When we look at 2022 in the rearview mirror, many of us will remember it as a year of inflation, volatility, and extreme uncertainty.
So, in the midst of a massive market contraction and financial upheaval, what can you do to ensure you don’t run out of money–especially when it comes to your Social Security?
To help me answer that question, I’m thrilled to welcome Professor Larry Kotlikoff back to the podcast. Larry has written over 19 books, and has a passion for helping people make smart, sound financial decisions.
With that in mind, we’re talking about Social Security tips and strategies that can save you hundreds of thousands of dollars. We dig into how inflation directly affects Social Security benefits, the money-losing mistakes that so many people make as they approach retirement age, and what we should be doing to create a better financial future for our children and our country.
In this podcast interview, you’ll learn:
Andrew Rafal: 2022. What can we say about this year as it winds down? Well, it’s the year of inflation. It’s the year of market volatility and a lot of uncertainty. So, who better to help us through this tough time than Larry Kotlikoff, who’s coming back to the podcast? And a lot has happened since Larry was last on the show. Today, we’re going to go through a couple of key points to help each and every one of you make good financial decisions. As many of you remember, Professor Kotlikoff has written over 19 books. One of his core passions is helping you make good, sound financial decisions. We dig in today on one of his core beliefs, which is how to make sure if you live a long time that you don’t run out of money. So, we’re going to talk about Social Security. He’s one of the gurus in making sure you maximize your benefits. So, we go through tips and strategies and how to make sure that you avoid making a wrong decision that could cost you hundreds of thousands of dollars.
And then we talk about and I ask him about inflation, where he thinks things are headed and some of the tips and strategies that you can use right now to make sure that your money lasts in any environment, especially an inflationary one. So, without further ado, my episode here, latest one, with Larry Kotlikoff. Please enjoy.
Andrew Rafal: And, Larry Kotlikoff, welcome back to the Your Wealth & Beyond Podcast. It’s great to see you. It’s been a little bit over a year since you were last on. How you been?
Larry Kotlikoff: Great and it’s great to be with you, Andrew. Yeah. Doing just fine. A lot of research and I sort of sub-stack newsletter and lots of different activities. So, cool.
Andrew Rafal: Yeah. We believe content is king and you’ve been for years great at getting different content out in regards to things that you’re passionate about, the proper planning, Social Security, inflation, some of those factors that we’ll talk about today. And I just think that in today’s world, there’s so much misinformation. So, the fact that you’ve been getting stuff out and hearing from the people, answering those kind of questions, and making it specific, it’s a real passion for you, hasn’t it been?
Larry Kotlikoff: Yeah. I feel like I’m just starting out because I’ve accumulated a lot of knowledge and we have a lot of really cool research technology, software built over many decades now that we can use to answer critical questions like who’s getting hurt by inflation and how much? That’s one of the current research projects I’m working on and how much are people being induced not to work because we have such a crazy, God-awful fiscal system that has so many different programs that Congress has put together without any thought about how they interconnect so it’s really impossible for people. First of all, if they really understood, what would they do? And if they don’t understand, what are they doing and how badly are they getting hurt?
You know, think about, for example, taking a Roth conversion when you’re 63 and learning, thinking that it’s going to save you taxes over the rest of your life because maybe you’re not working right now, but you have taken your Social Security benefits. And so, now all of a sudden you’ve kicked up taxation of your Social Security benefits and the whole thing is a mistake.
Andrew Rafal: Yeah. And that’s where the software, whether yours or any software out there, that can show how Social Security is taxed. You know, we had a client in yesterday where because we helped them max out their Social Security, they’re going to be getting, I think next year, about 64,000, 65,000 combined and showing them with the standard deduction. That’s what they’re using. Living in California, literally, they can take money out of their IRA, whether they take out distribution or a few a conversion but up to almost 17,000 where their Social Security doesn’t get taxed. It’s just understanding that. And if they go over a certain threshold, then all of a sudden the Social Security gets taxed by quite a bit. So, those are those phantom things that a lot of advisors and planners they don’t think about when they’re just like blanketing, saying everybody should do a conversion. Now, when you say 63, though, that’s a problem too have taken it early, right? You’re a big proponent of delaying that gratification with Social Security as long as possible, based on the circumstance.
Larry Kotlikoff: You know, there’s a new study on my website. Just posted about two days ago about how much American households are leaving on the table by not optimizing their Social Security. And that’s typical. If you look at 45 to 62-year-olds, the median amount being left on the table is $182,000.
Andrew Rafal: Based on their life expectancy, what are you using for that? Based on a 90-year-old life expectancy?
Larry Kotlikoff: Well, we’re using whether it’s 90 or 100, we’re using 100 in the study because 100 is probably even too low because 1% of the population is going to live beyond 100 from what the data suggest. You really need plan to live your maximized life because you might. So, you can’t count on dying on time is the deal. So, you have to value – those benefits have value and they have really the most value. You know, you might think, well, the problem in making it there is very low but when you do make it to that age, you’re likely to run out of money because you would have had to spend for yourself to pay for yourself all those years. So, benefits in your nineties really have the highest since insurance value to you and that’s what the calculation is taking into account.
And the economic theory behind this goes back to an Israeli economist, Menahem Yaari. He wrote a critical paper in 1965 about the economics of life insurance and annuity, longevity insurance. And they’re really just mathematically opposite sides of the coin. If you solve the problem, you get a positive answer. It’s life insurance, it was a negative answer. It says buy this, buy a negative amount, then we’re talking about an annuity. So, you can kind of intuitively understand that these things are closely connected. And this critical this kind of seminal study showed us how to value Social Security benefits and that we need to look at our maximum, use the planning horizon being the maximum age of life, and value those using simple discounting right up to the maximum age. And our software, my company’s maximize my Social Security software, which is just $40. And then we have a tool called Max Life Planner, which is a little more expensive but it’s full lifetime planning. They do this year-based valuation.
