The POZ Worldview: David McKnight versus Dr. Larry Kotlikoff

Dr. Larry Kotlikoff is the foremost expert in the world on fiscal gap accounting and has done a great job transforming how we should be thinking about a nation's debt.

Dr. Kotlikoff recently stated during an interview that most retirement planning is wrong. 

According to Dr. Kotlikoff, the basic problem with financial planning is that the goal of our life is not to accumulate wealth so that people can charge us fees on our assets. It's about having the best lifestyle we can, given our resources, so we don't end up on the street if the market crashes or we live to be 100 years old.

You don't necessarily need to pay someone to manage your assets, but it can be worthwhile to have someone help you stick to your objectives. Most people without a financial advisor participate in emotionally driven investing, which is why the average investor's returns suffer.

Saving for retirement is a requirement in consumption smoothing, but there is an optimal amount to save. Once you know what you have, you know what you can spend.

Part of the job of a good financial planner is helping you reverse engineer what you need to create the lifestyle you want in retirement.

This is where the Power of Zero paradigm deviates from mainstream financial planning. You have to get the tax part of the equation right. It's not enough to know what you should be saving, because if you execute that plan in your tax-deferred bucket and watch as tax rates rise over time, you'll find that your financial plan only delivers about half what your lifestyle needs.

You need to contribute the right amount of money into the right kinds of accounts.

Dr. Kotlikoff feels the stock market is overvalued and dependent on the Federal Reserve's support to maintain its levels.

Market timing is tricky at the best of times. Statistically, it's nearly impossible to do. Over the course of a given year, that 80% of the rise in the market occurred on 6-8 days and you have to predict exactly which days those are going to be. 

If you can guarantee your lifestyle expenses with your Social Security, pension, and/or a guaranteed lifetime income annuity, you can take much more risk in the market. 

A good rule of thumb if you need to dip into your assets during a down year is to take money out of your LIRP instead of your stock market portfolio.

Dr. Kotlikoff recommends that you push off taking Social Security for as long as you can to mitigate longevity risk. The key here is predicting how long you are going to live. The worst thing that can happen to you is push it off until age 70, and then die at age 71.

The best way to predict how long you are going to live is to go through the LIRP underwriting process. When an underwriter accepts you, they are basically betting that you are going to live a long, healthy life, and you can use that to push Social Security off as long as possible.

Is paying off your mortgage early smart? The question we should be asking is whether we "should take money that could be invested in the stock market or pay off a mortgage early?"

When you look at the arbitrage between the market and your mortgage, the math doesn't add up.

Converting money to an IRA has to be done over a period of time to avoid paying more taxes than necessary. We are in a rising tax rate environment, so it makes sense to take advantage of today's historically low tax rates, but it has to be done systematically.

You shouldn't be drawing Social Security during your conversion period because it will cause Social Security taxation and lock you into a lower amount.

There are secrets to all stages of the life cycle. When you're young, stay home to save on housing costs and don't borrow for college if there is a reasonable likelihood you might drop out. Invest more in stocks as you age in retirement, especially if you have your lifestyle needs guaranteed already.

Mentioned in this Episode:

Medicine's Golden Age Is Dawning. 10 Stocks to Play the Latest Innovations. - barrons.com/articles/medicine-healthcare-stocks-roundtable-51632527474