ALSO BY LAURENCE J KOTLIKOFF AND SCOTT BURNS The Coming Generational Storm: What You Need to Know about America’s Economic Future ALSO BY LAURENCE J KOTLIKOFF The Healthcare Fix: Universal Insurance for All Americans Essays on Saving, Bequests, Altruism, and Life-cycle Planning Generational Accounting: Knowing Who Pays, and When, for What We Spend This publication contains the opinions and ideas of its authors It is sold with the understanding that neither the authors nor the publisher is engaged in rendering legal, tax, investment, insurance, financial, accounting, or other professional advice or services If the reader requires such advice or services, a competent professional should be consulted Relevant laws vary from state to state The strategies outlined in this book may not be suitable for every individual, and are not guaranteed or warranted to produce any particular results No warranty is made with respect to the accuracy or completeness of the information contained herein, and both the authors and the publisher specifically disclaim any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book Simon & Schuster 1230 Avenue of the Americas New York, NY 10020 Copyright © 2008 by Scott Burns and Laurence J Kotlikoff All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever For information address Simon & Schuster Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020 SIMON & SCHUSTER and colophon are registered trademarks of Simon & Schuster Inc Library of Congress Cataloging-in-Publication Data Kotlikoff, Laurence J Spend ’til the end: the revolutionary guide to raising your living standard—today and when you retire / by Laurence J Kotlikoff and Scott Burns p cm Includes bibliographical references and index Finance, Personal—Handbooks, manuals, etc I Burns, Scott II Title HG179.B849 2008 332.024—dc22 2007051823 ISBN-13: 978-1-4165-7967-0 ISBN-10: 1-4165-7967-2 Visit us on the World Wide Web: http://www.SimonSays.com To Dayle and Carolyn, with our deep love and affection Acknowledgments We thank our oustanding editor, Bob Bender, and our terrific agent, Alice Martell, for helping us make this book a reality We also thank our many friends and colleagues in the academic, journalism, and financial planning communities for their encouragement and suggestions Larry Kotlikoff wishes to express his deep appreciation to Boston University for a quarter century’s support of his research in economics Contents Introduction: The Three Commandments of Economics Part SMOOTH FINANCIAL PATHS “I Am Financially Sick” Consumption Smoothing Conventional Consumption Disruption Pimping Risk Financial Mind-benders Part FINANCIAL PATHOLOGY What, Me Worry? Understanding Financial Disease Financial Snake Oil Part RAISING YOUR LIVING STANDARD My Son the Plumber 10 Does College Really Pay? 11 Fire Your Job 12 Location, Location 13 Whether ’Tis Wiser 14 Pay It Down, Way Down 15 Does It Pay to Play? 16 Converting 17 Cashing Out 18 Double Dip on Social Security 19 Russian Roulette for Keeps 20 Learning Your Bs and Ds 21 Holding Your Nuts 22 Fire Your Broker 23 Downsize 24 Equitable Alimony Part PRICING YOUR PASSIONS 25 Ciao, Baby 26 Shacking Up 27 Take the Leisure and Run 28 Pricing Procreation 29 Can We Help the Kids? 30 Charity Stays at Home Part PRESERVING YOUR LIVING STANDARD 31 Are Stocks Safer Than Bonds in the Long Run? 32 Diversify Your Resources, Not Your Portfolio 33 Spending Down 34 Beware of Averages 35 Portfolio Choice 36 Public Policy Risk 37 Sell Your Boss Short (or Long) 38 The Troll Under the Bridge 39 Should I Care About Long-Term Care? 40 A Safety-First Strategy Epilogue: Is There an Economist in the House? * Economists assume that people get utility (pleasure) out of their living standard, but because of diminishing returns (recall the six-year-old becoming sated on cupcakes) the loss in utility from suffering a given reduction in consumption exceeds the gain in utility from an equal-size increase in consumption This heightened concern about downside risk is called risk aversion * ESPlanner’s M onte Carlo trajectory reports show these living standard bumps * We assume that two people can live for the price of 1.6 So two times $23K is $46K, which is greater than $37K But the difference represents our assumed economies of shared living; that is, 1.6 times $23K is $37K The $23K is the amount of spending a Blow would need to to have the same living standard as a single person as she or he has when married * ESPlanner is being modified to incorporate the aforementioned uncertainties as well as to provide general portfolio guidance * This $70 trillion estimate of Uncle Sam’s fiscal gap comes by way of a highly reliable source: the U.S Treasury Department Former Federal Reserve and Treasury economists Jagadeesh Gokhale and Kent Smetters initially measured the U.S fiscal gap in a highly detailed 2002 U.S Treasury study, “Fiscal and Generational Imbalances,” commissioned by then Treasury Secretary Paul O’Neill and then Federal Reserve Chairman Alan Greenspan Their study, which showed a $45 trillion gap, was censored the day O’Neill was fired by the White House To their eternal credit, Gokhale and Smetters quit the government and published their study (see www.aei.org/books/bookID.426.filter.allbook detail.asp) Today, after more tax cuts, huge military and other discretionary spending hikes, the dramatic expansion of M edicare to cover prescription drugs, and the accrual of interest, the fiscal gap appears to lie above $70 trillion This massive figure is, if anything, an underestimate, since it relies on highly optimistic longevity and health-care spending assumptions Gokhale and Smetters’s most recent fiscal gap study is posted on the National Bureau of Economic Research Web site at www.nber.org/papers/w11060 It reports a $63 trillion fiscal gap for 2005 * A put option written on a stock or bond provides the owner of the option with the right to sell it at a prespecified price For example, you might own a put on ABC Corp that allows you to sell ten shares of ABC Corp at $100 per share If the price of ABC Corp shares falls to $70, you can buy ten shares for $700 on the market and then exercise your option and sell them for $1,000, pocketing $300 on the transaction * Currently $117 a month for M edigap “F” from AARP/UnitedHealthcare † Currently $26 a month for M edicare Part D from AARP/UnitedHealthcare * Readers can follow this regular report at www.hewittassociates.com/Intl/NA/en-US/OurServices/IndexObservationList.aspx * For more information about costs, trailing returns, and platforms for putting the portfolios together, check Scott’s Web site for regular reports, www.assetbuilder.com * M onte Carlo simulations are used to examine possible results when events are varied and uncertain—such as the sequence of returns stocks may earn By repeated random samples, after thousands, the distribution of long-term results can be examined † TIPs are issued by Uncle Sam and protected against inflation Each year as prices rise, the government preserves the purchasing power of the bond’s principal (the amount you get when the bond comes due) by raising it by a percentage equal to that year’s inflation rate * This is the average of annual arithmetic real returns rather than the geometric mean The data source is Ibbotson 2006 Stocks, Bonds, Bills and Inflation Yearbook * To his credit, Greenspan has acknowledged that statements like this helped precipitate the subprime lending crisis that, as of this writing, has roiled financial markets and put the economy in recession * Figure from M orningstar based on M arch 31, 2007, values ... Spend til the end: the revolutionary guide to raising your living standard today and when you retire / by Laurence J Kotlikoff and Scott Burns p cm Includes bibliographical references and index... be spending blind and buying too little love for your money Maximize your spending power; smooth your living standard; price your love—these are the Three Commandments of economics Although the. .. achieving the same living standard per person when there are three of you at home, when there are two of you at home, and when you re by yourself But that means more total spending when the kids