Andrew Rafal: You know, an environment like this where we finally have inflation and we’re going to dig into that a little bit later. This is, I think, what is it going to be, 8.7% increase next year with the cost of living adjustment for Social Security benefit. So, it’s the largest we’ve seen in a long, long, long time. But going back to the early 80s, when you had that cost of living, I think when you’re 13%, you know, it doesn’t mean they have more money. It just means that they have more money that can help keep up with the rising costs. So, these are things we haven’t seen for 15, 20 years. And that goes back to that reason of where Social Security is a wonderful asset.
Larry Kotlikoff: Well, it’s wonderful except it’s like overstated the protection from inflation because the adjustment is coming like 13 months, actually 15 months late, if you like because the benefit increase we’re going to get, the 8.7 is going to be in January but it’s calculated based on inflation between last October, like last month and the year before. So, there’s an extra three months plus we’re going back 12 months. So, that’s what I meant when I said 15 months. So, in general, here’s the point, we’re getting our adjustment with a lag and consequently, we’re behind the eight ball. So, imagine just to keep it simple, keep it really clear, make it really clear, Imagine prices were rising 100% every month and you had to wait a year to get even with the current price level. You would have lost a year.
Basically, your Social Security benefits would be worthless within a couple of months. And so, over the course of the last year, it’s been about an 8% inflation. And so, we’ve lost in real terms, we Social Security beneficiaries and I’m one of them, we’ve lost 4% of our real benefits. The government says they’re protecting us against inflation but they’re really not because they’re lagging the adjustment. If they were to adjust every month, we would be kept closer to even. But like waiting a year and really waiting some sense 15 months, it’s going because to correct for what happened 15 months ago, we’re ending up poorer. This is part of the reason why people are being upset about inflation because they’re really not being compensated for when we’re talking about the elderly, I mean, obviously people on fixed incomes like retired policemen in Detroit.
Larry Kotlikoff: I think when Detroit went bankrupt, they were giving like $0.40 on the dollar and the pension benefit was not indexed for inflation, which I thought was horrendous, first of all, to rip these people off after they put their lives on the line, policemen and firemen and all of the teachers. Teachers also put their lives on the line, right, because they then get attacked in school and then to have their benefits wiped out by inflation. The government needs to really address these fixed pensions by some local governments.
Andrew Rafal: Yeah. Very rarely do we see that there’s cost of living adjustment in most pensions. And in fact, most people don’t even have pensions anymore. So, that makes that three-legged stool where they used to have 80%, 90%. So, now it’s on the retiree, the saver.
Larry Kotlikoff: Yeah. Well, there’s about 20, you know, I would say about 15% to 20% of retirees work for state and local governments that are getting defined benefit pension. You also have some union plans for some companies that have defined benefit pensions. So, if they’re not fully indexed and indexed on a really timely basis, then people are getting hurt.
Andrew Rafal: So, let’s go back to that point you made earlier. So, you guys calculated about 182,000 for the average person is what they’re giving up.
Larry Kotlikoff: Median.
Andrew Rafal: So, on that median. So, I mean, is the government pushing it almost as a reverse psychology that everyone’s like, “I got to get it now. I’ve got to get it now because I paid into it and it’s not going to be there later.” Is that what you feel? Where is the disconnect that people take it earlier than they should? Where’s the lack of advice?
Larry Kotlikoff: A lot of, you know, Wall Street is interested, frankly, in getting people to take their Social Security early so they can keep their 401(k) money with Wall Street, and Wall Street can keep charging fees. That’s really a big part of the con here that Wall Street is… There’s nothing that Wall Street does that’s not some form of malfeasance, financial malfeasance, to tell you the truth. So, that’s one aspect of this that Wall Street is saying takes us to reverse. And they’re focusing people on life expectancy rather than their maximum age of life. But nobody is going to die on time as their life expectancy and then the other. And Social Security itself, their website keeps talking about life expectancy. You don’t go to a, you know, if you went to a website of a homeowners insurance company, they would not talk about the expected loss from a fire.
They would say, “Let’s look at the catastrophic loss. You need to be fully insured against the worst-case scenario.” The worst case scenario here is living to your maximum age of life. It’s not having the average fire. It’s having the worst fire. The worst fire is you lived your maximum because you have to keep paying. So, long life is a financial catastrophe for us and it’s a psychological dream but it’s a financial catastrophe. So, there’s part of that. There’s also this somehow screwy idea that if we think about living to our maximum age in life, we’re going to jinx ourselves and die tomorrow. So, therefore, we won’t think about that. We’ll think about dying maybe at our life expectancy. And then you have people say, “Gee, if I don’t take it now, I could die and therefore I will have worked my entire life and not have collected a penny.” Well, first of all, your spouse or ex-spouse can collect widow’s benefits potentially, because you wait and get higher benefits because of that.
Larry Kotlikoff: Benefit at 70, I would hasten to say it’s 76% higher than at 62, adjusted for inflation even though the full retirement age is rising. That’s still the case under the system. So, think about it. If you died early at 63, are you going to be kicking yourself in heaven? You know anybody in heaven that’s kicking themselves? Do you know anybody who’s short on money in heaven? Heaven is heaven, right? So, we got this entirely screwed up in our brain. We have to worry about the worst-case scenarios living to 100. That’s what we have to protect against. And by waiting, we get to raise the widow’s benefits of our survivors and act as though if they are going to be collecting as widows if they haven’t made more money on their own to collect. So, I’ll just give you one last reason, Andrew, that I heard the other day from a friend of ours.
