Conventional advice may be wrong
A lot of traditional financial planning advice is just plain wrong and can hurt your chances of retiring successfully, says Laurence J. Kotlikoff, economics professor at Boston University.
Kotlikoff, who has studied and written widely on personal finance, says American workers sometimes should do exactly the opposite of the traditional advice.
He has written a book of unconventional advice, “Spend ‘til The End” (Simon & Schuster, 2008) to help workers with retirement planning.
Delay Social Security
For instance, many believe it is better to take Social Security early and preserve tax-sheltered 401k and IRA accounts until later in retirement.
But in a financial planning conference last month in Boston Kotlikoff argued that retirees should use retirement accounts to supplement their spending early in retirement while delaying Social Security.
He argued that the 8 percent increase in benefits granted for each year of delaying Social Security past normal retirement age and until age 70 will guarantee a higher living standard in retirement.
Another counterintuitive bit of advice concerns who should hold stocks and at what stage in their lives.
Traditionally it was felt that those who are well-off can afford to hold more stocks because they can bear the risk. But Kotlikoff argued that those with modest assets can afford the risk more, because a larger part of their assets are fixed and guaranteed through Social Security and pensions.
The same goes for retirees: rather than reducing stockholdings in retirement, they are better able to own stocks because their Social Security benefits are akin to holding a fixed income investment that balances stock risk.
Pay off mortgages
Many homeowners like the deductions they get for mortgage interest. Kotlikoff, however, says most do not realize any real tax advantage for having a mortgage.
First, taxpayers who don’t itemize their deductions realize nothing. High income taxpayers lose the mortgage deduction due to deduction phase-outs.
One group does gain some benefit: those who can take all of the deduction and are thereby kept out of the Alternative Minimum Tax trap. Everyone else should consider paying off their mortgage, he says.