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Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Editor’s Note: Economist Larry Kotlikoff is our resident Social Security columnist, but this week, he turns his attention to the children and grandchildren of Social Security recipients and takes a break from the 34 Social Security “secrets,” “mistakes” and gotchas that have prompted so many boomers to write in with Social Security questions.
Dear About-to-Graduate or Recently-Graduated College Grads,
I’ve been writing a weekly column since August 2012 that gives your parents and grandparents advice on how to maximize their lifetime Social Security benefits. This week, Making Sen$e asked me to send some personal financial suggestions your way.
Your generation is, unfortunately and outrageously, in a very tough spot.
First, you are facing fierce and increasing competition from smart machines who can substitute for you and other humans much more directly than was the case with previously developed technology. Smart machines have, at their core, software code. And since this code was produced in the past by humans, what we have here is, in the large, past labor competing with current labor.
Second, there is lots of current labor competing with current labor. Thanks to the Internet, outsourcing, immigration and international trade, you are and will increasingly be competing for jobs with people all over the world.
Third, you are joining an economy in which jobs, particularly good ones, are becoming increasingly scarce. Yes, the unemployment rate has come down. But more and more people have given up trying to find work. The country’s labor force participation rate is now just 62.8 percent — an all-time low.
Fourth, you face not just a very tough job market, but enormous and ongoing uncertainty about what career to pursue. A law degree used to mean a high-paying job. Now it often means no job at all. Doctors are in high demand, but general practitioners get paid no more than plumbers over their working lives when you consider all the training costs they face (see the section “My Son the Plumber” in my book “The Clash of Generations”).
Professors, like me, used to think we were irreplaceable. But online courses could put most of us out of business. Software engineering is now hot. But it was hot during the ‘90s and then crashed very hard for many years when the Dot.com bubble burst.
Fifth, there’s a gigantic dirty secret that neither political party has told you. The federal government is totally broke, indeed in far worse shape than Detroit. Almost all of the country’s $205 trillion present-value fiscal gap separating projected future expenditures and receipts comprises obligations that have been kept off the books based on accounting that would turn any true adult’s stomach. The politicians aren’t even acknowledging this fiscal gap, let alone asking anyone over 40 to cover a single penny of it. Consequently, it will be dumped in your laps because someone has to pay. Disreputable supply-side and demand-side economists to the contrary, there is no free lunch.
Sixth, … well that’s enough bad news, even for an economist. The good news is that we are Americans. The government may have lost its way, but we haven’t lost our edge. We are tough and resilient and creative and entrepreneurial. We get down and then we get up. And as individuals and as a country, we’ve been in hotter spots before. So as goes the World War II slogan that your generation has adopted as your own, “Keep calm and carry on.”
Your first job is to find a job, work hard at it, but always keep looking for a better opportunity. Better opportunity doesn’t necessarily mean more immediate pay. It may mean working at a lower-paid job that offers excellent future career opportunities. It may also mean investing more in education. But be careful. Higher education is a for-profit business, even when it comes to state schools. And as we’ve been seeing, it doesn’t always pay.
Your second job is not to get discouraged. Most young people entering the workforce quit, get fired or switch jobs numerous times before finding what they really want to do. Expect to quit, get fired and switch jobs so that when this happens you’ll keep calm and carry on.
Your third job is to figure out how to maximize your lifetime living standard. This may entail working for less, but in a job where housing costs, sales taxes, property taxes and state income taxes are lower.
Your fourth job is to keep your eyes open to starting your own business. There is a terrific restaurant in Edinburgh called The Oink. It consists of one small room and a huge roasted pig in the window. All day long people stand in line to buy delicious pulled pork sandwiches from that pig. They sell drinks and great chutneys to put on the sandwiches. That’s it. That “restaurant” can be replicated anywhere in the country and be profitable. You don’t have to be the first to invent something. If you see a great business that works and can be replicated without infringing on any intellectual property or trademarks, go for it. Or ask that owner if you can set up a franchise in your town.
Your fifth job is to try, as soon as possible, to buy a decently-priced apartment or house. This is especially true if you intend to live and work somewhere for many years and have a reasonably secure job or can rent out the house if you lose your job. Owning a home provides some tax breaks. But the big deal is securing a major part of your living standard, namely your housing needs. If you own a house, no one can ever raise rent on you.
Your sixth job is to never take stock tips, even from your favorite uncle who has made a killing in the market. He was lucky. No one can systematically beat the market unless he or she has either insider information or works very hard at researching particular companies and has special talent evaluating them. Such Warren Buffets are extremely rare, meaning you will most likely lose your shirt investing with someone who isn’t Warren Buffet and pay a high fee for the privilege.
Your seventh job is to not be scared of the stock market. It’s the right place to invest most of your savings (apart from money you are saving for a down payment) when you are young. The goal is always to stay fully diversified. When you are young, most of your assets are invested in your own human capital — your own future labor earnings. The returns on this investment aren’t likely to be correlated with the return on stocks. Hence, putting money in stocks is a way of spreading your risk.
Your eighth job is to be very careful of investing in long-term bonds from a governments like ours that’s broke. Such countries print money to pay their bills, which is exactly what’s been going on in spades for the last six years. Indeed, the Federal Reserve in 2013 printed 29 cents of every dollar spent by Uncle Sam. This will, eventually, produce inflation, which will wipe out the return on your investments in long-term nominal (non-inflation-indexed) government and, also, corporate bonds.
Your ninth job is to pay off your debts, starting with your credit card bills, which charge you a usurious interest rate. Once you’ve paid them off, pre-pay your student loans and then, if you have one, pay off your mortgage. Pre-paying loans may not sound like it, but it’s fundamentally the same as investing in something perfectly safe that yields a very high return. To see this, think about your net worth a year from now if you take $1,000 today and invest it in a one-year Treasury bill yielding one-half of 1 percent versus paying off your outstanding credit card balance, for which you’re being charged 18 percent interest.
Your tenth job is to maximize your happiness. The super rich aren’t super happy. Yes, they have more toys and don’t have to worry about money. But plenty of super rich movie stars, musicians, actors and business moguls have led miserable lives because money can’t buy you love — either from someone else or from yourself. Love yourself, give yourself a break, be kind to others, find meaning in what you are doing or stop doing it, and have fun!
Laurence Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Kotlikoff's columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications.
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