We’re just at a party. She told me she’d taken her Social Security benefit early, and she said she was embarrassed to tell me this because I had been pounding the table to wait especially for her and her husband. And I said, “Why did you do that?” She said, “It’s a strange reason but I’ll have to explain that to you. Here’s the reason. I’ve been retired and I don’t get a check every month and my husband has been working, gets a check every month, and I feel bad about spending his money.” She’s a second. This is a second marriage. So, she wants to have money coming in on her own that she can feel comfortable spending. And that’s why she went early, so she can have a check coming in for her own.
Andrew Rafal: Well, I mean, that’s a good point. But for her, I guess, I probably wasn’t thinking this but when the husband passes away or one of them potentially how long she’ll be able to jump out potentially to get the survivor benefit, which could be higher.
Larry Kotlikoff: Yeah. But, of course, if they both live a long time, she will have, I mean, that’s what’s called, I think, the split strategy that some financial planners have been pushing. I think it’s risky because there’s also a good chance that he won’t die and she won’t die early. And now they’re collecting at 80, 85, 90. Every year they’re collecting less than they would otherwise have collected by a fair amount. So, they’re leaving a lot of tape. You need to look at the worst-case scenario, which is they both lived to 100 and protect against that as opposed to what Wall Street is saying, let’s follow this split strategy. Having one of you go early again is let’s really leave your 401(k) money in our hands so we can charge your fees. And of course, on a risk-adjusted basis, right now, the stock market is yielding what inflation-indexed bonds yield because that’s the risk adjustment.
I could take my money this moment out of the stocks, put it into 30-year tips, treasury, inflation-protected securities and earn like 75 basis points. Well, 75 basis points, risk-adjusted, inflation-adjusted, sorry, risk or inflation-adjusted, and first score is much less than you can get by being patient with Social Security in terms of lifetime spending capacity. And that’s what our software Max Life Planner is showing you.
Andrew Rafal: And that is, you know, from us on our planning side, we are big proponents like what your advice is, which is if they have assets, use those while they’re in retirement, while they’re delaying Social Security. The hard part is getting through to somebody because they’re so used to saving. And we know most people are going to pass away with money, with their retirement money, some of it, right? So, it’s just hard to get them and we have to show them and sometimes it’s not us telling them but the software and letting them see it but looking at that drawing down assets in that 65 to 70 range and getting them in that mindset that, yeah, it’s in a sense a little bit of pain that you’re giving up. You know, because like a Roth conversion, a little bit of pay now for some benefit later potentially if it’s in their best interest but that’s a hard thing. People are just so used to saving and wanting to see their portfolio go up. And as planning firm here, as an RIA, we are big proponents of even if we’re managing it and getting paid for it, let’s use those funds because it’s going to put you guys in the best position possible by delaying the gratification of Social Security for all the reasons that you talked about.
Larry Kotlikoff: The Social Security is a much better security blanket, safety blanket than having money in the market. Okay. We’ve just seen a drop like 20%. And then the other thing is taking money out earlier. You may lower your taxes on a lifetime basis because let’s say you retire at 63 and you’re not going to take Social Security until 70. Well, here are all these seven years when you’re in a low tax bracket. You want to take advantage of that. That money has to come out of the 401(k). The IRA money has to come out at some point. Maybe you taking a 401(k) and convert it to an IRA and you retired. So, if you take it out after let’s say 72 when these minimum distribution requirements kick in, you could be clumping so much income together that pushes you into a higher tax bracket. Better to take it out earlier. You lose something on the deferral of the inside build-up because you have to pay taxes.
But you can also take it out early and put it into a Roth, right? And I know you’re exploring that with your clients. You want to see exactly, you know, what’s optimal to do but do it in a realistic conservative way. Not assuming you’re going to make a killing on the market, on the money that’s in the IRA.
And we introduced, by the way, since I talked to you last, in our software, a method I’ll just tell you about because it could be used by anybody, even without using our software. Anyway, it’s called Upside Investing. And the idea is this, Andrew, to establish a living standard floor by having people invest in inflation-indexed bonds. All their resources, all their money, all their assets, except for either– I’m talking about both outside of retirement accounts and inside of retirement accounts to the extent that’s possible, even inside of retirement accounts, you can buy mutual funds of chips, inflation-indexed bonds.
But anyway, you put all your money except for the money you want to have in the stock market. And the stock market money, you decide how much to put there and how much to add to it and when to start withdrawing and when to stop withdrawing. And when you withdraw, you convert the withdrawals to these inflation-indexed bonds that are protected and guaranteed by the government.
So, you treat the money in the stock market as casino money that you don’t spend until it’s been made safe. So, all the rest of your money is supporting your labor income and your pensions and your Social Security that’s supporting a living center floor. And then the stock market money, you’re assuming is going to be lost entirely until it’s found, until you withdraw it. So, you say, “Okay, I’m telling you, you’re going to put so much in here, and every year to it.”
And then starting at 60, I’ll take out over the next 15 years the money. I’ll take out a 15th and then a 14th the next year and the 13th and what’s ever there. And now, you only have upside to your living standard because you only raise your living standard floor as your withdrawal and put it into safe chips.
So, you see the idea. It’s just like going to Vegas and leaving your wallet in a hotel room and taking 200 bucks, assuming you’re going to lose it and not spending any of your winnings until you leave the casino, whereas a lot of us are doing is we’re in the casino, we’ve made money at the tables, whatever. And now, we start going on to Amazon or on our laptops or cell phones and start buying things.
And then, all of a sudden, we start losing money and we walk out of the casino with less money than we walked in and haven’t made a loss but also having bought stuff we couldn’t afford. That’s the danger. So, Upside Investing is a way to a very simple idea for being able to sleep at night while still having a decent upside to your future living standard because you have money in the market, you’re just not counting on it.
