Spend 'til The End by Laurence Kotlikoff & Scott Burns

[bamsphd]

In my case, and many others, after attaining a certain age, you can roll part of the 401k to an IRA, while retaining part within the company's plan.

Found it. I must be 59.5 years old to make a non-hardship withdrawal while still employed at my company. Unfortunately, that won't happen until after 2010 in my case.

 

[Marquette]

If I'm recalling correctly, my wife's plan will allow her to roll up to 50% of her balance out to an IRA while still working. She's 29.

I'm not sure on mine, but I think I can only roll when I quit.

 

[2B]

I got the book from the library Thursday afternoon and just finished it. I highly recommend it. I found it gave me a new way of looking at things and it challenged some of my long held opinions (annuities and LTC).

In my case "consumption smoothing" is really a question of retirement spending so it is less complicated than a 20-something just starting out. The book discussed the risk-rewards of being too heavy in equities and the need of balancing all resources. That wasn't too novel an idea for this forum but it was presented well. It still comes down to unknowable risks -- inflation, stock market performance, taxes, changes in entitlements, etc.

He made a big case for inflation-indexed annuities but then turned right around and said insurance companies severely overcharge for them and there is a significant risk of default. That's pretty much what I've been saying. I would love to buy an annuity but they are financial rip-offs!

There was a plug for LTC insurance but then he also turned right around and described how insurance companies can easily screw you when it comes time to collect. They can also change the terms in many cases so you paid for 40 years without being able to get coverage when you need it. My father had LTC insurance and he was "risk adjusted" every few years by having the whole group get a big price increase. The smart thing was to reapply to a lower cost, new policy -- if you still qualified. Again, I'd love have true, affordable LTC insurance but I don't trust the insurance companies.

It wasn't a sales pitch for the software unless you wanted to see it that way. Unfortunately, there isn't any way to self-analyze without buying the program. I'm not sure if I'm going to get it. I probably will just to play with all the scenarios. Consumption smoothing for me is really a risk assessment of all the seen and unseen things lurking out there.

 

[Dog]

I got the book from the library (was on the wait list for a week). Anyway, did a quick read and set it aside. Will do a second read next week. I agree with 2B. It seemed as if they were making a recommendation and then would point out the flaws. I'm not sure I picked up anything new. DH occasionally comments that he doesn't want to over prepare for RE at the expense of living for today. But, when I ask him what we are giving up - he doesn't have any good examples (except a new car....that he agrees we don't need). The book was okay....I will give it a 2nd read.

 

[clifp]

I ended up spending about 30 minutes reading and Barnes and Noble before deciding to buy Ben Grahams instead. (I am 100% sure that Buffett and Grahams know more than I do vs only 80% sure about Burns and Larry.)

I thought the point about consumption smoothing were interesting. And I see how traditional financial tools fail to take into account kids leaving the nest, mortgages being paid off etc. Although, I think you can use FIRECalc to replicate most everything but taxes.

It seems like a good book for those in the accumulation phase.

Could anyone who has read summarize the key take away for those of us who have already retired?

 

[haha]

I ended up spending about 30 minutes reading and Barnes and Noble before deciding to buy Ben Grahams instead. (I am 100% sure that Buffett and Grahams know more than I do vs only 80% sure about Burns and Larry.)

I thought the point about consumption smoothing were interesting. And I see how traditional financial tools fail to take into account kids leaving the nest, mortgages being paid off etc. Although, I think you can use FIRECalc to replicate most everything but taxes.

It seems like a good book for those in the accumulation phase.

Could anyone who has read summarize the key take away for those of us who have already retired?

I have read it. I don't think the book lends itself to an easy summary; or maybe it is just that I am not good enough at summaries to do it. I think there is a lot in there. It is not an investment book really, so there is no real comparison to Graham and Dodd.

I guess one big point is actions usually have many direct and indirect effects on your overall standard of living and financial security, so think broadly about any plans.

Ha

 

[Midpack]

Summary: It delves into a lot of financial planning topics, pre- and some post retirement. It asks some provocative questions and offers POV's that are not mainstream in some cases, but it does not go too deep on most topics so you may be left with some (worthwhile) homework. Just look at the Table of Contents to decide if it's a worthwhile read for you. I'd recommend reading it, but it's not among my top ten financial/investing books...

 

[hellbender]

ESPlanner is mentioned 9 times in 300 pages, and 3 of them are in the Intro or Epilogue, so 6 times in the body of the book. In 7 cases they do no more than mention they used ESPlanner as the tool used to calculate numbers presented, that's it. On pgs 12-14 there is a section titled "Full Disclosure" in which they describe ESPlanner - I would consider that the extent of the pitch.

Yes, but how often is the term "consumption smoothing" mentioned? This term has become virtually synomonous with Esplanner. Search for consumption smoothing soiftware on the web and the vast majority of the hits will be associated with this product.

