So says “Harvard trained economist”.
https://www.cnbc.com/2022/01/05/harvard-trained-economist-sh…
At least he got the “wait until age 70 to take Social Security” right.
They must not teach you about “the skim” at Harvard.
intercst
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I’m glad you posted this. I read this yesterday and I was thinking I agreed with some of it, disagreed with some of it, and some of it just seems so out of touch with its very middle to upper class focus.
“Find jobs others dislike and you’ll be paid more.” Really? Because janitors and nursing home aides are paid so very well……
“Don’t borrow for college.” Why not “don’t borrow too much for college, and definitely don’t borrow to finance a major that won’t earn you in enough money to pay it back in a reasonable time frame.” (He seems to have bought in to a lot of the horror stories about student loans).
“Buy your home in cash.” Really??
He also seems to have bought into the divorce rate statistic that is widely quoted, but wrong, or just not quite that simple.
https://psychcentral.com/lib/the-myth-of-the-high-rate-of-di…
https://www.fatherly.com/love-money/what-is-divorce-rate-ame…
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This guy worked with Scott Burns (the Couch Potato Portfolio) on many things.
Surprised he’s now taken a ‘don’t retire early’ position. But that might be true for MOST working folks who have no concept of the 4% SWR (before large fees for ‘advice’).
I’m not so sure that starting out you want to jump into ‘owning a home’. While you get tax breaks, you also put in a lot of extra hours on house maintenance, cleaning, and need to furnish it and all the rooms. Unless you need the ROOM, probably don’t until well situated. It also locks you into a geographic location. Great if you’re in Silicon Valley but not so great if there is only one major employer in your town.
Yeah, I guess being a plumber or the septic guy (that no one really wants) gets you job security and decent pay… I’m not sure there are that many white collar jobs that few want to do…other than ones that take 60 hours for 40 hours pay.
I think he believes that there are going to be huge ‘asset taxes’ in the future from his statements. Could be true and could impact those saving away hoping to retire on their nest egg. If that gets dinged 1 or 2% a year, there goes your SWR.
As to college borrowing - duh. Even some going to state college have to borrow a bit, but it should be figured on how long to pay it back at the expected salary you will receive at graduation for your major/career. Even in the 1960s, I had college debt, but it was 30% of my first year’s pay - and paid off in 18 months. Had some scholarship, had big help from parents, but when second kid started college too, had to borrow a bit.
As to seniors…not all necessarily likely to stay in their house. Some will move to retirement communities. Some will move to assisted living - sooner, not later. Hard to generalize. (Still in my house at age 75 - been here 31 years - but who knows when health and other considerations cause change? ) Parents lived in same house in retirement - not the same as when working. Couldn’t wait to get away from NYC suburbs(urburbs)…
t.
t.
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“Spend 'Til the End: Raising Your Living Standard in Today’s Economy and When You Retire Paperback – January 5, 2010
by Laurence J. Kotlikoff (Author)”
this is the “Harvard trained economist”
"Takes on the financial-planning establishment: Economist Laurence J. Kotlikoff and syndicated financial columnist Scott Burns criticize major financial institutions such as Fidelity, Vanguard, and other mutual funds and insurers for offering what they call “rules of dumb,” financial planning information that is inadequate for most people’s needs…
• Unconventional, economics-based advice: You might be better off waiting until age seventy to take Social Security; you may be overestimating the tax benefits of your mortgage; you might be scrimping, saving, and struggling to fund your retirement when you could be spending and enjoying your money…"
https://www.google.com/search?q=book+spend+to+the+end&hl…
So…in one place, it’s buy your house…in another it’s ‘overestimating tax benefits of your mortgage’… (and most folks aren’t able to pay cash for a house)
He also co wrote
https://www.amazon.com/Coming-Generational-Storm-Americas-Ec…
"n 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we’ll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the current administration is heading straight into the coming generational storm.
Kotlikoff and Burns also offer a “life jacket”— guidelines for individuals to protect their financial health and retirement.
t.
