The One Armed Economist

I was going to talk about retirement calculators but came across a really bad article in Time magazine titled The Time To Plan Is Now.  Got all excited.  Oh, boy, the low down on retiring dumb, rich and happy.

Didn't happen.  Should have read the little author blurb at the bottom first--Laurence J. Kotlikoff, professor of economics at Boston Univsersity and co-author of the book The Coming Generational Storm.  (The reference to one armed economists comes from economic professors that make a point, then add "on the the other hand" causing a friend of mine to wish for a one armed economist that could make a point and stick to it.)

It appears that Professor Kotlifkoff has both arms as he makes a lot of points. 

But first he starts out as all good doomsdayers do with the bleak and cold future.  No Social Security unless the government raises income taxes 70%, payroll taxes 109%, cut Social Security and Medicare 41%, eliminate 79% of government discretionary spending. 

Gosh, Larry, that doesn't make me want to plan, it makes me want to slit my wrists.

Then he goes after the financial services industry (Fidelity, T. Rowe Price) with their retirement calculators as being "too simplistic."  Also calls them "primitive."  But Larry knows better because he and a bunch of economists (this is going to be good) invented "consumption smoothing software" that "does the targeting for you."  Like I'm going to give my money to some egghead economist from Boston.  Sorry to all you Bostonians out there but you know what I mean. 

Larry doesn't go into a lot of detail on the software (which he admits he invented) or the process.  This is code in the book business for "Buy My Book If You Want To Know."  No reason to give out the answer when you've got books to sell.  Way to go, Larry.

But finally Larry gets specific.  Kind of.  Larry says "Given the US fiscal mess, investing abroad is a good idea."  Good idea?  Ok, Larry, how much abroad?  He doesn't say but the inference is ignore the United States, the most advanced, the largest, the strongest, the most efficient economy on the planet.  Thanks Larry.

"Try to avoid inflation sensitive investments, like long term bonds."  I actually did this about three years ago and got clobbered.  Long term bonds have done great, short term bonds have gotten killed.

"Avoid waiting to withdraw your 401(k) balances until after tax rates have risen."  This took awhile to figure out.  I think he is saying that if you can, take out the 401(k) and pay the taxes now because tax rates are going up.  But you can only if you are 59 and one half years old.  Oh, you can take the money out before that but you pay taxes and a 10% penalty if you are under 59 and one half.  I don't think so, Larry.

"You may also want to purchase real estate, commodities, and collectibles that should retain their purchasing power over time."  Larry is saying that inflation is just around the corner.  If Larry really believes that I have some Beanie Babies I would love to unload.

The he recommends borrowing long term money and investing in inflation protected bonds.  Works great if inflation takes off.  A big flop otherwise.  An expensive flop as well.

I can't take anymore of Larry right now.  There is more and I'll deal with it tomorrow.  With some specifics and not the professor's generalizations.   

Comments

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[frugal]

Paul,
Despite all the doom & gloom naysayers' propaganda, one thing that I can never deny is that their data is correct. Yes, US simply has too much debt. You could check out my portfolio. There are many things that one can do to avoid some pains if naysayers are correct.

Regards,

[Paul]

I'm curious as to your take on where the US is headed with regard to the problems Larry made mention of. I read his book and I have to admit I got suckered by the fera-tactics he employed. I've got a decent net worth (600k) and am 37 years old , but have zero invested outside US (and 180k in a 401k, not roth IRA as Larry suggests). I'm definitely conserned with the present and future debt obligations the US is looking at. Would like to hear your thoughts....