And because you’re not spending out of it, you’re not withdrawing from it until you decide to do so. You’re not experienced what’s called the sequence of return risk, which you’re familiar with, which is taking money out at some point to pay for something, and then you take out the money. And after maybe the market’s not done well and because you have less in there, the next day, the market goes up and you don’t benefit from that because you’re taking the money out. That’s the, in a nutshell, sequence of return rules. This avoids that because you’ve left it in there just to accumulate. The stock market is a casino with a fabulous return, which is 9.5% of real, but it’s got this huge variability.
Andrew Rafal: Yeah, the deviation of that, and then there’s the emotional impact, too, of people, whether they’re taking money out or not, are they going to stay the course? And a lot of times, people capitulate at the wrong time.
Larry Kotlikoff: Yeah. So, here, if you’re not depending on it, if you say, “Hey, I’ve set things up so that I have some money in the stock market.” And the interesting thing from our software is how much up we have, you can run the program in upside investing mode or for risk investing mode, but in upside investing, what I found is that for middle-class households, they can put, rich people even, just maybe 20% of their assets and still get a huge upside and not have much of a degradation in their floor. They can still have a very pretty high living center floor but a very good upside of, I’m talking about being able to potentially spend three or four times in retirement what you spend before retirement.
Andrew Rafal: I was just thinking here that you’re– I mean, are you thinking that inflation…
Larry Kotlikoff: Not for sure but maybe.
Andrew Rafal: So, on the inflation point, if inflation has peaked and we start going into more of a gradual down again, would this strategy still work? Or would you also look at the safer side? Would you look at just regular treasuries right now? Not long term, maybe not a 20-year, but there’s a game plan fit in to have some chips and maybe a 7 to 10-year Treasury were being able to lock in certain rates where we are right now.
Larry Kotlikoff: Anything that you can kind of think of that you think is really a safe investment could be a substitute for chips or an addition to chips. Chips or treasury inflation protected but they’re not protected against the taxation of the protection, which is the inflation kicker that you get on these chips is subject to taxation. So, they’re not perfectly safe either. Nothing’s perfectly safe.
I think buying toilet paper is safe. What I mean by that, I mean buying toilet, if we got an 8% inflation going to under 7%, that’s the latest number for the– retrospectively, if I will say that continues for the year. If I buy toilet paper today, a year from now, I’m going to have the toilet paper to use for the following year. I was talking about buying next year’s toilet paper today, and next year’s paper towels today, and next year’s canned goods today because all this stuff will go up in price. If I buy it today, I won’t experience that price increase. And if my salary doesn’t keep up in real terms, I’ll be okay. Even if it does keep up, I won’t have to pay. I’ll get basically a zero real return on the toilet paper, whereas the market return, even on chips, could be negative after we take into account the taxation on the inflation component of the chips.
So, there are things we can do. You might be able to buy some real estate and rent it out as an Airbnb where you think this is an area that’s going to appreciate, it’s a low price. I know I can use my creative talents to improve it. So, that fact for any particular individual might be a really safe investment as opposed to– so I’m saying one has to be creative in thinking about where’s a way of putting in money and saving, and obviously, paying off credit card bills is a safe investment, paying off student loans is a safe investment, although we need to understand whether Biden’s forgiveness, if you have a, let’s say, less than $10,000, you wouldn’t want to necessarily pay that off because…
Andrew Rafal: Who knows if it’s going to pass? Well, that’s to be determined. You’ve been a believer in paying off the mortgage, especially as you get into the retirement years. Question for you now on this kind of arbitrage where we have people locked into a 3% mortgage, and now, we have the risk-free rate of 4% or 5%, what’s your thought, today’s world versus a year ago, should that person who’s got $300,000 mortgage in a very low-interest rate, should they take money that they have over here and pay that off? Or should they use the arbitrage now and keep that mortgage because it’s really a value now, it’s an asset?
Larry Kotlikoff: So, when I wrote the book Money Magic that we talked about, inflation had been quite low and was likely. Everybody predicted the same low, but I did talk about the fact in the book that mortgages are great hedges against inflation. So, now that we have inflation, you don’t want to basically pay off your mortgage because you’re paying it back in watered-down dollars.
Even if you took out us, today, the mortgage rates might be 7%. People think that’s a crazy high number to be borrowing it. Well, think about it. If I borrow at 7% and inflation turns out to be 15%, which it could be over the course of the year, I’ll be paying back -6%, -8% return, a negative real return of 8%. So, it’s great insurance against inflation.
And if inflation isn’t 15% but goes down just 2%, then mortgage rates will come down, I can refinance. So, part of the reason the mortgage rates are high is because they provide insurance against unexpectedly high future inflation. That’s why mortgage rates, 30-year rates have gone up more rapidly than some other rates. So, yeah, in the context of inflation, I would not be paying off my mortgage right away.
Andrew Rafal: The supply and demand of homes, obviously, the market has taken a hit because it’s had to. But people are going to stay in their house, they’re not going to move because if I got a 2.75% mortgage, even if I want to downsize, it may not even make fiscal sense to do that. Or if I want to move from Iowa to Arizona, can’t really do it now. Fiscally, I may not be able to. So, it’s an interesting dynamic to see what happens with supply and demand on the real estate side because of that, unless they make these mortgages portable, which they never will. But it would be awesome if they allowed me to sell the house to you and you take over my 3% mortgage. Who knows? Maybe they’ll do it, but.
Larry Kotlikoff: That would be a great idea. It’s a cool idea, think about that. But you’re absolutely right. We moved during COVID to this 302-year-old house. It’s got four fireplaces. It’s actually one of the oldest houses in Providence. And if I can show you this– anyway.
Andrew Rafal: How old is it? 102 years old?
Larry Kotlikoff: 302.
