Bad Advice at Any Price

The theme of this blog, which admittedly I often stretch and occasionally just ignore, is that the money advice we Americans get is lousy.

That advice comes from several sources. There are publications and US_Silvercert1 broadcasts of various kinds. Aside from often lacking much wisdom or insight, these sources of information suffer from the fact that they are aimed at a broad and anonymous audience. By their nature, they are one-size-fits-all, leaving individuals to work out for themselves any customizations that might be required. On the other hand, this advice is free or nearly so.

More near-free advice can be had from friends and relatives. Some of this is probably good, but given the general state of PF knowledge out there the chances of hitting on a gifted amateur with sound ideas is low.

At the top of the advice food chain are professionals who give advice to particular individuals, presumably based those individuals’ situations, in exchange for money in the form of fees and/or commissions. In principle, that ought to work best and I have no doubt that there are many paid advisors out there who do a great job. But I am also pretty sure that many others, maybe even most others, are not up to snuff.

I was reminded of this by two recent items from the publication end of the personal finance advice spectrum.

The first is from Kiplinger’s. Social Security Payback Option May Disappear serves as a good update to a post I ran a few weeks back on a clever Social Security maneuver. In a nutshell, the idea is that instead of choosing between a lower payment at 62 and a higher one at 70, a person can have it both ways. Start at 62 and then, if you are still healthy at 70, repay what you got without interest and start over at 70.

Combining a free option with an interest-free loan from the government is pretty compelling. Frankly, I was embarrassed that I had, a year ago, written about when to take Social Security without knowing of this facet. But I never pretended to be a particular expert on this corner of personal finance and I certainly do not charge anybody money for advice on it.

Alas, the Kiplinger’s article tells us that the government is on to this trick and may soon close it down. That’s not exactly a shock. What did raise my eyebrows was some background data buried deep in the piece.

In 2007, only about 500 people — out of more than 37 million retirees and their dependents receiving benefits — took advantage of the payback option. By 2009, the number had nearly doubled as more retirees learned how they could repay their benefits, interest- and penalty-free, and restart them at a new, higher level.

Fewer than 1000 retirees took the payback and restart option last year? Out of 37 million people getting checks? That is 0.0027%. More people played Major League Baseball in 2009 than took advantage of this peculiarity in the SS rules. It almost makes me wonder why the bureaucrats are bothering to even discuss plugging such a tiny hole.

I am not sure what percentage of old folks would ideally be paying back and re-filing. But it is important to keep in mind that the basic strategy of starting at 62 and then calling a do-over at 70 is something that would make sense for almost all SS recipients. In the ideal world, most 70-year-olds would be re-filing for higher benefits. I do not know what portion of the 37 million are 70 years old. Would it be unreasonable to take a rough guess that the profit-maximizing ideal proportion re-filing is something like 2.7% of recipients? That would mean that the actual number is a thousand times lower than what it should be.

What is wrong with the other 99.9%? The great majority of them, we presume, are simply the victims of poor one-size-fits-all advice from the mass PF media. Or perhaps they just listen to their friends. But some non-trivial portion, way more than 0.1%, paid an expert to give them advice. In fact, folks nearing retirement and in their early 60s are probably the best served demographic by financial advisors. Some of those advisors even hold themselves out as experts on such things as Social Security. And yet….

My other example of poor advice given one-on-one to the nearly retired is from CNBC. When Is Paying Off Your Mortgage the Right Move? is a typical exercise in making the relatively simple confusingly obscure. As I have written here repeatedly, the core issue on to pay off your mortgage or not is whether or not you can expect to get a better (after-tax) return on your money by investing it.

The CNBC story tells us of a soon to be retired couple in New Jersey who are advised by a certified financial planner to pay the mortgage down. (The article names the advisor and contains a link to his firm’s website in case you want to sign up.) He advised them that “they would need to make between 6 percent and 8 percent on their money to make it worth holding on to the mortgage.”

Setting aside the fact that 6% to 8% is actually not hugely ambitious as a projected return, I have to wonder how the CFP got that hurdle rate. The CNBC piece doesn’t say. (Why waste space on such trivialities? We need to know that the husband of the couple once owned an auto repair business but now sells real estate.)

But the article does say that the couple paid down a 30 year at 5.25%. Is it possible that the advisor took 5.25% and bumped it up a little to take into account the risk of investing? Did he forget the tax effects? Or is mortgage interest not deductible for this couple, which seems very unlikely given what we are told about them?

More to the point, the advisor, who undoubtedly assured the couple he was an expert on these things, is apparently ignorant of a little trick that might have helped his fee-paying clients. They could have refinanced the mortgage, reducing the interest rate by at least a full point. On an after-tax basis, I am guessing the cost would be close to 3%. That’s an investment hurdle rate that most people would expect to comfortably beat.

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