ArcaMax

Caution: Read this column only if the idea of “running out of money” in your lifetime (with the exception of Social Security) keeps you awake at night! Relying on conventional financial planning could give you a 20 percent likelihood of that result.

In my columns I try to recognize the diversity of my readers. The one thing they have in common is a concern about their money. Young and older, people want to know how to keep it safe, save for their future needs and make their money work for them – without making risky mistakes.

Today, I’d like to focus on a special segment of that audience – people in the age bracket 40 to 65, who are just starting to think about retirement issues – whether they have “enough” money to retire, how to invest that money, when to take Social Security, and how to withdraw that money over their lifetime, without running out of money before they run out of time!

That’s a huge task. And it’s what keeps the financial services industry in business, offering advice on those issues – advice for which you will pay through fees, commissions, hidden costs and worst of all, opportunity costs. Money wasted on these costs could have been growing for your retirement.

But even worse, most of this advice is BAD advice, misleading and designed to make money for the industry. That’s the conclusion publicly stated by economist Larry Kotlikoff (my co-author of “Social Security Horror Stories”) in a substack column headlined: “No One Can Safely Use Fidelity’s ‘Planning Tool’ to Plan Their Finances”!

In fact, Kotlikoff indicts almost all of the financial services industry’s planning advice as a “bait and switch” to gather assets under management on which they generate fee income. He concludes the conventional planning process exposes clients to “major financial risk.”

This is a bold and shocking attack on companies like Fidelity, which has $20 trillion under management or administration through retirement plans, and 44 million customers.

Kotlikoff gives a well-reasoned and documented account of the flaws in these online planning tools – starting with his assertion that conventional planning bears no relationship to economic principles that have led to Nobel prizes in economics for legends in the field, including Harry Markowitz, William Sharpe and Robert Merton.

Says Kotlikoff: “The fact that the financial industry’s spending, saving, investment, and insurance advice bears essentially no relationship to the work of these economic and mathematical geniuses, let alone common sense, is deeply disturbing.”

Kotlikoff has created and patented his own tool, MaxiFi Planner, available to professionals and individuals at www.MaxiFiPlanner.com, so the immediate conclusion is that he is tooting his own horn. But Kotlikoff clearly demonstrates the superiority of his process. For example, other tools ask you to estimate your desired retirement spending, then proceed to adjust your investment advice adding risk to give you an increased probability of reaching your retirement goals.

(That explanation is a vast oversimplification of the issue, and you should read his full column at https://larrykotlikoff.substack.com/ to understand the distinctions.)

Kotlikoff’s planning method uses three interactive algorithms, constantly adjusting for the consequences of planning decisions. It is a multi-dimensional “chess game” – converging within a half second to display a solution for an individual or a couple that is considering alternative retirement scenarios.

Incorporating your own securely entered financial information, and including your Social Security records, this complex tool can show you how to invest and withdraw to maintain your standard of living – as long as you may live – while diminishing risk. And it clearly demonstrates in graphic form the impact of death on a surviving spouse’s income, factoring in life insurance needs and surviving spouse benefits changes.

You can instantly model the impact of decisions like selling your home and moving to a smaller place, perhaps in a state that doesn’t tax income. Or see how working an extra few years could improve your retirement standard of living. Or check the impact of different Social Security claiming strategies over the long run – even if you live to be 100!

All of this costs only $109 per year. Help is available on the site. Or ask your financial planner to download the low-cost license and use the tool with you.

The Monte Carlo investment modeling of most tools relies on probabilities that could leave you with a 20 percent chance of running out of money in your last years. My recent column on the Society of Actuaries’ new longevity calculator will show you that beating the longevity averages is a distinct possibility!

If you’re serious about financial planning while you still have time to seriously evaluate the consequences of your decisions, I highly recommend a visit to MaxiFi Planner. Or you could just pray. And that’s the Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2024 Terry Savage. Distributed by Tribune Content Agency, LLC.