Andrew Rafal: 300-year-old.
Larry Kotlikoff: Basically, about seven years after Louis XIV has died. It’s that old. There are a lot of houses in the country. I was like, I can’t figure out whether our house was the oldest in Rhode Island. And it turns out there are all these 1,600 houses built in the 1600s. So, I started feeling bad. But this is really old, I mean, huge– why don’t you go and see the floorboards?
Anyway, we got this totally by accident. We locked down. And now, we’re sitting in this house. The house prices might go up or down, but as you kind of suggested, the services of this room that I’m in are changing, right? If I’m not going to sell this house, imagine I was going to live forever in this house, and forgetting any depreciation of the building or any up maintenance then, and I own it outright, I’ve got this dream of housing services forever whether the house prices of this house or other houses in the area go up or down or I’m completely insulated. So, it’s a completely safe asset.
The press is all of the time talking about house prices as if its fluctuations are affecting most Americans. Its fluctuations aren’t affecting most homeowners because they’re not going to move. They’re not in the moving mode. And so, we can get overly concerned about house price fluctuations and get nervous about that when we shouldn’t. So, I’m into trying to figure out how people can sleep at night.
So, having a house that’s affordable, that’s not too expensive in old age that you owned or a condo that gives you an annuity. Getting the highest Social Security annuity benefit gives you, investing everything apart from this casino stock money in chips or something else that you really think is very safe, that’s also giving you security. And then not taking out the stocks and telling you some specified date, well, that keeps you upside. So, that’s a way for people to get through the future now inflation of, if you’re on a fixed income, there’s just no clear way to hedge inflation risk unless you could take out a mortgage. You probably want to take out a mortgage on your home.
If you’re on a fixed pension, what you could do is if you could borrow on your home for 30 years and take the money and buy chips, now you would have a built-in hedge against inflation because inflation goes up, your chips are pretty well protected, except for the tax issues, but the mortgage goes down in real value. You’re paying back in watered-down. So, now you’ve made money and that hedges the fact that you’ve lost money on your fixed pension.
Andrew Rafal: Right. If you did that as a hillock, most of those are adjustable, though. If inflation does reduce, you’ll get a reduced amount on that interest rate. And you’re more of a believer in that than the reverse mortgage. Is that correct? Is that still your thought process there?
Larry Kotlikoff: When you say hillock, you’re not referring to reverse mortgages, you’re thinking about some kind of line of…
Andrew Rafal: That’s raised our question for you is when you’re talking about taking money out for somebody on a fixed income, were you referring more to the reverse mortgage side of it or just doing a conventional taking money cash out, refi…
Larry Kotlikoff: That’s the mortgage. For a while there, I was really opposed to reverse mortgages. I thought they were just a con job by the financial industry. And then I got myself conned into– I was talking to people and got myself convinced that, well, it’s government regulated and it really is because the government regulation, it’s a good idea. And then I started actually running cases in our software of reverse mortgages and then talking in more detail about my own taking out of reverse, just to find out what it was like. I really don’t want to take one out, but just to find out what was involved or were they hillocks or just taking this kind of line of credit or option to take out money in the future.
And there are something like 15 fees that are incredibly expensive. I found out that for me, to have the ability to take out a line of credit on this house 15 years from now, I’d have to pay $20,000 today in fees. And this was like for my guy who was giving me preferential rates because I was somehow in the financial advisory world, and I wrote in the book that this was nuts. So, I wrote a long discussion in the book, Money Magic, it’s hard to wrap your brain around these reverse mortgages and these lines of credit, reverse mortgage lines of credit.
One of the big problems with these reverse mortgages is if you have to move, you have to pay back. Suppose you have to go to a nursing home or have to move to help your kid live with their child across the country, well, now, you have to pay back everything they gave you for free that you never have to pay back at extremely high-interest rates, plus all the fees that you didn’t have to pay at the time have accumulated up at this high-interest rate. Now, you have very little money to buy a new place in California, but then they say, “Well, you can do this again because you can put in a small amount. The reverse mortgage company will give you some extra funds.”
But then if you have to move again, it’s really a malfeasance. It’s government. Uncle Sam is engaged in a con here. Uncle Sam is engaged. Everywhere where I see Uncle Sam involved in financial matters, I see malfeasance.
Let me just give you one quick example. The inspector general of Social Security– and there’s a column in Kotlikoff.net, if you just put in under columns fraud, if you search for fraud, you’ll see a bunch of articles actually about Social Security’s biggest fraud, which is they have scammed 13,000 widows out of $130 million. This is according to the inspector general’s report of 2019. And the inspector general said to Social Security, “Fix this, reimburse these people for what you rip them off.”
And it’s widows who, if you imagine you’re a widow or a widower, it doesn’t have to be a female. You’re a widower. Suppose you, Andrew, are 62 and you can get a reduced widow’s benefit of $2,000 and a retirement benefit to reduce retirement benefits of $1,900.99, a dollar less, and you go in, and somehow, you’re asked whether or not you want to get all your benefits and you say yes. And they check off that you’re filing for both your widow’s benefit and your retirement benefit.
Now, we fast forward you to 70, and you go to Social Security and you say, “Well, look, I haven’t gotten my retirement benefit. I got the larger of the two benefits. Give me a 76% kicker on my $1900.99.” They’ll say, “No, you’ve been getting your retirement benefit the whole time.” The fact that it was less doesn’t mean you haven’t been getting it. You’ve been getting it and then getting an excess widow’s benefit of $1. And they will not give you the kicker, and that will cost you hundreds of thousands of dollars in present value just because you checked a box or somebody checked it for you or you got conned into checking a box.
Andrew Rafal: Are they doing that on purpose? Or is it just they’re not giving the advice? And maybe this widower doesn’t have the financial planning team to help her. Are they doing it on purpose or are they just saying to her, you could get the most amount and not letting an understanding that they’re clicking both boxes?
