:28.960 --> 0:13:31.920
<v Speaker 1>sold an annuity to anybody that's old. So I got

0:13:31.960 --> 0:13:35.560
<v Speaker 1>an inflation index annuity for her, and they said, she's

0:13:35.600 --> 0:13:37.920
<v Speaker 1>not to make me on four years, and she did.

0:13:38.000 --> 0:13:41.760
<v Speaker 1>She made it. It was great that we that she

0:13:41.840 --> 0:13:44.040
<v Speaker 1>made it, and I was great that we we had

0:13:44.040 --> 0:13:48.080
<v Speaker 1>the annuity to help with that. Well, we could talk

0:13:48.160 --> 0:13:50.320
<v Speaker 1>and forgive me. I were running out of time, and

0:13:50.360 --> 0:13:51.880
<v Speaker 1>I wish, you know, hopefully you can come back at

0:13:51.880 --> 0:13:54.479
<v Speaker 1>another time, because I think this is really provocative and

0:13:54.480 --> 0:13:57.839
<v Speaker 1>and any time. Larry, good luck with the books. Larry Lakoff,

0:13:57.920 --> 0:14:00.520
<v Speaker 1>he's professor of economics at Boston University's Your book is

0:14:00.600 --> 0:14:01.360
<v Speaker 1>Money Magic