Larry Kotlikoff

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Leesbro63
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Larry Kotlikoff

Post by Leesbro63 » Thu Jul 11, 2013 4:53 pm

I just listened to Jim Lange's podcast with Larry Kotlikoff on Social Security timing (when to take it etc). An excellent listen. Here: http://www.retiresecure.com/radioshow/LMH-061913.mp3

That being said, they mentioned a book by Kotlikoff and Scott Burns called "THE CLASH OF THE GENERATIONS". Is it worth reading. From what I can tell, it's a worst case scenario for the US entitlement system. I don't want to discuss politics or economics, but one section of the book supposedly is about how to invest to protect yourself if you believe their scenario. Is this doom and gloom investing or is it sound financial advice? I just want to get a better handle on if this is worth follow up for someone who thinks like a Boglehead.

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TomatoTomahto
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Re: Larry Kotlikoff

Post by TomatoTomahto » Thu Jul 11, 2013 5:05 pm

I have used the good Professor's software (ESPlanner) that I find very useful. It is not BH in the sense that it promotes consumption smoothing (rather than spend as little as possible and save every penny you can), but it's very powerful and configurable and I recommend it.

I don't remember the book you refer to, at least in any detail. I do remember "Spend Til The End" which covered consumption smoothing and which I recommend.
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Leesbro63
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Re: Larry Kotlikoff

Post by Leesbro63 » Thu Jul 11, 2013 6:22 pm

It sounds like the software, then, is not at all doom and gloom. But rather "spend a reasonable amount with a reasonable amount of confidence". Right?

Here is the book:

http://www.amazon.com/The-Clash-Generat ... 0262016729

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TomatoTomahto
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Re: Larry Kotlikoff

Post by TomatoTomahto » Thu Jul 11, 2013 6:33 pm

No, no doom and gloom that I've come across. He also markets a pricey but useful Social Security tool (http://www.maximizemysocialsecurity.com). I must sound like a shill, but I've been very pleased with the company, and i dont have a relationship with them other than that i purchase their software. I had some questions, emailed them, and heard back from Larry K and a developer within a few hours.
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nisiprius
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Re: Larry Kotlikoff

Post by nisiprius » Thu Jul 11, 2013 7:25 pm

I was fairly disappointed in Kotlikoff and Burns' Spend 'Til the End. It does not actually talk about ESPlanner but there is practically no information in the book that can be put to use without having ESPlanner. And it seemed to be entirely about insanely overprecise projections based on information about future earnings etc. that you can't possibly know beyond a WAG, and nothing to suggest you can put a WAG in and get precise numbers out.
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Rodc
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Re: Larry Kotlikoff

Post by Rodc » Thu Jul 11, 2013 7:56 pm

nisiprius wrote:I was fairly disappointed in Kotlikoff and Burns' Spend 'Til the End. It does not actually talk about ESPlanner but there is practically no information in the book that can be put to use without having ESPlanner. And it seemed to be entirely about insanely overprecise projections based on information about future earnings etc. that you can't possibly know beyond a WAG, and nothing to suggest you can put a WAG in and get precise numbers out.
Exactly.

I traded some email with Burns after a related article he wrote where he admitted, yeah, it depends on a lot of information you can only take a wild guess at, but it was easier to make the point without that complexity. One can of course play with the inputs.

I don't have a problem with the general concept. I wrote my own consumption smoothing software before I ever heard the term after an argument with my wfie of whether we were saving too much (consumption would jump up in retirement, her concern) or drop, or stay the same.

One of the great lessons I learned was that when you factored in even a decent fraction of the uncertainty in the assumptions any of those answer might easily be true. Life is uncertain and I better just deal with it. :)

In the end I felt our current plans were reasonably in the middle of the range of future realities.

One of the things I do not like about ESPlanner especially for younger folks is it assumes future earnings that may not come to pass and if not careful it can seem like the thing to do is spend (consume) now because surely you can catch up later as income rises. Works great if you in fact do have a nicely rising income, never have a bout of unemployment or health problems or other unplanned emergency. But really is not a sound idea because of course those things very well might happen.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Leesbro63
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Re: Larry Kotlikoff

Post by Leesbro63 » Thu Jul 11, 2013 8:49 pm

Why does consumption smoothing require extensive software? I do it now...I budget a certain amount of dollars to spend each year. Some of that goes into what I call "future liabilities" and is invested in short to intermediate term fixed income that I consider as "already spent" (earmarked) money. When I buy a new car, I take it from there. In reality I spent $30,000 more that year than the prior year (all other things being equal). But mentally that money was considered "spent" as parts of prior annual allocations to the "earmark" fund. Is this brain surgery?