Larry Kotlikoff: There are tens of thousands of Social Security people out of their operatives. We have crazy people in our country. We have people who are shooting people, hitting people in the head with hammers. So, some of these people are malevolent and certainly are probably doing this on purpose. Most of these people or probably Social Security operatives are doing this because they don’t know better because they don’t understand the system. So, you never want to ask Social Security what to do. You basically need to run maximize my Social Security for 40 bucks and get the right answer and then say, “Here’s exactly what I want to do.”
And in the remarks section of your application, say, I am filing just for my widow’s benefit and I’m not going to file for my retirement benefit until 70. I’m not filing for my retirement benefit. Or it could be optimal to do the opposite, which is file for your retirement benefit, and then wait to take your widow’s benefit. But here, again, Social Security’s website says that your widow’s benefit will max out at full retirement age. It doesn’t max out at full retirement age if your deceased spouse took their retirement benefit early. That’s one of the crazy provisions of Social Security.
We have a different widow’s benefit formula. So, I’m 62. I decide, take my retirement benefit. My wife died at 67. She was older, but she took her retirement benefit at 64. Now, the widow’s benefit that applies to me because she took her benefit early is different from the regular one had she taken it beyond for retirement age be different. So, my widow’s benefit, what’s called excess widow’s benefit will peak possibly two years before 67 if, let’s say, that’s my full retirement age.
So, the best thing for me to do would be to take Social Security retirement benefits, my case at 62, and my widow’s benefit at 65. It’s really called the excess widow’s benefit, and now, to wait until 70 because I could lose 20,000 bucks easily. So, this is where it becomes too difficult for human capacity calculation. You have to actually have extremely accurate software.
Andrew Rafal: Question for you on that, specifically for a client, we did the exact same thing. Her husband, she was 58, he died when he was 59. And then she stopped working around 63. We turned on, for her, it was better to do the survivor benefit, and then we’re delaying hers to 70. She’s 66 right now. So, she’s getting $1,500 in survivor benefits. At 70, does she have to go in and say, I want my benefit now? Or would they automatically switch her over to her benefit and get that max? How does that work?
Larry Kotlikoff: If you don’t ask for something, you won’t get it. It’s kind of use it or lose it. That’s one of my rules in my chapter on Social Security, 10 Secrets to Maxing Your Lifetime Social Security. I think secret one is know all the benefits, and secret two is use it or lose it. I have had people call me at age 75 and say, where’s my retirement benefit? Or can I collect it? I’ve just stopped working. They’ve lost four and a half years of benefits because you can only get six months of retroactive benefits. Waiting beyond 70, produce nothing except loss benefits, so.
Andrew Rafal: Wow. So, they will automatically switch somebody on at 70 unless they go in or they go online and they trigger their benefit. Interesting.
Larry Kotlikoff: Probably the worst scam I’ve heard of Social Security, I mean, there are so many scams that they’re engaged in. I’ll just give you an exaeets them. She’s 50 years or so, and she decides she has nothing to do except watch TV. And she writes a child’s book and it becomes a New York Times bestseller. She’d never written anything her life. So, she starts getting royalties.
And you can be a bestseller without becoming a millionaire. You can get a couple of hundred thousand dollars. So, for the next 10 years, she’s getting these royalty checks which she’s spending. She doesn’t save them. She just gets them and spends them thinking they might continue, and they go away. And then she gets a bill in the mail. So, every year, she calls up and says to Social Security, I’m getting these royalty checks. Can I still get my disability benefits? And they say, well, they’re royalties, not earned income. So, therefore, okay, you can get your disability.
So, 10 years later, she gets this bill in the mail. And I saw the bill for $300,000. Now, she’s living just on her Social Security check. And they say, unless you repay this, we’re going to start eliminating your monthly benefit for the next 30 years until you repay it. So, she appeals, and they say, well, even though we told you we were not going to reduce your disability benefits, it was because you did something to earn that, really. And what did she do? She gave a couple of talks at libraries, so they probably reimbursed her for her travel expenses.
They sent a 1099 to the IRS who sent it to Social Security. Now, that royalty income is called earned income. She appeals that the administrative law judge writes this decision, which I read on the third appeal. He gets to a top guy and he writes this thing and says, “Well, I can’t do anything legally because you’re getting earned income even though we told you the opposite. That’s our mistake, but our mistakes are your mistakes. That’s the way it works in Social Security.”
So, the only thing I can do is eliminate this bill based on your being poor. She’s just living on disability. But I looked at it, I asked for all your records, your checking accounts. I also looked for your cable plan. I’m reading this. And the cable plan is very expensive. It’s a better plan than most people have, better plan than I have. This is what the guy is writing. It’s a $200-a-month plan.
The lady has nothing to do, except sit there and watch TV. She’s disabled. And he says because you have an expensive cable plan, I’m denying your appeal and you have to repay $300,000. What he did is he decided to kill this person because she will have no money to live on. She will starve to death or not have medication or whatever it is. She had no other real resources. This is a true story. $300,000, this is the worst. I’ve seen lots of these stories, but this is the worst of the worst that I’ve seen.
Andrew Rafal: And she never won that appeal. When he said that, that was set and she had to pay that back so they took away all her benefits?
Larry Kotlikoff: I don’t know. She reappealed, I do know that, but I don’t know where she got with that. But I wrote about this maybe about eight years ago.
Andrew Rafal: Wow. That’s scary, sad. It’s part of why, listeners, you got to get Larry’s books, Get What’s Yours, which was something that we use as one of our Bibles here for helping clients. And your column that you’re still doing, Ask Larry, is awesome.
