JLP: It seems as though we are in the midst of a national personal finance education crisis. What do you think should be done to better educate Americans about personal finance? Have you come across any programs that are working?
SB: Rather than think everyone should be their own investment advisor I think we should accept the idea that (1) some people will be clueless to the grave and (2) that we’d have a more productive society if people could do what they do best— which probably isn’t money management.
That’s why I wrote the “Reinventing Retirement Income in America” paper for the NCPA with ERISA attorney Brooks Hamilton. In it, we recommend automatic enrollment in 401(k) plans, a default investment in a pension-like fund that is professionally managed, automatic escalation of contributions, no company stock, and a regular report on progress toward a retirement accumulation benchmark. The closer we can get to a program like the Federal Thrift Savings Plan (http://www.tsp.gov/) with lifecycle index funds that cost 6 basis points a year, the better.
JLP: What advice do you have for parents who want to teach their kids about money?
SB:Let them work for what they want. Start small. Start when they are young. Remember that just because buying something is easy for you doesn’t mean you should do it.
JLP: Do you have any advice for a young people beginning their careers?
SB:Value liquidity over investment. Avoid debt. Be in a position to negotiate your salary. You can’t do that unless you have an “or else” factor in your pocket. And you won’t have an “or else” factor in your pocket if your lights are about to be turned off because you’ve overspent. Without the power of unions to negotiate for them, young workers need to learn new techniques. Having the money to walk is a major power tool.
JLP: Are there any books about personal finance or investing that you can recommend?
SB:I think people should read the little, easy books— not the tomes that are sold by the pound. So everyone should read Andy Tobias, “The Only Investment Guide You’ll Ever Need.” From there you have to move up a level to, say, Jack Bogle’s books or David Dreman’s books. And don’t forget Bill Bernstein and his Four Pillars.
JLP: Finally, what can we expect from Scott Burns in the future? Any more books in the works?
SB:I’m working on a second book with Larry Kotlikoff. We wrote “The Coming Generational Storm” together for MIT Press and it was very successful— endorsed by four Nobel laureates, translated into Chinese, Japanese, and Russian, and now out in paperback.
The new book is based on the life cycle hypothesis— the idea that people adjust their consumption to smooth it throughout their lifetimes. The idea is old— rooted in some Irving Fisher papers and Franco Modigliani’s work— but today we finally have the computer tools to do actual financial planning with it. Kotlikoff has developed the software (E$Planner). It produces a lot of counter-intuitive results and blows away conventional financial planning. We think the book will be a must-have for serious planners— and a major challenge to the practices of the financial planning industry.