Here on the AgingOptions blog, we appreciate writers who pull no punches – whether we agree with their opinions or not. In this case, we’re hearing once again from Harvard-trained economist and financial writer Laurence Kotlikoff, someone we’ve quoted here before. Today Kotlikoff takes aim at a goal that for many people is their Holy Grail: early retirement.  In this essay published by CNBC, he calls it one of the biggest money mistakes you can make, and he states emphatically that most early retirees will live to regret it.

Now that we know where he’s going, let’s find out what Kotlikoff has to say, and we’ll see whether we think he’s right or way off base.

Early Retirement is a Mistake Because We’re “Lousy Savers”

“As an economist, pulling punches isn’t in my DNA,” Kotlikoff begins. “So, I’ll be blunt: For most Americans, early retirement isn’t just a decision to take the longest vacation of their lives — it’s one of the biggest money mistakes that they will regret.”  According to this outspoken retirement expert, the reason is simple: “We are, as a group, lousy savers, making early retirement unaffordable. Financially speaking, it’s generally far safer and far smarter to retire later.”

As Exhibit A, Kotlikoff cites this Boston College Center for Retirement Research report, released some years ago, which showed that roughly half of today’s working families were likely to face a major decline in their standard of living once they reached retirement. But if those workers were to stay on the job just two years longer, the number of at-risk retirees would be slashed by half.

Most Early Retirees Chose That Route Despite Meager Savings

Kotlikoff does hedge his bets just a bit in acknowledging that there are situations in which retiring early is a great (or unavoidable) option. “Some people have carefully planned and can afford to buy more leisure,” he writes. Then there are those who find themselves forced into it. “Many have no choice; they run out of physical or psychological steam. Others find their jobs automated or outsourced.”

But recent research makes it clear that the majority – roughly two thirds of early retirees between 57 and 66 years old — made the decision themselves. These folks, Kotlikoff writes, “choose to retire early out their own volition, despite having saved next to nothing. And most of them are able-bodied, without disabilities that would prevent them from staying on the job.”

Baby Boomers Face a “Retirement Debacle”

Kotlikoff takes special aim at the baby boomer generation, “the 76 million-strong population of those born between 1946 and 1964, who are retiring in droves.” According to data highlighted in this CNBC article from 2019, nearly half of the boomer generation report either minimal savings, or none at all. “Indeed,” he adds, “their median wealth is just $144,000 — less than three years of median household spending. If they had significant private, state or local pensions on which to rely, things would look better. They don’t.”

Only a small percentage have a pension apart from Social Security, and for many of those, their pensions are coming from state- and local-government jobs that weren’t covered by Social Security. Not only are they starting retirement at a disadvantage due to lower (or no) Social Security earnings, but even those who did work in covered jobs could potentially lose most or all of their Social Security benefits due to Social Security’s Windfall Elimination and Government Pension Offset provisions.

Social Security Doesn’t Meet the Need

Most retirees say that Social Security will be a prime source of retirement income. But with an average benefit of about $18,000 per year, it’s not going to make much of a dent. The problem: a huge majority of beneficiaries – 94 percent – start benefits well before they peak at age 70. “In fact,” says Kotlikoff, “roughly 85 percent should be waiting until 70 to collect. The age-70 retirement benefit is 76 percent higher, adjusted for inflation, than, for example, the age-62 benefit.”

Sadly, the decision to start benefits early is tough to undo, which means those lower payments are locked in for life. “Moreover,” Kotlikoff adds, “when Americans take their Social Security retirement benefits far too early, they potentially condemn their spouses or ex-spouses (to whom they were married for a decade or more) to far lower widow(er)‘s and divorced widow(er)’s benefits.” Translation: your spouse pays the price of your inability to wait.  

Misjudging the Impact of Living Longer

A big disconnect in planning for retirement, Kotlikoff asserts, lies in how we process the idea of living longer. “The failure of most of us to save reflects a misfocus on life expectancy,” he writes, “which is routinely used to set one’s planning horizon.” He quotes  Social Security actuarial statistics reporting that half of today’s 50-year-olds will live beyond age 80 and roughly one-quarter will reach age 90.

If we don’t plan for the eventuality of a longer life, we’ll doom ourselves to impoverishment or dependency as we age, Kotlikoff illustrates. Because we “can’t count on dying on time, [we need] to plan to live to [our] maximum age of life, because [we] might.” In his article he writes about a fictional 40-year-old named Jane who plans to retire at 62. With no savings to speak of, she’s “counting on Social Security and her 401(k), with its $150,000 balance and to which she and her employer contribute 3 percent annually, to sustain her retirement.”

But in truth, she’s heading for a cliff. “Jane is miles off base,” Kotlikoff asserts. “Her retirement could last longer than she works. If she lives to 100, she needs to save 28 percent of her take-home pay each year through retirement!” By delaying Social Security and cutting her living standard, Jane can get that savings rate down to a more realistic level.

“Unfortunately,” says Kotlikoff, “Jane is saving nothing. If she continues to do so, her post-retirement living standard will be half her pre-retirement living standard!” But even at that, she is actually in better shape than some of her peers, many of whom have no workplace retirement plan. And many who do have access to a plan fail to take advantage of their employee match.

Kotlikoff’s Answer: Postpone Retirement

In Kotlikoff’s view, there’s a simple plan to “rescue” retirement for people like Jane: work longer. By staying on the job until 70 and then starting Social Security benefits, boomers can take a lot of the pressure off their requirement to save, and actually have more to spend once they do retire.

“Yes, this is a risky strategy,” Kotlikoff acknowledges. “Jane could become disabled. Or she could be fired. But if she refuses to save a ton and doesn’t want to experience severe financial deprivation in retirement, her only answer is to keep on working.”

Kotlikoff is taking his own medicine. At age 71, he’s in an enviable situation, enjoying the security of academic tenure. He finds his work of researching, writing, and teaching “just too rewarding — financially, intellectually and psychologically — to give it up.” His plan, he says, is “to die in the saddle.” Realistic for everyone? Maybe not – but his words may cause us to re-assess that dream of early retirement. What do you think?

Rajiv’s View: A Financial Dashboard is a Must

When we ran this story by Rajiv Nagaich of AgingOptions, his response was clear. “It sounds to me as though Kotlikoff is talking about people who retire early without a plan,” he said. “But if you have no plan, it doesn’t matter if you retire early or not – you’re heading for disaster. It’s like flying blind!”  Rajiv’s philosophy is succinct: Don’t work a day longer than you have to.

Rajiv repeated the advice he so often shares on the radio and in seminars. “The answer,” he emphasized, “is to sit down with a qualified financial adviser and prepare a financial dashboard. And the sooner, the better! That way,” Rajiv adds, “you’ll be able to see how all the financial puzzle pieces fit together – saving, spending, investing, everything. With a financial dashboard in place, you’re far better equipped to enjoy a long and happy retirement – without running out of money and becoming a burden to those you love.”

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(originally reported at www.cnbc.com)