Larry Kotlikoff: There’s LarryKotlikoff.substack.com, that’s my latest endeavor which is this newsletter and podcast, LarryKotlikoff.substack, one word, no doubt.
Andrew Rafal: We’ll have that in the show notes. And it’s great because you get a lot of these real people asking real questions about how they can either not get screwed by Social Security or some of the strategies that they’ve heard of. And you kind of walk them through using, whether it’s your expertise or your software, to help make them make good decisions. So, they can go in and make the right decision and tell them exactly what they need because, like you said earlier, if you don’t say the exact same or the exact word, then you could be hit for the rest of your life.
So, question for you, I’d be remiss with your 45-plus years as an economist and helping to kind of shape a lot of where we are today. Have they ever come to you and asked you for help on how we’re going to not save the system, but with Social Security– let’s talk about that first. We know that’s a lot of times people talk about. I got to take it now because it’s not going to be there. You and I know that’s not the case, but what do you think can happen here, raising the retirement rate, changing the cost of living? The big one I keep hearing is that we’re not having that limit of $148,000, taxing it like Medicare. What are your thoughts on how we can fix this system?
Larry Kotlikoff: So, you probably don’t know this, Andrew, but I ran as a write-in candidate in 2016 against Trump and Clinton, and I was registered across the country. So, I could have actually had people vote for me knowing about me, but the press wasn’t interested. They wanted to have this food fight between Clinton and that was all they cared about. No issues.
But I wrote a platform, which is you can download it, it’s now become a book on my website, Kotlikoff.net. It’s called You’re Hired. And there’s a solution for Social Security how to fix it, which is we should freeze the current system, pay off the accrued benefits, what we owe to current retirees and what we owe to our workers, and then put everybody in the margin in a fully funded, I call it a– well, it’s an individual account system, but everybody has exactly the same assets, which is a global index, which are managed by my laptop. So, Wall Street has nothing to do with this.
So, a personal security system is what it’s called. It’s on an individual account system. It’s really a personal scheme. It’s very different from anything anybody’s proposed. So, the idea is to do this at no cost, put your money, my money, everybody’s money in the same pot, earning the same rate of return. And then when you get to between 59 and 69, we take out a 10th of your money every year and convert it into inflation-indexed bonds and pay you back. You and everybody in your birth age cohort pay you back an inflation-indexed annuity. So, we’re buying annuities every year from the money we withdraw from the market. So, it’s really just more upside investing.
Andrew Rafal: I was going to say that. It sounds like the upside investing.
Larry Kotlikoff: Yeah, it’s really upside investing. Anyway, there is a way to fix it. I have been asked by, testified to Congress about 15 times in my life, I’ve talked to Social Security subcommittees and I haven’t actually talked about this plan, but I’ve written about it. But we have people, the left and the right, the extremes of both parties are influencing policymaking. The Democrats are controlled by the far left, really, in terms of their policymaking. We haven’t seen anything from Biden in terms of domestic policy.
Well, the infrastructure bill, I think, is kind of a bipartisan centrist. And there are probably some other things, I don’t want to overstate this, but I haven’t seen anything about Social Security reform, about health care reform, about education reform. We could have videos posted on the Department of Education website of the best teachers in the world teaching eighth-grade algebra so that schools all around the country could use that for pedagogy for their kids or people that were homeschooling could go and get the best. And we could have uniform education in a kind of income, like in 10 seconds at no cost.
So, there are so many things we can do. I don’t see the Biden administration thinking beyond kind of some left-wing agenda that some people are pushing. And then on the right, we have people like Congressman Jordan. All he wants to do is investigate people. This new Congress is coming in, the new House of Representatives, Republican-dominated, they’re going to control. They haven’t said a thing about fixing anything. Social Security, we have 18%, 19% of our GDP is being spent on health care. The country is going broke. Fiscally speaking, the country is insolvent. We’re in the worst shape of any developed country. And we have to get control of what we’re doing and we have to get that 18% down to a reasonable 12% that’s going to save our kids.
So, we have to start thinking about policy that’s going to save our kids because right now, we’re on a trajectory to destroy our kids’ economic lives and pay for our excessive government spending, not just now, Trump going back for decades post-war by printing money. We’re running inflation right now. And the Treasury made it just to say this, I know you’re probably running out of time, but we have $22 trillion in official debt. The Treasury made $2 trillion just by having basically 10% inflation because it watered down that debt by about $2 trillion.
So, the government is making money by making money. We have to realize this, but we really can’t inflate our way out of our fiscal problem, Social Security’s unfunded liability. It’s red ink, according to its Trustees Report, which came out in April, which is on table VI.F1, like three pages from the very end of the report. It’s stuck in the appendix. Nobody wrote about it except me. It shows a $61 trillion unfunded liability. It’s basically two and a half years of GDP.
So, the country is beyond broke. We’re leaving all the bills to our kids. That’s what President Biden should be talking about. That’s what the new Republican leaders in the Congress need to be talking about.
Andrew Rafal: They just want to make sure they get reelected. That’s the problem. They’re taking all, it’s short term, short term. Before we end here, but so like the servicing the debt, now that Treasury rates are up, you’re saying we made money with inflation, but now, we got service this new debt at this higher rate. Is that going to be a problem in regards to whether we were able to refinance in a sense, the government at 1% last year? And now, we’re up to 4%, 4.5%. Where do you see that going?
Larry Kotlikoff: Well, see, so far, the interest rates the government has to pay haven’t kept up with the inflation. So, imbalances, we’ve watered down the debt by more than we’ve had to kind of water it up in order to pay interest. But if the interest rates go up above inflation, which they did in the 80s, after we had the high inflation and Volcker brought it down, the interest rates stayed high because people worried about future inflation, about this not sticking.
