Recently I was given the opportunity to review the new book “Spend Til the End” by nationally syndicated financial columnist and author Scott Burns. In addition to being an accomplished writer, Scott is also the chief investment strategist for AssetBuilder where he advocates a low fee approach to investment management. As part of my review, I had a chance to interview Scott, find out more about him and his financial views as well as pose several questions that I had after reading the book.
In “Spend Til the End” authors Scott Burns and Larry Kotlikoff offer a unique approach to financial planning that focuses on maintaining a smooth living standard throughout your life. This is different than the approach used across much of the financial planning community that relies on accurately determining your spending targets for the future. Scott and Larry are of the opinion that the spending targets we choose are often fraught with error and lead to over or under saving behaviors that miss the mark.
Living standard based planning requires analysis of a wide variety of factors that can make for a complicated planning situation. With advances in computers over the years, Larry has been able to develop a software program called ESPlanner that offers to help you do these living standard based calculations in the comfort of your own home on your own computer. The theories that they support in their book are the product of ESPlanner and their experience putting them into practice themselves and with clients.
I hope you enjoy this series of two articles that will share the interview with you and the subsequent book review which will follow thereafter.
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Jeff: Why did you decide to write this book?
Scott Burns: We thought it was time to introduce the idea of consumption smoothing and true financial planning to a broad public. As a journalist I’m tired of the self-serving ideas the financial services industry passes off as planning. As an economist, Larry Kotlikoff was, too. More important, he had developed the software to actually do it rather than theorize about it.
Jeff: Tell me a little about your relationship with Larry Kotlikoff. Have you worked together before? If so, on what projects?
Scott Burns: In the mid-90s I read some of his research papers to prepare for interviewing him. I was impressed by how completely his research showed a concern for families and how public policy could gather votes today and give the bill to the next generation. I had been writing about the unfunded liabilities of Social Security and Medicare for more than 20 years and saw that his generational accounting provided the best tool for examining the issue.
He was starting to write “The Coming Generational Storm” for MIT Press and asked if I’d like to co-author it with him. I was delighted and intimidated at the same time, but quickly found that we made a good team. He’s Dr. Johnson. I’m Boswell.
Jeff: “Spend ‘Til the End” poses several counter financial culture ideas and emphasizes the importance of managing your living standard rather than focusing on spending targets. How did you come to these conclusions that are detailed in the book? Are these ideas you had before ESPlanner or are they borne out of experience using ESPlanner?
Scott Burns: I had a clue about some of the major ideas in “Spend ‘Til the End,” but using ESPlanner confirms them with very coherent output.
The most powerful single idea in the book is that most of us don’t need to replace the conventional 70-85 percent of our pre-retirement income. We actually need less, that has a lot of very positive ramifications.
Jeff: Why is the replacement rate lower than what has become conventional wisdom?
Scott Burns: Because much of that income has always been spent on things we did for our children or debts we assumed and paid off, like a home mortgage. Since we never had this income to spend on ourselves, it is income we don’t have to replace. This is not a minor observation.
Another is that public policy risk, in the form of Social Security and Medicare financing, is the biggest risk faced by more than 90 percent of the population. Investment risk is relatively minor. Sadly, the financial services community doesn’t address this because their work is generally focused on financial assets and the other 10 percent of the population.
Jeff: What is the central message you intended to convey to those who read “Spend ‘Til the End?”
Scott Burns: Personal decisions are as important for financial planning as saving and investment decisions. Often, they are more important.
It is possible to materially improve your lifetime standard of living by taking the consumption smoothing approach. And this is something anyone can do. It doesn’t require Wall Street brainpower (now known to be an oxymoron) or deep insight into the workings of the Federal Reserve.
Jeff: Why do you think that’s an important message?
Scott Burns: It’s important because most people are intimidated or terrified by the task of financial planning as it is currently done. In fact, they can use this tool to reassume control of their lives. We can manage our lives with less risk, more control, and vastly more satisfaction.
Jeff: If consumption smoothing is as important as you make it out to be, how come this concept hasn’t been addressed in the mainstream media before now?
Scott Burns: First, this is a “slow” idea. Back in 1996 I wrote a simple column showing that Peter Lynch was wrong when he said you could be 100 percent invested in common stocks and withdraw 7 percent a year forever. Many in the financial planning community used the same deterministic methods for their planning. In fact, stochastic analysis was called for.
Well, it took ten years but stochastic analysis is now the standard. Any financial planner or financial services person who still uses deterministic methods now faces ridicule from both his professional peers and from many potential customers.
I expect much the same with consumption smoothing software. We all have habits to give up. But we’ll give them up to use a better tool. And that’s what consumption smoothing is, a better tool. In medical terms, this is a treatment that changes the standard of care.
A second reason might be called “the butcher’s thumb factor.” The sloppy tools currently used for determining life insurance needs, saving needs, etc. often conclude that people need more insurance and more savings and that they need them now. All of these conclusion benefit the industry using the tool.
That’s a pretty powerful reason to be slow about adopting better tools.
Ultimately, however, failure to adapt is bad for business. The financial services firms that fail to adapt will be in the position of GM and Ford, offering the same old and inefficient stuff while other firms grow.
In fact, the idea is starting to move mainstream right now. It emerged from deep academia with a CFA publication last year. It has also been referenced in one of the personal finance books written by Ben Stein and Phil DeMuth. Another consumption smoothing book, “Are You a Stock or a Bond?” will be published in September.
“Spend ‘til the End” is at the front of a change wave.
Jeff: The book provokes critical thought on many of the financial issues I’ve taken for granted as fact in the past…e.g. life insurance requirements. You make use of many example scenarios throughout the book to support your points but don’t take the opportunity to give the reader a chance to closely examine the logic and the math behind the conclusions. What do you suggest for those readers who aren’t ready to press the “I believe” button regarding these ideas? Is there another resource they can study to learn more about the rationale, logic and math that produced the results?
Scott Burns: It’s difficult to show because the computation is so complex. I think ESPlanner is several orders of magnitude greater than conventional software in the complexity of its computations. I’d love to be able to demonstrate the answers with, say, an HP financial calculator, but we’re talking about a different creature.
If you spend a few minutes just checking the internal consistency of ESPlanner output and note that it handles projections of every aspect of your finances, including tax payments for every year of the rest of your life, you start to reach for the “I believe” button.
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This concludes part one of my discussion with nationally syndicated financial columnist and author Scott Burns on his new book “Spend ‘Til the End.” I will share more of this discussion in a future post and a subsequent review of the book.
-Jeff
I’m managing my money, are you managing yours
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1 Interview With “Spend ‘Til the End” Author Scott Burns - Part Two | Minding My Own Business // Sep 29, 2008 at 10:19 am
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