I am normally a sucker for stuff like this, but after reviewing the postings and responses at the Esplanner Forums, I have reconsidered. The application is very limited in its treatment of personal and investment real estate and still appears to be quite buggy. I've been there and done that. I am not interested in wasting my time devising arcane work-arounds and offline subroutines to deal with the programs inadequacies. Since real estate is my investment of choice I think I will continue to use my tried and true spreadsheets rather than pay $50/year for the pleasure of debugging this thing.

 

[Robert8]

Economic Life-Cycle Planning

Consumption smoothing is an integral part of the science of economic life cycle investing, saving, and insuring. Economic life cycle theory and models are the standard way economists have analyzed household financial behavior for the past 30 years.

Among research economists there are probably hundreds of consumption optimization models based on dynamic programming that are being used to analyze household financial behavior through the lens of economic life cycle theory. ESPlanner is one of the most advanced of these consumption optimization models and the first consumption optimization model to be made available for sale to the general public. It won't be the last.

I'll bet that 15 years from now almost all the financial planning models you actually have to pay for will be consumption optimization models based on dynamic programming.

Finally, consumption smoothing does not necessarily mean flat or level real consumption. A consumption path could be gently trending up or down and still be a smooth consumption path. Consumption smoothing means avoiding abrupt consumption shifts, i.e. avoiding consumption disruption.

Robert K

PS - It wasn't until the late 1990's that economists even considered porting consumption optimization models to the PC desktop. Dynamic programming methods were, and are, simply too processing and memory intensive for the desktop PC hardware of the mid 1990's and earlier to begin to handle. Even today most consumption optimization models are run exclusively on mainframes and workstations. One of the biggest hurdles the ESPlanner guys face is making dynamic programming algorithms more efficient, and the accompanying computer code more efficient, so that ESPlanner simulation runs are a manner of minutes, and not hours, when run on a desktop PC.

 

[hellbender]

I'll bet that 15 years from now almost all the financial planning models you actually have to pay for will be consumption optimization models based on dynamic programming.

Great! Hopefully by then the bugs will have been worked out.

 

[oma]

Finished the book. I concluded I knew everything they were preaching. However for someone being clueless it wouldn't be a bad read.


Peace O0

Speaking on behalf of the clueless, we'll find out. Just picked up a copy from my local Army library.

 

[chinaco]

{Bump} Pulling this one back up.

I am beginning to read STTE now.

In light of the events in the last few months how does the wisdom from the book and the ESPlanner stack up now?

Any cracks in its approach?

 

[2B]

{Bump} Pulling this one back up.

I am beginning to read STTE now.

In light of the events in the last few months how does the wisdom from the book and the ESPlanner stack up now?

Any cracks in its approach?

The software has two ways of figuring out portfolio "growth." One is the standard X% return with Y% inflation. It can be "historical" or user input. For more money, you can get the Monte Carlo version. I really don't see how this makes any great predictor of our recent meltdown.

The value of STTE is really philosophical. It shows how the young are capital poor but have a long amount of earning years ahead of them. They "need" the housing and "things" to go out into the world, marry and raise children. The old have fewer (or no) earning years ahead and are in the contraction phase. They are free to shed capital because it's no longer "needed" to raise their family.

The whole concept involves "consumption smoothing" and goes against the mantra that everyone needs to save 10% or more of their income for retirement from Day 1. They show that it is better for the workers entering the workforce to establish themselves financially before saving for retirement.

They also make a point out of showing the 80% of pre-retirement earnings needed for retirement spending is not correct for most people.

 

[chinaco]

The software has two ways of figuring out portfolio "growth." One is the standard X% return with Y% inflation. It can be "historical" or user input. For more money, you can get the Monte Carlo version. I really don't see how this makes any great predictor of our recent meltdown.

Yes. I did not thing the book was about specific investment advice... but illuminates the topic of risk in terms of maintaining a lifestyle and how to think about it and manage it.

I was thinking that this downturn may have affected how people think and are approaching FI and management of it. (e.g., It looked a certain way last summer... things look different now). Have your interpretation changed about the ideas put forward in the book.

The value of STTE is really philosophical. It shows how the young are capital poor but have a long amount of earning years ahead of them. They "need" the housing and "things" to go out into the world, marry and raise children. The old have fewer (or no) earning years ahead and are in the contraction phase. They are free to shed capital because it's no longer "needed" to raise their family.

The whole concept involves "consumption smoothing" and goes against the mantra that everyone needs to save 10% or more of their income for retirement from Day 1. They show that it is better for the workers entering the workforce to establish themselves financially before saving for retirement.

They also make a point out of showing the 80% of pre-retirement earnings needed for retirement spending is not correct for most people.

I am in the transition stage of ER. We have what we have and I am endeavoring to better understand the spending phase.

I have been using about 100% of my earnings as a benchmark for income in ER (but not including DW's earnings). But we only spend about 60% of my earnings today and that includes paying the mortgage. We intend to have the house paid off when we ER. After the mortgage, we probably only spend about 45% of my current income.

Obviously we were in much better financial shape (on paper) 12 months ago. Last year, I was doing modest projections and was thinking, we have a surplus... So I was not looking too closely at the consumption side. But now our total portfolio is off by about 30% (much money), I am taking a closer look. I am doing more analysis using my method... But I suspect my method is lacking because it involve certain generalizations.

I am hoping the book will help me to think about things I have not considered.

One area I am coming to grips with is the idea of my goal. It took me a while to figure it out... but my goal is not to become rich (although I would like to )... My goal is to maintain my standard of living. To that end.... am I taking too much risk? Or am I forgoing spending on products and services that DW and I might otherwise purchase?

I am hoping the book will shed light on those concepts.



Did you think ESPlanner was a worthwhile purchase? Has it helped you in making decisions or show you where you need to adjust.

 

[2B]

Have your interpretation changed about the ideas put forward in the book.

I have been using about 100% of my earnings as a benchmark for income in ER (but not including DW's earnings). But we only spend about 60% of my earnings today and that includes paying the mortgage. We intend to have the house paid off when we ER. After the mortgage, we probably only spend about 45% of my current income.

Obviously we were in much better financial shape (on paper) 12 months ago. Last year, I was doing modest projections and was thinking, we have a surplus... So I was not looking too closely at the consumption side. But now our total portfolio is off by about 30% (much money), I am taking a closer look. I am doing more analysis using my method... But I suspect my method is lacking because it involve certain generalizations.

Did you think ESPlanner was a worthwhile purchase? Has it helped you in making decisions or show you where you need to adjust.

My ideas about money haven't changed since reading the book. I didn't think it was as much about money as spending patterns during a lifespan.

Since you are living on 45% of your income, why are you fretting about planning to have 100%? If anything, your spending will decrease as you age except for medical care. The type of medical coverage you have in retirement will determine by how much it will go up. I'd suggest establishing a realistic retirement budget and go from there.

At my low point I was down about 30% and now a little under 25%. I was FI before the fall and I'm still FI. I am glad I decided to put into fixed income a basic amount to assure I stay FI. For anyone going into ER I would recommend a similar approach. My AA was more driven by this dollar amount than any risk assessment.

As far as your SWR, I'm going to start a thread about Scott Burns' latest column if someone already hasn't.

I never bought the book. I checked it out of the library. I buy very few books.

 

[SteveL]

One of the interesting facts in the book is the lifetime value of a daily latte from $tarbucks. This is apparently equal to the price of a BMW 325i.

The concept of smoothing is interesting, However, I think the execution is difficult. When your children are young, and you are house poor and trying to save for college expenses, there is no way to spend then some of the excess funds you may have as an empty nestor at age 55. And, the parsimonious skills you develop to cope with those thin years create habits of non-spending that are difficult to change if life turns better for you later on.

 

[chinaco]

...

Since you are living on 45% of your income, why are you fretting about planning to have 100%? If anything, your spending will decrease as you age except for medical care. The type of medical coverage you have in retirement will determine by how much it will go up. I'd suggest establishing a realistic retirement budget and go from there.
...

I think we have a realistic budget. Plus assets and resources to cover our expenses. I am very confident that we have resources to cover the budget (even with this market decline). But we need to wait till 55 for certain resources to be available (i.e., my pension and Ret Healthcare).

If I were to express my concerns... it is more around contingency planning to ensure that we have planned appropriately.

Conversely, I do not want to hoard money that we could be spending.

Although, I know that executing the plan will require adjustments as things unfold.

I am reading the book now. I am hoping the time investment reading the book will yield some worthwhile insight. But I realize that it might just be a theoretical academic read that provides little practical value... or just restates already know common sense advice.

 

[growing_older]

why are you fretting about planning to have 100%? If anything, your spending will decrease as you age except for medical care.

I see this suggestion almost everywhere. Yet, it is not what I have observed in the older folks I know. Those living on fixed incomes that were forced to spend less, did indeed do so. Those with sufficient means seemed to spend more every year as they make greater use of services for things they no longer do themselves. Those that travel and used to be adventurous about finding hotels off the beaten path, now tend to stay in major cities and increasingly luxurious hotels. Instead of driving, they start to use more taxi or hired car services. I know folks with a small summer place. They used to do all the work there themselves, but gradually they started having a cleaning service help them, then a handyman for major repairs, now snow removal and opening/closing for the season. I'm glad they can still enjoy the place, but expenses are definitely rising, not falling, as they age.

 

[2B]

I see this suggestion almost everywhere. Yet, it is not what I have observed in the older folks I know.

You quoted me and it's based on my personal observation and Bernicke's study. I've watched both my father and my in-laws decrease spending as they aged.

In my father's case he retired broke and barely survived on his pension. When he died 14 years later, he had money in the bank, a paid off condo and had been supplementing one of my brother's lifestyle. As he got into the mid-70s he essentially stopped traveling and spent time with his buddies at a senior center. He read and watched movies a lot.

Everyone is different. There are cases where people are mountain climbing in their 90s and tour Europe twice a year. I think these are outside the norm.

When you plan for retirement, your spending pattern over the rest of your life can be a major consideration. It's almost as important as planning how long you expect to live so you'll have money left when you do die. If you plan on living to 100 with a 100% budget for every one of those years you need a larger nest egg than if you are willing to consider a lower desire for things and stuff as you age.