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Murray Boyd
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Re: Larry Kotlikoff

Post by Murray Boyd » Thu Jul 11, 2013 9:57 pm

Leesbro63 wrote:Why does consumption smoothing require extensive software? I do it now...I budget a certain amount of dollars to spend each year. Some of that goes into what I call "future liabilities" and is invested in short to intermediate term fixed income that I consider as "already spent" (earmarked) money. When I buy a new car, I take it from there. In reality I spent $30,000 more that year than the prior year (all other things being equal). But mentally that money was considered "spent" as parts of prior annual allocations to the "earmark" fund. Is this brain surgery?
The big problem is trying to keep your standard of living consistent from your working years through retirement. I've played around with ESPlanner Basic (the free one) a litte bit and it's pretty impressive. If you have big hiccups in your income or consumption (college, spouses retiring in different years, etc) it smooths all of that out. Anybody could do that for the short run, but calculating over the course of decades basically requires a computer. And yeah, projecting your income that far out is baseless speculation, but what else can you do?

Leesbro63
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Re: Larry Kotlikoff

Post by Leesbro63 » Thu Jul 11, 2013 9:59 pm

Good explanation. Makes sense and I see its more than about budgeting/saving for a new car.

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patriciamgr2
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Re: Larry Kotlikoff

Post by patriciamgr2 » Thu Jul 11, 2013 10:09 pm

I was disappointed that this long radio interview didn't cover any of the solutions to deal with the "coming crisis" as promised. For those of you who have read Kotlikoff's book, what do the authors suggest?
Last edited by patriciamgr2 on Fri Jul 12, 2013 10:51 am, edited 1 time in total.

Leesbro63
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Re: Larry Kotlikoff

Post by Leesbro63 » Thu Jul 11, 2013 10:10 pm

patriciamgr2 wrote:I was disappointed that this long radio interview didn't cover any of the solutions to deal with the "coming crisis" as promised. For those of you who have read Kotlikoff's book, what do the author's suggest?
To be fair, the radio show was billed as being about Soc Sec, not about Kotlikoff's other stuff. And it delivered on that. But yeah, that is what I am asking. What is Kotlikoff's secret sauce to protect against a negative US economic future?

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nedsaid
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Re: Larry Kotlikoff

Post by nedsaid » Thu Jul 11, 2013 10:38 pm

I am always amused how Scientific Wild Ass Guesses are disguised in precise calculations, formulas, ratios, and scenarios. We all wing it more than we admit.
A fool and his money are good for business.

cbeck
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Re: Larry Kotlikoff

Post by cbeck » Fri Jul 12, 2013 12:22 am

Leesbro63 wrote:I just listened to Jim Lange's podcast with Larry Kotlikoff on Social Security timing (when to take it etc). An excellent listen. Here: http://www.retiresecure.com/radioshow/LMH-061913.mp3

That being said, they mentioned a book by Kotlikoff and Scott Burns called "THE CLASH OF THE GENERATIONS". Is it worth reading. From what I can tell, it's a worst case scenario for the US entitlement system. I don't want to discuss politics or economics, but one section of the book supposedly is about how to invest to protect yourself if you believe their scenario. Is this doom and gloom investing or is it sound financial advice? I just want to get a better handle on if this is worth follow up for someone who thinks like a Boglehead.
For a detailed critique of Kotlikoff's views on generational conflict here's Dean Baker's rebuttal:


Soltas falls for a couple of Kotlikoff’s tricks in warning us that net tax rates for those born in 2026 will rise to 73 percent. First, Kotlikoff uses a 4 percent real discount rate compared to the 2 percent industry standard. This is a bit technical, but making the switch raises his net tax burden figure by close to 50 percent.

Kotlikoff’s other trick is that he doesn’t count education as a benefit for future generations. In Kotlikoff’s accounting, if we closed down the schools and handed everyone a check when they turn age 21 for half of what we would have spent on their education we would substantially reduce their net tax burden. Wouldn’t this be great news for our kids?

If we can step away from the efforts to foment generational warfare and back to reality, let’s get our eyes on some simple facts. In 40 years per capita income and real wages will both be roughly twice as high as they are today. This will not be because the people alive in 40 years will be smarter than we are today or will have worked harder, this will be due to the fact that we have passed on more and better capital and infrastructure to them than what we have today. We will also have given them drastically improved technology. [Disallowed topic comment removed by Mod Mel]

These are the factors that will overwhelmingly determine their living standards. By comparison, whether they pay 3-4 more percentage points in taxes is not going to amount to a hill of beans. (For those who are really troubled by the prospect of higher taxes we can have an option where people get to pay their grandparents’ tax rates in exchange for getting their grandparents’ living standards.) This means that we should be focused on measures that will ensure that the economy grows through time.

http://www.cepr.net/index.php/blogs/bea ... tional-war

ResearchMed
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Re: Larry Kotlikoff

Post by ResearchMed » Fri Jul 12, 2013 8:39 am

We gave the software a try, and it was pretty nice (this was an early version).

HOWEVER... it didn't/couldn't take into account what is for us (and I assume for more people than realize it) a very, very important factor in "consumption smoothing", at least in retirement - and for those not strapped for basic survival.

