Laurence Kotlikoff, the brash Boston University economics professor and social security specialist…

Laurence Kotlikoff, the brash Boston University economics professor and social security expert, doesn’t mince words.

“We Americans are financially quite sick,” he wrote in his new book“Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life” before listing all the financial gaffes we Americans make in our lifetime.

“As a group, we undersave, underinsure, underdiversify, pay for bad investment advice, rely on dying early, retiring too soon, taking social security at the first chance, release far too little trapped equity, borrow to invest in stocks, convince ourselves that stocks are safe for the long term, live house poor,” he wrote.

Marriage, divorce, college, and other lifestyle decisions we make also irritate him. But it’s the lack of savings — especially for retirement — that really bothers him.

“Most workers save budkes,” he writes. “Half of today’s working families face a significant decline in living standards in retirement. The share would fall by about half if all workers retired two years later.

So, he offers his retirement advice in his book, which comes with a winking title. It’s not abracadabra.

“It’s lifelong budgeting,” he told Yahoo Money. “It’s the economic approach to financial planning… [it’s] don’t ask yourself what you would like to spend, but here is what you can spend.

Here’s what else he had to say in a conversation with Yahoo Money.

Kerry Hannon: Is conventional financial advice for retirement all wrong?

Laurence Kotlikoff: “The financial industry directs people seeking advice on retirement planning to an imaginary world. Advisors ask them how much would they like to spend in retirement? My answer is a billion dollars a day.

Then they ask them how much do you save? ‘Not really. Alright, let’s get into those high yield funds. Your success probability of not running out of money East higher. And your probability of success or failure is low – that really means the probability of dying of starvation.

So where you have financial planners putting a plan in place where the likelihood of starving is low. That doesn’t sound like particularly good planning.

What are the biggest mistakes people make when it comes to retirement?

A lot of people just don’t plan for it. They leave it to someone else. They assume that Uncle Sam and their employer are looking after them. Then they are surprised when they reach retirement and realize that they may not have enough money.

Second, there are a lot of people who don’t save in 401(k)s, or who are in 401(k) plans and don’t participate enough. They don’t even invest enough to get a match from the employer.

Taking advantage of employer matching is probably the easiest financial magic trick in the book. The average matched contribution to an employee’s pension plan is more than 4% of salary. Yet a quarter of workers eligible for this free money do not participate in their employer’s plan. Allow me to state the obvious:

If your employer offers to give you free money, Take it.

In my opinion, the whole 401k retirement account experiment in this country has failed.

(Photo: Getty Creative)

Are people retiring too soon?

Yes. They retire too early thinking they are doing well without really looking at it carefully. The median wealth of retiring baby boomers is about $144,000, or about three years of median spending, in a retirement that could last 35 or 40 years in some cases. So most baby boomers retire with too little money by a long shot for retirement. This money could last longer if they worked longer.

I think retirement for most people is financial suicide. It’s a decision to take the longest vacation of your life.

What prevents people from saving in a retirement plan?

At least 32% of employers do not sponsor retirement account plans, period. And they employ a good portion of Americans.

And then we have a lots of people who just have more pressing needs. They have to pay for daycare. They have to pay the mortgage. They just don’t feel able to contribute.

See also

What are the biggest mistakes people make when it comes to Social Security?

They take Social Security too soon at a much lower benefit. About 6 p. 70% of people wait until age 70 to receive their retirement benefits. My estimate is that around 85% would have to wait until age 70 to take advantage of the benefit, while it is 76% higher adjusted for inflation compared to taking it at age 62.

This way, you will have more of your resources in an inflation-protected form. And then you have this assurance if you continue to live to be a hundred years old. You have this much larger number year after year coming your way.

If you’re disabled and can’t work and have nothing else, you’ll have to take it early, but there are plenty of people who aren’t and take it as soon as they can.

“Paying down household debt, starting with the debt with the highest interest rates, is your best investment,” said Laurence Kotlikoff, the brash economics professor at Boston University.

What is your best financial advice?

I know a lot of people who have student loans at the same time invest in stocks. It’s a crazy thing to do. That’s one of the things I try to get across in the book.

So what they did was borrow money to invest in the stock market. If you invest less in the stock market and pay off that student loan, you’re now probably getting a 5% return, maybe 7%.

Same with mortgages. Due to mortgage interest rate differentials, mortgages are financial losers. They’re not as bad as credit card balances, student loans, or payday loans, which have much higher interest rates, but they’re still something to avoid whenever possible. Paying off household debt, starting with debt with the highest interest rates, is your best investment. It is completely safe and offers you a safe and above market return.

Parting thoughts?

Work on your financial health now, so you can spend your money until the end. This is the object. And if you’ve made a lot of money, if you’re rich, you don’t want to put it on the stock market. The stock market could fall by 50%. He has.

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Kerry is a senior columnist and senior reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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