Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?

Overall a decent primer on how to think about personal finances from an economics point of view - with a caveat - much is controversial. I agree with the concept that your standard of living is the starting point to base financial decisions. It always has been, however the loss of pension programs for people to sustain their standard of living has changed how people need to think about funding that standard of living once they no longer work. This change has caught many in the baby boom generation off guard and hopefully younger generations will learn from this.

I also agree that a blanket income replacement ratio is nonsense for planning purposes and that individuals need to explicitly determine what their standard of living currently is and what level they wish to sustain when no longer working. The financial industry cuts the problem with a cleaver (with income replacement ratios) and then works with a scalpel on what is left (spreadsheets and calculators galore in office or online) as it relates to this point.

The use of index funds (Vanguard or Dimensional Fund Advisers from their website) to obtain asset class returns is another area of agreement. However, their asset allocation suggestions are very controversial.

Utilizing a mortality age ("maximum age of life") instead of longevity ("expected age of death") is also prudent advice given people are living longer; which means by definition that the expected age of death is getting older! In fact this being such an important point - I'm mystified that they don't explain how to determine maximum age of death (not really mystified, since you can buy their software which might tell you - not sure since the book is silent on what the software does) ... readers can go to the National Center for Health Statistics http://www.cdc.gov/nchs/ and search "life tables" which will easily explain how to determine probability of living to a given mortality age based on your current age. A factoid for example: people ages 55 to 75 in U.S. have an approximate probability of 10-12% (range corresponds to age range) of living past age 95; and approximately 20-30% chance of living past age 90.

The above are just a few examples of agreed upon points in the book.

So the reader is aware, many planners and economists take issue with the author's assertions about many topics, and readers can follow the logic of many of their arguments and decide for themselves, if they are knowledgeable about the pros and cons of the debate, where they may agree or disagree with some philosophical differences. The reader should be aware that things are not as dogmatic as the authors may imply - and seem to give strength to their arguments by bashing the financial industry at almost monotonous frequency. Magically, the software and website touted in the book will perform complex calculations only they can provide. In other words, the book is a thinly veiled marketing piece for this software and website.

I came away fundamentally disappointed in the book in that it provided very little actionable points with most requiring their software to see just how their process may work. Also, subtle and at times, blatant use of fear are a turn off. Overall, a decent primer on how to think about money in many areas of personal finance; however major areas lacking are the need to buy their software to do the complicated calculations they claim need to be made to apply their concepts correctly; and, not balancing their discussion to point out what areas may be controversial and why. It would have been a better read had they included such discussion and dropped the monotonous sales pitch for their software.

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.

To preface, I am a semi-active stock trader, a long-time reader of Scott Burns column, and a recent reader of the authors' 2004 book, "The Coming Generational Storm." In my opinion, their earlier book is more of an eye-opener and better written, and since their prognostications came true, lends credence to their theories. Reading it would certainly clarify ideas in this book, but "Spend 'Til the End" is still a must-read follow-up.

This book sets out to debunk the insipid and misleading retirement advice given by web-based questionnaires like Fidelity's myPlan. They show that the idea that a replacement income goal of 80% is not based on any real academic research -- if people use this simplistic number as their guide, they could either end up saving way too much or much too little.

The authors also question if you really need to starve yourself today in order to feast in the future, describe how Uncle Sam will steal much of your savings if you're not careful, and how you should strive to enjoy a consistent living standard throughout your life, something the authors call "Consumption Smoothing."

As a result of reading this book, I am pushing my employer about offering a Roth 401(k) in addition to the traditional one. The authors' two books explain why this is a good idea.

If other reviewers complain that this book acts as a commercial for one of the author's software products, I partially agree, but I believe there is a lot to be gained here without buying the software. As for me, I still plan to purchase the download in the near future.

This is an interesting book with a twist. Good for those just starting to save and plan for their future, but nothing new for those more experienced in handling their money. The basis premise is that there are trade-offs for every decision about money and sometimes following the standard wisdom (i.e., save all you can for retirement) may not be in your best interests at the moment.

There is no financial or retirement planning in this book. It is about money management and understanding how you behave with money -- from an economist's perspective.

I just finished this book today and kept waiting for the discussion of problems and issues to end in some guidance but it never really did. It was an interesting read and probably very accurate in its treatment of the financial planning industry but it just makes you realize how many variables there are - inflation, government rules, laws, and tax policy - how much Social Security will I get and how much will be taxed and how much will my Medicare premium that gets deducted from it be? Oh, and what lifestyle do I want? Where will I live? Who will I live with? Life is full of uncertainy so I think I will still tend to over-save just in case, perhaps at the "expense of my youth" as the authors caution against.

There were some valuable insights into what you need to consider - like how nursing home care can wipe out all of a married couple's savings, leaving next to nothing for your surviving spouse (Medicaid will come after your house eventually so don't count on leaving it to your kids). But then there was no information on what to do to prevent that or which states have the most favorable Medicaid rules that allow you to pass on more to your kids. Since the authors already established that financial advisors are only interested in lining their own pockets, who am I supposed to go to for that guidance?