So, for years in the 80s, the interest rates on the treasuries were above the inflation rate that actually occurred. So, it could go the other way. You’re absolutely right. We could be in worse long-term fiscal shape because of the inflation because rates go up and then inflation comes down and they stay up because people got burnt. If you held a 30-year Treasury bond, a nominal Treasury bond a year ago, you lost basically 8.8% of your money. And that’s gone for good.
Andrew Rafal: Yeah. The TLT, which is an ETF that focuses on long-term Treasury loss, it’s down 33% year to date, which is incredible. So, lastly, I mean, do you think…
Larry Kotlikoff: Not just 8%, but 8% next year, and 8%– that’s why it’s gone so messed.
Andrew Rafal: The wrong way compounding. I know they were, what you think, late to the game, obviously. But what do you think? You think they’re doing a good job?
Larry Kotlikoff: The Fed is just accommodating inflation. If inflation has been running, it’s still running around 6% and the federal funds rate is 4%, that’s a 2% negative federal funds rate. So, nobody should kid themselves that the Fed is fighting inflation. I’m not saying it should fight inflation. I think inflation is partly these supply shocks that have occurred and partly people. So, reasons are out of the Fed’s control. I think the Fed’s destroying the economy is just going to make matters worse. I think what we should do is index our tax system fully to inflation, which we’re not doing.
So, for example, old people could invest in inflation-indexed bonds and not face the risk of paying higher taxes on nominal gains on just the inflation protection they’re getting. That’s not any real income. So, I think we should live with inflation. And that step one there is fixing the tax system so we’re not paying taxes on phantom capital gains.
But there are so many other things we need to do, like get billionaires who pay absolutely nothing in taxes because they buy assets. Stocks and other assets are going to appreciate. They don’t take those appreciated assets and never realize them. They just realize the losers. And then they borrow money to pay for their yachts or whatever it is, their consumption, and they pledge those assets that they’re not realizing against the borrowing.
So, they’re never having to realize the assets. When they die, they hand over those appreciative assets to their kids with what’s called a step-up in basis. So, the kids don’t have to pay the capital gains taxes. And this is probably done through a trust so there’s not very much estate tax.
This is a scandal and it’s not being explained to the public by President Biden. You should be talking about this every day. Why do we want Bill Gates and people like this? I know Bill’s probably not doing this because he probably wants to pay taxes to be civically minded. But there are all kinds of Elon Musk, first-rate jerks, to use a nice word, who are probably paying nothing in taxes. And we just don’t know it because we’re not seeing their tax returns.
Andrew Rafal: So, big corporations, too, a lot of corporations paying taxes.
Larry Kotlikoff: The 740, so we need to have an entire fix. So, that’s also part of You’re Hired, which is this book, it’s Not You’re Fired. I wrote this thing for Trump. I said, let me take my platform that I didn’t get elected. Here’s my platform. It’s 100 pages. I got very simple solutions, but there’s some explanation for all these different– every solution’s got 10 bullets. It’s not complicated. Let me show this to Trump. I’ll write this book. I’ll say a playbook for President Trump to fix America. It’s called You’re Hired, Not You’re Fired. And you can freely download it from my website, and nobody’s discussing any of this, but there are answers. And we have to do more fundamental reforms. We can’t do these piecemeal reforms. We have to start thinking big to save the country. So, if one of your listeners is a billionaire and wants to stake my campaign for president, I’d be happy to run again.
Andrew Rafal: Did you hear that, billionaire? Who’s listening? We need your help, so.
Larry Kotlikoff: If I can get my wife’s permission, which I probably can.
Andrew Rafal: Yeah. I mean, I feel like if that happens, she’s got to give you the permission to do it, so. Well, I think we should do this every year. This is great. Obviously, the markets change, economy changes so much from last year. But love the intuitive nature of just knowing the pulse of what’s happening out there.
So, listeners, what we talked about today, Larry has got this all covered before you got the books, which will all be in the notes, Money Magic, Get What’s Yours, and then the software, MaxiFi, you could do it on your own. You don’t have to have an advisor, but the Social Security software to make sure that you don’t make the wrong mistake in regards to one of your biggest assets.
Larry Kotlikoff: But also a lot of us wanted to have somebody to hold our hands to give us who’s really in this business full time. And I would strongly recommend you go see Andrew because I can just tell from talking to him last time and this time, he knows this stuff from top to bottom. So, he’s a trustworthy, good guy.
Andrew Rafal: Appreciate that, Larry. And that’s a hard thing to kind of quantify real advice in our industry. It’s so much more than what investments did you pick it. Having that approach of knowing, especially in retirement, we can’t make mistakes of how to take advantage of all the things that are out there and Social Security and tax planning, all those things or that alpha of what can bring you each year. Who cares if I make 6% in the market today? But what if we saved you all these other things in protecting you against what you say a lot and we do as well as you’re going to live longer than you think you are? That’s I think clients, I’m going to die at 88. That’s when my mom died. But it’s not the case for seeing people in their 90s that are living great.
Larry Kotlikoff: Yeah. You need to have somebody who’s, first of all, a human being cares about people not just out there to make money and knows their stuff and knows what to worry about that you’re not thinking about. So, that’s where a financial planner– I mean, the software is great and you can answer questions that nobody can answer, including me. So, that’s very important to have, but then, having somebody in your court is a real deal.
Andrew Rafal: Well, we appreciate you coming on to the podcast again. And I appreciate all the good work you’re doing and continue doing it while you’re in that 302-year-old house, doing your thing. So, have a great rest of 2022, and I’m sure we’ll talk next year.
Larry Kotlikoff: Hey, any time. Thank you so much.
Andrew Rafal: You’re very welcome. See you soon. And stay tuned, listeners, later this month for a brand-new episode of Your Wealth & Beyond. Happy planning, everybody.