OK, Telegraph, I’ll bite: What’s their “life jacket”?
So…in one place, it’s buy your house…in another it’s ‘overestimating tax benefits of your mortgage’… (and most folks aren’t able to pay cash for a house)
This piece is actually internally consistent. Pre-TCJA the federal government typically subsidized 25% of the cost of your mortgage interest and real estate taxes through itemized deductions. Under TCJA rules, your state and local tax deduction is capped at $10K and with the increased standard deduction, fewer taxpayers can itemize. So you’re no longer getting the tax subsidy. If your carrying costs aren’t being subsidized, why pay 2-3x your mortgage principal in interest over the life of the loan?
I’m not saying I agree with this position. Even if you can purchase your house for cash, one should consider the net result of having a mortgage plus investing the uncommitted funds vs. the outright purchase.
Ira
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3. Strive to own your home, not rent — and try to buy in cash. This is particularly the case if you’re a moderate to high earner. Having more of your money packed in your home is a way to shelter it from federal and state asset-income taxation.
I would agree with don’t over buy, but I am one of those that falls into the get a mortgage if you can and don’t pay it off early camp, particularly with the low low rates we have now. When you buy a house with 20% down, you get appreciation on the value of all the house, not just the amount of cash you have in the house, while avoiding mortgage insurance. And yes, home values don’t always go up in the short term, but in the long term they tend to appreciate at least with inflation. For homes in TX, YMMV.
4. Mortgages are tax and financial losers. Pay them off ASAP. Think about it: If you have $100,000 that you can invest right now in a bond earning 1.5%, you’d have $1,500 in interest income over the course of a year. But if you had a $100,000 debt at a 3.2% interest that you could pay off right now, you’d save $3,200 over the course of the year in interest payments.
Anyone who considers himself a financial advisor would get the boot from me if they suggested I buy $100K of bonds at 1.5%. I would invest it in the stock market.
20. Most conventional investment advice is, to be nice, of dubious value.
He got that right at least, including most of his advice!
IP
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At least he got the “wait until age 70 to take Social Security” right.
Actually, even that isn’t right for everybody. I retired at 62, for the sake of my physical and mental health. It was not a financial decision. I was burned out on the job. Even if I hadn’t been, it was a good move. I spent much of the next two years helping care for our daughter who had cancer, and died 4 years ago Jan. 4th.
And I started taking Social Security at that point. That WAS a financial decision, but I still maintain it was the right one. I didn’t have as much money as I do now, and having Social Security for the 3 years to Medicare age of 65 let me minimize the distributions from my retirement and investment funds that I did take. Now since then, I inherited some money, and the market has been good to me. But I still am not 70 yet, and there’s no way I would have worked past 65 and let Social Security benefits sit there. I don’t know how long I’ll live. I’m 68; 20% of my high school classmates are dead (that’s high, I know.) But there’s no way I would pass up 8 years of benefits when you have to live to be pretty old to justify waiting until 70.
Bill
6 Likes
This piece is actually internally consistent. Pre-TCJA the federal government typically subsidized 25% of the cost of your mortgage interest and real estate taxes through itemized deductions. Under TCJA rules, your state and local tax deduction is capped at $10K and with the increased standard deduction, fewer taxpayers can itemize. So you’re no longer getting the tax subsidy. If your carrying costs aren’t being subsidized, why pay 2-3x your mortgage principal in interest over the life of the loan?
For clarity’s sake, here’s the para in question:
4. Mortgages are tax and financial losers. Pay them off ASAP. Think about it: If you have $100,000 that you can invest right now in a bond earning 1.5%, you’d have $1,500 in interest income over the course of a year. But if you had a $100,000 debt at a 3.2% interest that you could pay off right now, you’d save $3,200 over the course of the year in interest payments.
I realize he used the one year time period if for illustration, but most mortgages are amortized over 30 years. So the comparison should be paying it off sooner than 30 years compared with not paying it sooner than 30 years.
