A different take on retirement

Professor says fund companies encourage us to save too much

To all those who say Americans don't save enough for retirement, Laurence J. Kotlikoff has a message: Don't believe the hype.

From an office overlooking Storrow Drive, the 57-year-old Boston University economics professor has become one of the country's toughest critics of mutual fund companies and other financial firms. They urge consumers to save too much money, buy too much insurance, and otherwise make poor choices that enrich the industry, Kotlikoff argues in his latest book, "Spend 'til the End," published last month by Simon & Schuster.

Taking a contrarian tack, as he has in several previous books, Kotlikoff says many people end up setting aside too much money for retirement, at the expense of enjoying their youth more.

A better strategy, he argues, would be for individuals to study their own situations - including mortgage debt, private pensions, and future Social Security payouts - so they can understand how such things will affect their standard of living, before and after retirement.

In a slowing economy, Kotlikoff's prescriptions may resonate among people who are struggling to keep up with hefty mortgage bills and higher food and fuel costs. Though he is careful to say that perhaps 40 percent of US households still aren't saving enough, he is among a number of economists who believe that many people are on track or in some cases over-saving for retirement.

For instance, in a recent paper two economists from the RAND Corp., a nonprofit research institution, said 84 percent of all married couples likely are adequately prepared for retirement. They suggest the common advice that couples should save enough to replace 80 percent of their income doesn't account for factors such as the drop in expenses after one partner dies.

But Kotlikoff is more than just a critic of financial firms. He is something of a competitor, selling his own software to put his advice into practice. He says his calculators are free from the conflicts of interest built into those that fund companies like Fidelity Investments, TIAA-CREF, and Vanguard Group Inc. offer on their websites. He says that on the whole they advise people to save too much without asking enough about their individual situations.

"It's like going to the doctor for a one-minute checkup, and then he sells you medicine from a company he owns," Kotlikoff said.

At some points Kotlikoff may be oversimplifying the fund companies' calculations. He notes Fidelity's myPlan Snapshot online calculator asks just five questions, but doesn't mention the more in-depth reviews Fidelity.com also contains.

Some financial executives, such as Guy Patton, former head of a Fidelity research organization and now president of the University of Oklahoma Foundation Inc., say they welcome the discussion. But fund firms shouldn't be faulted for recommending conservative targets, and no company is only out for more investor dollars, he says. "I always felt that criticism was unfair."

A Fidelity senior vice president, John Sweeney, says the Boston mutual fund giant's software was designed based on the experiences of millions of clients. Fidelity declined to discuss Kotlikoff's ideas directly.

But the chairman of rival Vanguard Group, John J. Brennan, last year posted a response on the company's website. The consequences of squirreling away too much, Brennan wrote, are much less than of under-saving, and gains for investment companies aren't at the expense of individuals. "The money's still yours," he wrote.

The debate shows what a hot topic savings has become. As companies cut back on traditional pension plans and Social Security's future is questioned, contributions have poured into vehicles like 401(k) savings plans.

Among the mutual fund industry's hottest products are "lifecycle" funds, which shift their holdings to become less aggressive as investors age. These held $168 billion at the end of September 2007, up from $153 billion at the end of June 2007, according to the latest statistics from the fund industry's trade group, the Investment Company Institute.

Retirement savings are a big target for Kotlikoff, who's known for his radical ideas on other issues, such as scrapping the tax code in favor of a heavily rebated sales tax. Yet in person Kotlikoff is polite to the point of becoming the office punching bag.

"Teasing Larry can be a great release for all of us," says the chairman of BU's economics department, Kevin Lang, who adds that Kotlikoff often takes heat from colleagues for his unusual suggestions on how to handle administrative problems. When one e-mail discussion got too heated, Lang wrote, a colleague suggested they "go back to picking on Larry as we usually do."

In his new book, the basic advice from Kotlikoff and coauthor Scott Burns, a financial columnist whose work appears in the Globe, is to spend, save, and invest in a way that preserves a constant standard of living, after taking into account things like taxes and mortgages.

Their suggestions include potentially delaying when one starts taking Social Security payments or choosing a career such as plumbing that doesn't rack up big educational debts.

Kotlikoff presses the same points in his $149 software, ESPlanner, sold online at esplanner.com. He estimates 7,000 households have used the software since he started selling it in 2005.

The program can be asked to analyze a 40-year-old couple with two children earning the Massachusetts average household income of $60,000, living in an average home in the state worth $322,500 and with typical retirement assets of $40,000 in a 401(k) account and a $1,000-a-month pension starting at age 65.

The software would urge them to cut their spending by $1,001 a year, to $38,023, a figure meant to represent total spending on food, clothing, cable television, and other expenses, aside from 401(k) contributions and housing costs.

One way they could cut spending is to reduce their life insurance coverage 63 percent to $154,492. In this scenario, the couple's recommended retirement account balance would max out at $211,460 in 2031, the year they retire. That's less than many fund company calculators would suggest, though results are shown differently so they're hard to compare head-to-head. A tough question for all is how to forecast late-in-life healthcare expenses.

Among a half-dozen ESPlanner users interviewed for this article, most were pleased. Paul Gornick, a 55-year-old engineering manager in Oregon, said it persuaded him to suspend a $1,500 monthly contribution to a retirement savings plan, to avoid a higher tax bracket, and use the money to pay down his mortgage.

Alicia H. Munnell, formerly an economics adviser in the Clinton administration and now a Boston College management professor, said she agrees with much of Kotlikoff's economic analysis but fears that, at a practical level, too much savings is hardly a problem. And his message might come at the wrong time.

"This is a moment when the self-interest of financial firms is consistent with good national policy," she said.

Despite his tirades about the practices of mutual fund companies, Kotlikoff remains an investor. His holdings include Fidelity funds offered through Boston University's retirement plan.

Kotlikoff adds he doesn't mean to suggest that people live spendthrift lives, but rather that they adjust their lifestyles to levels they can sustain, even after retirement.

The point is for people to be able to afford things they care about, such as having children or holding a rewarding job, even if it pays less than other jobs.

"You should price your passions," he says.

Ross Kerber can be reached at kerber@globe.com.