The book did have a few small nuggets of very good advice - one type of investment I hadn't heard much about that sounds very safe, another financial product I bought a few years ago due to my own paranoia, and a task that will require I do some legwork to figure out how to execute - very carefully. It has advice but you still have to do the work and hopefully find someone you trust to help you.

The notion of being over or under funded, saving too little or too much, and balancing all of life's choices in spending based on what you personally value to avoid, as David B. Loeper has long put it in his speeches and white papers, too much uncertainty and needless sacrifice to have a rational balance is well articulated in this book. (The white papers are: "Do You Perceive a Contradition - Examining the Premises of Financial Advising-August 2003" and "Measuring Temperature With A Ruler- Is Your Wealth Manager Really a Return Manager In Disquise").

Also well examined are the premises Loeper outlined in his 2007 book - Stop the 401(k)Rip-off! that avoiding active management not only has the certainty of lower fees, but also has value in avoiding the needless risk of materially underperforming the markets that any attempt to out perform introduces.

There's been some very good early press on this book. See, for example, the Washington Post article (copied below) as well as this comment in a recent article in the New York Times:

-----
Even if the parents have money left over, the ones who didn't have custody of the children may be less inclined to pass an inheritance on to them. "The ties that parents have with kids and their interest in supporting them could well be weakened by the fact that they haven't spent much time with them," said Laurence J. Kotlikoff, an economics professor at Boston University and the co-author of "Spend 'Til the End," which gives readers a new way to think about financial planning.
-------
http://www.nytimes.com/2008/06/21/business/yourmoney/21money.html?em&ex=1214193600&en=6425b01af144e3d7&ei=5087%0A

from the Washington Post:
SPEND 'TIL THE END The Revolutionary Guide to Raising Your Living Standard -- Today and When You Retire By Laurence J. Kotlikoff and Scott Burns | Simon & Schuster. 319 pp. $26

With a different view of spending, economics professor Laurence J. Kotlikoff and financial writer Scott Burns stress that what matters is not how much one spends but rather the standard of living that it enables. In their new book, Spend 'til the End, they argue that most people could achieve and sustain a higher standard of living throughout their lives.

This book's greatest contribution may be the inclusion of often overlooked topics, such as the timing of payouts and deductions. The authors analyze when, how and in what order to start taking payouts from various retirement savings plans, as well as when and whether to choose your own or spousal Social Security benefits. Making the wrong choice could significantly increase your tax bill and reduce the tax benefits of charitable contributions and other deductions now and for years -- or decades -- to come.

Another neglected topic they cover is the problem of outliving your money. Kotlikoff and Burns advocate making spending decisions based on the maximum age to which you might live, not the lower, average life expectancy that most financial planners use.

How can a consumer optimize his standard of living? Kotlikoff and Burns tout their software program "ESPlanner," which is available online for a fee. They claim that the late Nobel Prize-winning economist Franco Modigliani endorsed it. Whether their software lives up to the authors' promises is never proven. What is shown is that Kotlikoff "is president of the company and has a financial stake in the software."

I am naturally frugal, so my instinct is to aggressively over-save. However, their idea of consumption smoothing, and the corresponding metaphor of "law of diminishing returns" is spot on. For years, I didn't give much thought to what happens to a nest egg as one ages, other than happy compound interest. However, the threats of uninsured medical care, assisted living and nursing homes loom to strip property at warp speed. At least in my case, as a single person. Which means there is a fairly good chance that I will not get to pass on my assets to my relatives, or favorite charity. I don't really have much desire to "consume" more per se. With substantial self-discipline, I might could trade in my humble Ford for a BMW, and take an annual European vacation. Or better yet, maybe I should get married to have someone help me with consumption smoothing. :-)

Spend til the end is a must have book that examines, diagnoses and prescribes cures for the illogical and ill advised financial advice inflicted on ordinary americans by the army of brokers, dealers,wealth managers and financial planners (aka sales people) carrying fancy titles such as CFA, CFP, CFC, CIMA etc. It exposes the advice given by these sales people who prescribe Financial "Rules of Dumb" for savings and investing, which results in unnecessary oversaving or undersaving, consumption disruption, and risky investing. Spend til the end offers a better approach, Consumption Smoothing, which if followed, allows individuals to maximize their spending power, smooth their living standard and price their passions. The subject of Consumption smoothing will be new to most without significant studies in Economics. But the tenets of consumption smoothing, that individuals want to maintain their standard of living over time will resonate with most readers. Read this book, and buy a copy for your financial planner. If your planner is not willing to educate herself about consumption smoothing, the advice they prescribe is not good for your financial health. Fire them! One major light bulb moment after reading this book is that individuals need to diversify all of their resouces, not just their financial assets. This means individuals should take into consideration their non financial assets, such as the ability to earn a living, Social Security, and Medicare. You will not see headlines about this approach on the cover of your favorite financial magazine, because those magazines have one goal in mind, to sell more magazines. Leave the magazine on the shelf and read this book. You will improve your life.

Kelvin
Chicago, IL