Over a 30 year period, stocks will crush that 3.2% savings you’d get by paying off the mortgage. Plus, if inflation is something like average over that time period, you’ll get to use the bank’s money for free.
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4. Mortgages are tax and financial losers. Pay them off ASAP. Think about it: If you have $100,000 that you can invest right now in a bond earning 1.5%, you’d have $1,500 in interest income over the course of a year. But if you had a $100,000 debt at a 3.2% interest that you could pay off right now, you’d save $3,200 over the course of the year in interest payments.
When I wrote my earlier reply, I didn’t know he was comparing the mortgage interest cost to a bond return. My final comment imagined a more typical investment return. One should be able to easily exceed the mortgage interest rate with a not-very-aggressive equity or blended portfolio.
Ira
Paying off a mortgage still makes sense for many of us, even with low rates. If you are a mature/retired investor with, let’s say, at 60/40 portfolio, you’re gonna have a big chunk of change in bonds, today even below the 1.5% mentioned above. It makes sense to not have a 3%+ mortgage versus fixed income earning less than 1.5%.
First pick the correct asset allocation for your age and situation. Then decide if you want a negative bond (mortgage or other debt) that costs you more than you’ll earn in a (positive) bond. For many of us, it never makes sense to have the debt. I guess there’s the arbitrage play of having the debt with the thought to invest the cash (that would otherwise pay if off) once rates rise. But if you started that game in 2003, you’d still be waiting to invest.
In the end, a 1.5% (or less) bond interest rate received with a 3% mortgage cost makes no sense. And the math has been the same for my lifetime.
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Daryll44 writes,
First pick the correct asset allocation for your age and situation. Then decide if you want a negative bond (mortgage or other debt) that costs you more than you’ll earn in a (positive) bond. For many of us, it never makes sense to have the debt. I guess there’s the arbitrage play of having the debt with the thought to invest the cash (that would otherwise pay if off) once rates rise. But if you started that game in 2003, you’d still be waiting to invest.
In the end, a 1.5% (or less) bond interest rate received with a 3% mortgage cost makes no sense. And the math has been the same for my lifetime.
That was my thinking in 2012 when I bought my home. I happened to have enough money sitting in a money market fund at a sub 1% return to pay cash for the home. Why would I take out a mortgage for 3.0 to 3.5%?
intercst
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That was my thinking in 2012 when I bought my home. I happened to have enough money sitting in a money market fund at a sub 1% return to pay cash for the home. Why would I take out a mortgage for 3.0 to 3.5%?
This was my thinking in mid-2020 when I bought my current home. I could have pulled the cash from the IRA and ROTH to cover the entire price, instead of just pulling 20% for the down payment, but my TTM return there at the time was over 50%. Why wouldn’t I take out a mortgage for 2.75%?
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RHinCT asks,
That was my thinking in 2012 when I bought my home. I happened to have enough money sitting in a money market fund at a sub 1% return to pay cash for the home. Why would I take out a mortgage for 3.0 to 3.5%?
This was my thinking in mid-2020 when I bought my current home. I could have pulled the cash from the IRA and ROTH to cover the entire price, instead of just pulling 20% for the down payment, but my TTM return there at the time was over 50%. Why wouldn’t I take out a mortgage for 2.75%?
Depends on your asset allocation. I was 95% stock/5% cash & fixed income at the time. And the money I withdrew to purchase the home would be replaced by my “dividend income in excess of living expenses” within 2 years. (I was still in the middle of my project to reduce dividend income to make my portfolio “Obamacare ready” for a big refundable tax credit in 2014.)
intercst
In the end, a 1.5% (or less) bond interest rate received with a 3% mortgage cost makes no sense. And the math has been the same for my lifetime.
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Liquidity. A bond is. Equity in a house is not.
Our family got an up close & personal lesson in this. My Uncle & his wife owned a few acres of prime land outside Atlanta worth easily $3-4 million. And a paid-for house with no mortgage.
