It's Time to Review Retirement Path

"Spend 'Til the End" challenges traditional retirement planning advice.

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"Consumption smoothing" is an ungainly label to describe a different way of analyzing your lifetime spending needs. It is the centerpiece of a recent book called Spend 'Til the End, by Laurence Kotlikoff, an economist at Boston University, and Scott Burns, a syndicated personal-finance columnist.

By way of a disclaimer, I have known Larry for a few years and Scott for a few decades. I don't always agree with what they say, but I can vouch for the integrity they bring to the process. If Larry and Scott could gain Suze Orman popularity by changing their views or dumbing down their message, they would happily choose conscience-clear lives of obscurity.

With their book resting comfortably at number 24,711 in the Amazon rankings, I don't think Suze has anything to worry about.

But the rest of us have lots to worry about. The gravity of our economic condition will become even more painfully clear as the election buzz wears off and we're confronted with the reality of a continuing global malaise that is proving resistant to all forms of financial antibiotics.

Even as banks show signs of resuming lending, the pool of borrowers is shrinking, and we are pretty much assured of a serious recession that will hang around for a long time. Investment markets will be slow to recover, and consumer spending, the engine of the U.S. economy, has gone into early hibernation that will last not only through this winter but quite possibly next winter as well.

Against this backdrop, it is a very good time to revisit fundamental assumptions about your future spending needs, and Larry and Scott are excellent guides for this journey.

Because I do aspire to Suze Orman status, let me dumb down their arguments for you.

1) Traditional financial planning models are built on needlessly conservative assumptions, including post-retirement spending needs that do not reflect the actual spending needs of real households. These models primarily serve the interests of financial advisers, retirement fund companies, and others whose livelihoods depend on the fees they earn from consumers.

2) Individuals often ask the wrong questions and rarely have the information needed to make sound decisions.

3) Consumption smoothing uses sophisticated computer models to more accurately help consumers plot lifelong spending and investment programs. The goal is to build spending plans over a lifetime, enabling people to meet their goals as they age and still have sufficient resources to live out increasingly long retirement periods.

"Economic common sense, you'll come to see, is at complete odds with conventional financial planning," the authors say. "Indeed, this book will argue that virtually every bit of conventional financial wisdom you've heard over the years is simply wrong."

Whether you end up agreeing with this point of view, making your way through Spend ' Til the End is a great way of testing your own assumptions about the important objectives in your life and whether the cost of achieving those objectives is really what you thought it was. In the end, the book is all about asking the right questions. You're the only one who can supply the answers that reflect your resources, needs, and goals.

Many of those questions are not so obvious. I found, for example, that the book was a particularly effective tax guide. Even for mere mortals who don't run hedge funds, tax consequences affect virtually all major spending and investment decisions, and their impact is often decisive in guiding what you should do. State tax rates can be particularly important for retirees and should be factored into major spending decisions.

Larry has embodied the discipline of consumption smoothing in a fee-based online program called ESPlanner. It sits on top of databases that contain details on state and federal taxes and other information that should be factored into consumption planning. It also provides some good, and free, looks into specific arguments contained in the book. Scott provides an investment service called AssetBuilder that is consistent with the book's philosophy.