“Consumption Smoothing” May Be the Way to Go

At least one economist suggests that dying poor might be the best way to go. There is a way to keep your spending level so that you will not suffer at one extreme end of the spectrum or another:  either a collapse in living standards in your older years or retirement with absurd wealth to transfer to possibly ungrateful or irresponsible heirs. Some call this plan “consumption smoothing”. Laurence Kotlikoff is a teacher at Boston University and a writer for Forbes. He believes that Americans should put all their savings into annuities so you can convert a lump sum into monthly payments for life. This way you will not run out of assets, but your heirs will not end up with much, if any.

When challenged on the idea of leaving children with nothing, Kotlikoff says that the best way to help children is to buy annuities because the payout will nearly double what you could get on stocks and bonds. That way, you can take some of your annuity income to make gifts to your kids.

Not all people are comfortable with annuitizing their entire net worth. Kotlikoff proposes a compromise for a retiree who is healthy and in sound financial shape. Assuming that you have assets that you can use to cover basic needs and that your assets are evenly divided between taxable and tax-deferred accounts, in your 60s, you should live off those taxable accounts. Don’t touch your social security and IRA until you’re 70. If you have your basic needs covered, you can take bigger risks with your remaining money by investing in stocks and junk bonds. You can also give children appreciated stocks. With this strategy, you can reach a compromise between the two ends of the extreme spectrum.

See William Baldwin, The Case For Dying Broke,  Forbes, Feb. 8, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.