Then one Saturday afternoon he had an emergency trip to the hospital for quintuple bypass heart surgery. Regardless of insurance, there are sill large bills, especially if you want to convalesce at a decent place.[ Cue intercst to come in and rant about the US healthcare system.]
Oddly, no bank wants to give you a loan when you call from the hospital, even if you have a ton of real-0estate equity. -
Inflation protection. A 30 year fixed rate mortgage has it. Yeah, a 30 year bond doesn’t, but a shorter term, 10 year duration or so, does.
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“The standard is not perfection, the standard is the alternative.” A 1.5% bond is arguable very safe, therefore “perfect”. But it is a stupid alternative for your money. Invested at 60/40 or even 20/80 is not quite as safe, but is safe enough. And the return over the 30 year term will be a lot more than the cost of a 3% mortgage.
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That was my thinking in 2012 when I bought my home. I happened to have enough money sitting in a money market fund at a sub 1% return to pay cash for the home. Why would I take out a mortgage for 3.0 to 3.5%?
First question I would ask is why did you have so much money sitting around earning nothing. Doesn’t seem like an optimal place for it. Heck, the 10-year Treasury yield rate was 1.5% in 2012.
Vanguard Total Bond Market ETF (BND) yield was 3.43%.
It seems like you are justifying your position by comparing to a very sub-optimal alternative.
Why would I take out a mortgage for 3.0 to 3.5%?
Okay. Here. Running some numbers. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&a…
A 50/50 Couch Potato portfolio had 9.74% annual return, 2012 to now.
A 20/80 portfolio had 5.58% annual return.
Both of these were well above a 3%-3.5% mortgage rate.
Subtract out a monthly withdrawal for a 3.5% 30YR FRM, the 50/50 Couch Potato ended with 1.6 times as much as it started with. Initial $10,000 ends at $16,288.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&a…
That’s why.
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Rayvt: You are having a totally different discussion. You are making the case that “it’s different this time”, therefore having 40% of your assets in fixed income (at 1% or less, as Intercst posted) isn’t optimal. But the whole portfolio IS optimal for many of us who don’t believe it’s different this time. And are willing to accept near zero interest rates on 40% of our money in return for reduce equity risk. And if 40% is sloshing around at zero ANYWAY, it makes no sense to have a 3% mortgage.
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If you are a mature/retired investor with, let’s say, at 60/40 portfolio, …
You lost me at 40% bonds. We are retired, but unless you are talking I bonds which are indexed for inflation and currently earning over 7%, bonds invested at 1.5 are losing money after you add inflation into the mix.
In the end, a 1.5% (or less) bond interest rate received with a 3% mortgage cost makes no sense.
In the end, a 1.5% bond makes no sense. We have a 30 year fixed rate mortgage at 2% and more than enough cash sitting in the bank waiting for an investment opportunity that could be used to pay it off. We have found a few things here and there to throw the money into, including a recent $40K into Ibonds. But you make money the day you buy a stock, or a property, because that sets your basis. We are fine with waiting for a good value and happy to consider the 2% in mortgage interest as opportunity costs of staying liquid.
IP,
patient investor
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That was my thinking in 2012 when I bought my home. I happened to have enough money sitting in a money market fund at a sub 1% return to pay cash for the home. Why would I take out a mortgage for 3.0 to 3.5%?
Because if you get a 30 year FRM, you have that same rate for the length of the term. It’s an inflation hedge. I wouldn’t buy a property for cash unless I got a decent amount of a price break or some other advantage. We actually bought our residence as a “cash” buyer, but with right to appraise and a long enough time to closing to get a mortgage. The buyer took notice, and while we did not argue the $10K we were asked to increase our price, it got us to the front of the line and awarded the contract. The property has appreciated about 50% in the past two years. Zillow has moderated their projection for next year to 12.5%.
There are many benefits to a mortgage. The key is to not over extend yourself.
IP
Depends on your asset allocation…
Among many other things. Circumstances are individual, and circumstances change. I threw that out there as an example of a different situation leading to a different choice.