Review of Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire (Hardcover)

Kotlikoff is a very interesting writer/economist.His previous book The Coming Generational Storm: What You Need to Know about America's Economic Future is a must read for anyone interested in the actuarial position of Social Security.Now, Kotlikoff and Burns focus on financial planning.To investigate it, Kotlikoff developed a sophisticated program (ESPlanner).Its underlying methodology is "consumption smoothing" that consists in evening out your discretionary income over your lifetime.

Per the authors, the financial service industry ignores consumption smoothing methodology for several reasons.First, it is really complicated.It includes many variables (mortgages, change in member of households, AMT, Social Security benefits taxation, etc...).Second, it reduces retirement savings needs.Third, it reduces the investment risk you need to incur to reach your goals.Thus, consumption smoothing would cut into the sales of financial products.

The authors spare no one in the financial service industry.The mutual fund managers don't earn their fees as 70% of them routinely fall behind the stock indexes.And, the 30% that beat the market change every year.Thus, the 30% who beat the market are just Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.Hedge funds don't have a chance to make up for their high fee structure (1% management fee; 20% of returns).Insurance salesmen care more about their commission than your finances.

The authors are at their best when dealing with the intricacies of Social Security and Medicare.They explain unique strategies to maximize consumption smoothing such as Social Security double dipping.Similarly, you can come ahead by giving to a Charitable Gift Fund because it markedly reduces your taxes on Social Security benefits.They stress how rapidly Medicare premiums are rising and how we should boost savings even during retirement to withstand that fiscal shock.

Many of their other recommendations make good sense.Those include holding stocks in taxable accounts and bonds in tax advantaged ones (IRA, 401k) to lower your tax burden.They recommend using index funds instead of regular mutual funds to save on costs and boost returns.Diversify your 401k holdings away from your employer's common stock to reduce your own portfolio risk.They also suggest that marriage is a good deal from a tax standpoint in most cases.Their chapter on how to hedge against potential increase in taxes and inflation and upcoming cuts in Social Security benefits is very good.Their chapter on long term care is excellent.

But, some of their investment advice is less sound.Kotlikoff recommends inflation indexed Treasuries (TIPs) as a safe investment that is guaranteed to keep up with inflation (just as Robert Shiller did in Irrational Exuberance).But, on an after tax basis TIPs are unattractive. The yield they offer above inflation is really low (< 1.5% for 10 year TIPs).When inflation is higher than 3% you incur negative real returns after tax.This is because the entire return (inflation + yield) is fully taxable by the IRS.Also, TIPs with longer maturities offer little extra yield that does not compensate for the increase in interest rate risk.Thus, with TIPs it is questionable you can preserve capital let alone grow it.As a better alternative, I suggest medium term Munis.

Occasionally, they make errors.Upon retiring, Kotlikoff recommends converting your 401k into a Roth IRA because you may hit the 28% AMT that is lower than the 35% maximum tax rate.But, you don't "benefit" from the AMT because your tax liability is always the higher of the AMT or your regular taxes.Also, Kotlikoff suggests people's living standards go up when home prices fall because they save on insurance premium and property taxes.But, they don't.Insurance premiums are based on the replacement costs of the house.And, property taxes are based on assessed value.Replacement costs are always lower than the home market value.Assessed value almost always is lower too.Thus,in the majority of cases declining home prices will not save you money.

The authors make other questionable statements.Supposedly, on a consumption smoothing basis, a plumber maintains a higher living standard than a doctor.I don't believe that.Also a college education supposedly provides little financial benefits vs just high school.Meanwhile, figures from the US Census indicate that college grads make nearly twice as much as high school grads.I ran the numbers and calculated the NPV of a college education was several hundred thousand dollars.Also, they suggest that having a second child cost either little or is a cost saver.That's pretty hard to believe too.

Occasionally, the authors appear to contradict themselves.Late in the book, the authors share that per the Employee Benefit Research Institute 56% of retirees spend either the same or more than their pre-retirement level.This contradicts the authors' position that the financial service industry advocated replacement rate of 70% of pre-retirement earnings is too high.The mentioned survey instead suggests it may be too low.

In another chapter, the authors oversell the concept of annuitizing assets and reverse mortgages.That's where they push consumption smoothing too far.By annuitizing your assets and getting a reverse mortgage, you wipe out your estate leaving nothing for the next generation.

This financial planning book is a bit too erratic.To build a robust foundation, I recommend instead The Random Walk Guide To Investing.




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