Leonidas
Thinks s/he gets paid by the post
I was browsing my pension fund's website and found an article from October that I had not previously read. One of the fund's in-house planners had gone to a seminar and had come away with what he felt were controversial, but interesting ideas. Basically, it's financial advice from an economist's viewpoint compared to what the typical financial planner would advise.
It's password protected, so I'll have to just summarize it here.
The speakers were Laurence J. Kotlikoff, and Zvi Bodiea. Kotlikoff is a Professor of Economics at Boston University. For many years he has provided expert testimony to the Senate Finance Committee (Washington D.C.), the House Ways and Means Committee and others. He has served as a Consultant to governments all around the world.
Zvi Bodie is the Norman and Adele Barron Professor of Management at Boston University. He holds a PhD from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT's Sloan School of Management. Professor Bodie has published widely on pension finance and investment strategy in leading professional journals.
From Kotlikoff:
On withdrawal strategies in retirement:
Financial Planner: Retirees should wait as long as possible to draw on their pre-tax retirement accounts, in order to maximize tax deferred growth.
Economist: Retirees should spend their pre-tax retirement savings first, since income tax rates are almost certain to be higher in the future. Withdraw those dollars now and pay your taxes at a lower rate than what you are likely to experience years from now.
On paying for kid's college education:
Financial Planner: Educate your kids at the most prestigious university you can get them into, regardless of the cost.
Economist: People spend too much on expensive colleges.
On asset allocation:
Financial Planner: Wealthy people should own stocks. Less wealthy people should invest in bonds.
Economist: The wealthy should own bonds. Less wealthy people should invest in stocks.
On financial priorities:
Financial Planner: Our top priority is to accumulate as much money as possible in 401k plans, Roth IRA’s and 529 plans.
Economist: Paying off the mortgage should be our first priority, and is one of the safest investment strategies available to us.
From Bodie:
We underestimate the risk in the stock market. He believes that most people would not choose to invest in stocks if they fully realized how much risk they are taking.
Bodie has real doubts about the long-term effectiveness of conventional asset allocation and diversification strategies, particularly for individual investors. In times of crisis, a positive correlation makes everything go down and investors have few, if any, safe havens.
He believes that the defined contribution industry and its clients have conflicting long-term objectives. The industry focuses solely on accumulating assets to provide for a future retirement of its client, yet they are frequently not offering a mechanism for converting the retirement plan from asset accumulation mode to lifetime income mode.
Rather than using diversification to manage risk, Bodie recommends that individual investors transfer the risk. He recommends doing that by using TIPS.
Individual investors should prepare for retirement using safe investments, and lower their expected rate of return. Save more, work longer, retire later.
Here is the final paragraph, from the planner who wrote the article:
It's password protected, so I'll have to just summarize it here.
The speakers were Laurence J. Kotlikoff, and Zvi Bodiea. Kotlikoff is a Professor of Economics at Boston University. For many years he has provided expert testimony to the Senate Finance Committee (Washington D.C.), the House Ways and Means Committee and others. He has served as a Consultant to governments all around the world.
Zvi Bodie is the Norman and Adele Barron Professor of Management at Boston University. He holds a PhD from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT's Sloan School of Management. Professor Bodie has published widely on pension finance and investment strategy in leading professional journals.
From Kotlikoff:
On withdrawal strategies in retirement:
Financial Planner: Retirees should wait as long as possible to draw on their pre-tax retirement accounts, in order to maximize tax deferred growth.
Economist: Retirees should spend their pre-tax retirement savings first, since income tax rates are almost certain to be higher in the future. Withdraw those dollars now and pay your taxes at a lower rate than what you are likely to experience years from now.
On paying for kid's college education:
Financial Planner: Educate your kids at the most prestigious university you can get them into, regardless of the cost.
Economist: People spend too much on expensive colleges.
On asset allocation:
Financial Planner: Wealthy people should own stocks. Less wealthy people should invest in bonds.
Economist: The wealthy should own bonds. Less wealthy people should invest in stocks.
On financial priorities:
Financial Planner: Our top priority is to accumulate as much money as possible in 401k plans, Roth IRA’s and 529 plans.
Economist: Paying off the mortgage should be our first priority, and is one of the safest investment strategies available to us.
From Bodie:
We underestimate the risk in the stock market. He believes that most people would not choose to invest in stocks if they fully realized how much risk they are taking.
Bodie has real doubts about the long-term effectiveness of conventional asset allocation and diversification strategies, particularly for individual investors. In times of crisis, a positive correlation makes everything go down and investors have few, if any, safe havens.
He believes that the defined contribution industry and its clients have conflicting long-term objectives. The industry focuses solely on accumulating assets to provide for a future retirement of its client, yet they are frequently not offering a mechanism for converting the retirement plan from asset accumulation mode to lifetime income mode.
Rather than using diversification to manage risk, Bodie recommends that individual investors transfer the risk. He recommends doing that by using TIPS.
Individual investors should prepare for retirement using safe investments, and lower their expected rate of return. Save more, work longer, retire later.
Here is the final paragraph, from the planner who wrote the article:
