48 of 53 people found the following review helpful
Important, stimulating, regrettably flawed
, August 15, 2008
This review is from: Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire (Hardcover)
The greatest value of this book is that it got me to "think outside the box" that has been built for me by decades of financial writers, employer 401(k) seminars, and retirement guides. It is a popular introduction to a new way of thinking about financial planning called "consumption smoothing," advocated in particular by BU professor Laurence Kotlikoff. I think almost everyone should read it. We are all sick from an overdose of the conventional wisdom and this book is therapeutic.
But I'm going to devote the rest of this review to knocking it.
It is a popular introduction. Too popular. The breeziness of the writing style goes beyond the Strunk and White's worst nightmare. Schticks like naming hypothetical characters "Bill and Hillary" or "Donald and Ivana" or "Dr. Ruth" annoy and distract me like the scraping of a fingernail on a blackboard. The book is replete with dialog like "I'm going to convert!" "You found Jesus?" "Not quite. I'm going to convert all my 403(b) money to a Roth IRA to save taxes." Ewwwwww!
What I take from this book is that our financial lives contain such unexpectedly complicated interactions that few decisions can be intuited or considered in isolation. For example, the financial aspects of a mortgage: the interest is deductible, but only if you itemize... and interest decreases with time while the standard deduction, being inflation-indexed, increases with time. So for many families, the tax savings on interest deductibility last for only a few years. But there are other complexities as well; by the time I finished the chapter on the tax and consumption-leveling implications of a mortgage, my head was spinning. I was glad that I paid off my mortgage long ago and don't need to think this stuff through.
Unfortunately, there is a hidden subtext: you need computer software to make sensible decisions. Kotlikoff and Burns are, of course, associated with such a piece of software, ESPlanner, which they disclose in their introduction. The book seems to go out of its way _not_ to sound like an ad for ESPlanner. But the result is a lack of any guidance at all. Most financial books will give some rules of thumb, some worksheets, some links to free online financial calculators. This book gives you reasons for distrusting such aids. Its hypothetical characters are forever going "to the computer" or "making an analysis" to evaluate some course of action and excitedly reporting their discoveries: "do you realize that we gain only $3,607 a year of lifetime spending for each additional year of work?" It doesn't say how he "makes that analysis." We must assume it is ESPlanner. It does not tell how I (who happen to own a Mac and thus could not run ESPlanner even if I wanted to) could "make that analysis."
Now, the book has a metaproblem of its own. I've long suspected that tools such as Fidelity's Retirement Income Planner or Financial Engines, suffer from grotesque overprecision. Even the uncertainties of the stock market pale by comparison with the uncertainties in one's personal life. It's fun to extrapolate the consequences of a difference between a mutual fund with an 0.2% and an 0.5% expense ratio, compound them out for twenty years, and see how many dollars that is, but I've never been sure it's meaningful.
The book's central tenet is that we should focus on consumption (how many dollars per month we have to spend throughout various stages of our life) and on "consumption smoothing" (equalizing standard of living throughout our various life stages), as opposed to mindlessly piling up the biggest heap we can by age 65, or calculating what age for claiming Social Security will pay us the largest number of total dollars. I agree with that.
But it then contains an assumption, not very carefully presented, that our happiness depends on smoothing that consumption; that it is a terrible thing if our standard of living varies by 25% from one part of our life to another. I'm not at all sure I buy that.
And then it contains the worst assumption of all: that by using a tool (like ESPlanner), we can succeed, in some meaningful way, in planning our financial life course--quantitatively--over a period of fifty years or more.
Of course, this is the same assumption the retirement workbooks of the world make: "Choose column A if you think stock market annual returns for the next thirty years will average 6%, B for 8%, C for 10%..."
After reading the book, I am torn between two courses of action:
a) run right out out and buy ESPlanner and a computer to run it on and trying to dig out twenty years of records...
b) luxuriate for a few days in analysis paralysis and a sense of utter inadequacy at the ignorant way I've led my financial life for forty years... then snap out of it, shrug and say Eh! I'll put 30% in a stock index fund, 70% in a bond fund, have my wife claim Social Security at 62 and try to delay mine as long as possible because some article I read said that's what fashionable couples are doing these days, and hope for the best, and go take a walk in the sunlight.
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