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Looking at retirement a little differently

Marketplace Staff May 18, 2007
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Looking at retirement a little differently

Marketplace Staff May 18, 2007
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TESS VIGELAND:
Think you know how much to have on hand for retirement? And when to start using that money? Well, your friendly neighborhood radio host thought so, too, until I read a recent article in the New York Times. It featured an economist who says we’re all thinking about this the wrong way. Laurence Kotlikoff teaches economics at Boston University, and he says don’t start withdrawing on Social Security benefits the second your eligible, which, of course, is exactly the opposite of all those online retirement calculators.

LAURENCE KOTLIKOFF:
Well, if you go to, for example, Fidelity is my plan, which is their new calculator, it has five questions. You just can’t even begin to get any – give somebody a decent advice based on the five questions. It’s like going to a doctor and getting a one-minute checkup. It’s really a form of malpractice. And they’re using the conventional replacement rate methodology, which was developed by the insurance industry to sell more product.

VIGELAND:
What is the replacement rate methodology? What are you talking about?

KOTLIKOFF:
Well, the replacement rate methodology is asking how much income do you need after retirement to replace the income you had before retirement.

VIGELAND:
That’s where we always hear about the – you need, what, 80 percent of your income while you were working, or something like that.

KOTLIKOFF:
Exactly. The typical advice is that you should target to have income of 80 percent of your pre-retirement income, 80 percent. And that’s far too high for almost all American households. And then the next thing that happens when people are given a target that’s way out of balance, I refer to this as like pimping risk. They get people set up with a target that’s far too high, and then they induce them to invest in things that are far too risky.

VIGELAND:
So how does this fit in to your argument that you should really delay taking money out of everything from your, you know, the money that you’ve stocked away individually to the Social Security benefits that you could potentially start getting at 62?

KOTLIKOFF:
Yeah, you can start checking Social Security at 62, but if you wait, Social Security gives you a much higher benefit, about 75 percent higher benefit if you take it at 70. And it turns out, for very good economic reasons, that it makes much more sense for most people to use their regular assets and their 401K money, their retirement account money, to tie themselves over and wait as long as possible to take Social Security because the increase in the benefit is so generous that Social Security is offering you.

VIGELAND:
Can you give us an example of the math on that? Say, you’re making $50,000 and you want to retire at 62, what would be the benefit to you of waiting until you’re 70 to start withdrawing Social Security?

KOTLIKOFF:
Well, again, if you can, use your regular assets in your retirement accounts to tie you over to maintain your spending before age 70 and then move on to your Social Security benefits, well I’ve done cases for people at around 60, they can typically raise their living standard by about 10, 12 percent.

VIGELAND:
So by waiting until 70, your annual payments from Social Security are much greater?

KOTLIKOFF:
Yeah, they’re going to be about 75 percent higher.

VIGELAND:
Wow.

KOTLIKOFF:
That’s a huge increase.

VIGELAND:
What about those like me who are in their 30s and don’t believe that Social Security will still be there when we retire?

KOTLIKOFF:
Well, there’s reason to be concerned. The system is about 20 percent under-funded. We need radical reforms in Social Security, the health care system, and the tax system to really find our way forward in, into the future. If you guys could just elect me president for the day, I’ll take care of the whole thing.

VIGELAND:
I’ll see what we can do about that.

KOTLIKOFF:
OK.

VIGELAND:
Laurence Kotlikoff is an economics professor at Boston University. Thanks so much for coming in.

KOTLIKOFF:
Hey, my pleasure.

VIGELAND:
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