It couldn't handle any sort of planning for adjusting spending if returns took a downturn for a while, or major upturn for a few years, for that matter.

(Maybe the newer versions could. I contacted Dr. Kotlikoff back then, who responding remarkably quickly, and we had a very good exchange. There was also a glitch so we couldn't get the software to work - some system incompatibility, it seemed - and he sent us link that did work.)

But the reality for us is that IF we have less than we hoped for whenever "full retirement" comes to pass, well, we'll be in the fortunate position to decide we'll take fewer trips, or less expensive trips. Should things really go south, we can cut back in other ways, too.
We've both lived VERY frugally when younger, by necessity, not due to Bogleheads' philosophy, and we can easily scale back quite a bit IF necessary, before using up too much. Hopefully, we'll keep an eye on things and cut back less, but sooner. But if the market tanks badly again, we still won't be eating Alpo. (Besides, that would offend any kitties living with us, and cat food? Not particularly appealing.)

The MAIN problem with any such software has already been mentioned: GIGO.
There's no way around that, IMHO. One can enter all sorts of variations of variable variables :shock: , but the apparent precision could be misleading to some, and possible dangerously misleading to those who don't get it about the sensitivity to such input.
Maybe not too many people in that category would be using software like that - or, maybe especially people like that might be using it precisely FOR the "precision".

RM

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Murray Boyd
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Re: Larry Kotlikoff

Post by Murray Boyd » Fri Jul 12, 2013 4:38 pm

ResearchMed wrote:We gave the software a try, and it was pretty nice (this was an early version).

HOWEVER... it didn't/couldn't take into account what is for us (and I assume for more people than realize it) a very, very important factor in "consumption smoothing", at least in retirement - and for those not strapped for basic survival.

It couldn't handle any sort of planning for adjusting spending if returns took a downturn for a while, or major upturn for a few years, for that matter.

(Maybe the newer versions could. I contacted Dr. Kotlikoff back then, who responding remarkably quickly, and we had a very good exchange. There was also a glitch so we couldn't get the software to work - some system incompatibility, it seemed - and he sent us link that did work.)
I'm pretty sure the ESPlanner Plus version ($199) does exactly what you want -- shows you what happens if the market tanks, does as you expected, or in between.
Upside Investing treats investing in the stock market like playing the casino. When you are running the program in Upside Investing mode, you tell the program how much you currently have invested in stocks, how much you intend to add to your stock holdings through time, and when you expect to start and stop converting your stocks to safe assets. The program then sets your living standard floor assuming that all your current and future investments in the stock market are entirely lost. But the program also runs simulations to show you the chances of different upsides -- different living standards above the floor -- once you start converting your stocks into safe assets
cbeck, the less said about Kotlikoff's macroeconomics, the better. Financial economics and macro are miles apart.

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Crystal Ball
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Re: Larry Kotlikoff

Post by Crystal Ball » Fri Jul 12, 2013 5:33 pm

One of the good features of ESPlanner is that it calculates Income taxes for you and also will automatically take care of Social Security payments in the income forecasts (based on your imput choices). It's the only one that I know of on the consumer market. I was able to do modelling for our retirement plan by changing the inputs. The output is in Excel spreadsheets so that is also very useful. I still pay for the updates when I am ready to do planning. The program is in Access and had a lot of rough edges in the early days, but works more smoothly now.

ALL planners work on your assumptions and thus are GIGO. That doesn't give us permission to avoid any planning. The idea is that you have a tool that lets you assess the effects of changes in input. There is value in that. "What happens if I choose private schools?" "What if one of us takes a few years off to stay home with the children?" "What if we take the vacation of a lifetime now?" "What happens if I quit the job I hate for a lower-paying position?" A decent calculator is better than a dartboard if you pay careful attention to the assumptions.

I'm not a fan of Spend to the End. I cannot understand the viewpoint that it is a tragedy if you die without spending as much money as you could have. I wish contentment would come back into style.

I hate this new trend of trying to stir up intergenerational warfare. My views aside, neither book was very well done.

Crystal
He is richest who is content with the least, for content is the wealth of nature. | Socrates

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Murray Boyd
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Re: Larry Kotlikoff

Post by Murray Boyd » Sat Jul 13, 2013 4:45 pm

Crystal Ball wrote: The program is in Access and had a lot of rough edges in the early days, but works more smoothly now.
It's in Access?! Really?!

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Re: Larry Kotlikoff

Post by frequentT » Sat Jul 13, 2013 10:00 pm

I have alot of respect for Prof. Kotlikoff.

The ESP software is very robust and was very helpful in discussions with my CPA regarding tax planning. It provided another retirement planning forecast that validated several others that I had done using other methodologies. It gave me confidence in my plan because the program is so comprehensive.

Like others, I found he and his team very responsive to questions.

The software was not smoothest in terms of user interface and you must be motivated to work it through. However, it is powerful and can provide insights and answers.

The generational stuff is very topical and the professor does a good job in challenging our politicians.

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