Mitch Tuchman – Charley you were telling us that the difference between taking social security at 62 years old versus 70, two people with the exact same income could mean a 76% difference.  What if I retire at 62, and I need that social security and I don’t really want to wait until I’m 70 years old, even though I can get 76% more I feel like, well I never really know how long I’m going to live, and maybe I’ll just grab it now.

Charley Ellis – That might be your way of thinking about it.  That’s not the way that I would think about it.  I would think very carefully, I might check with my doctor and if he said “Charley you’re going to go in the next 90 days” then I guess I’d go ahead and claim it, but if I am going to be hanging around at all, and had a decent chance of living until let’s say 80, I would defer because that extra income would be terrifically valuable and you never know you might live longer, and longer again. To me, the ability to have a higher income that is adjusted to protect me from any inflation, that happens and goes as long as I can live, I think that’s a really important benefit.

Mitch Tuchman – And in your book “Falling Short” that just came out, you co-wrote with some real important people from the retirement industry think tank at Boston College, what are some of the key things that the everyday investor can take away from that book like the social security claiming strategy, are there other ideas that you propose for people?

Charley Ellis –  Sure, one of the easiest ones to talk about is if I can convince someone to wait until they’re 70, not only do they get 76% more than they would have gotten then if they had quit working at age 62, at 76% I think it’s really important that’s not the total sum of it.  You then have a chance for 8 years, you’re not taking money out of your 401(k), 8 straight years you’re putting money in. It just so happens that your 60s are a time where most of us find our spending levels saucers down, so little bit lower than it normally is, and then it lifts up a little in our mid to late 70s because of healthcare.  You’re not taking money out, but you are putting money in, and you can put in pretty generous contributions and you get a return on your investments that are there when you started at 62 and all the accumulation.  If you put those three together and you have a shabby not very good market, you still have increased your 401(k) by 150%, and if you have a good market, decent, normal market, you’d be increasing it by 200%, and that’s really important because that means that your payouts can increase by that magnitude too. So you get the bigger social security and the bigger 401(k) payout, and the combination can lift large numbers of people, and when I talk large numbers I’m not talking 100,000 people I’m talking about 10-20 million people being lifted from a level where they can’t quite make it or worse, up to a level where they can say they’ve got enough and they’re going to be ok.

Mitch Tuchman – And we should remind everybody that “enough” in your judgment is when you hit retirement having at least 80% of your top income, whatever you were earning the last 5 years before your retirement.

Charley Ellis – Right you are.

John Rothmann – Ok, I want to reiterate that because everybody who is listening to the sound of our voices will now be able to compute roughly what it is that they need in order to retire with more.

Mitch Tuchman – Charley, since you published the book “Falling Short” you’ve been out talking about the book and listening to people’s responses to the book – what have people’s responses been to the book, and what are some of the surprising things that came out of the book that people are listening to and saying “wow, that’s important – I didn’t know that…”

Charley Ellis –  Well, the first thing is that almost everybody is surprised by how much benefit you get by working 8 more years and how valuable it would be for every individual to be able to sit down and know the numbers and then be able to make their own choice, for themselves and their family.  I’m all for free choice, but I don’t think anybody is making a free choice if they haven’t got the information that they need to make a good free choice.  That’s one of the things that virtually everybody is picking up on and saying “oh boy, is that really important.”  The second thing that really comes across very strongly is this is a problem that could grow to be one of the worst social economic financial problems our country has had in 50 years.

John Rothmann – Explain to me why it could be a major problem?

Charley Ellis – You tell me what you think John, when there are 20 million people who don’t have enough to live comfortably reasonably in retirement.

John Rothmann – That’s exactly the key.  You’re exactly right, but I want people to understand what it means that if people do reach retirement age don’t have enough money, don’t have enough resources, hasn’t contacted Rebalance in order to know precisely what they can do – the statement you made was so critical.

Charley Ellis – Well that sad reality is John, individuals are going to be left on their own.  10 years after retirement you don’t know anybody at the company that you could call and they don’t know you, and they don’t have a responsibility to you as they look at life and you don’t have a claim on them as you look at life and they look at life.  So you would really be on your own, getting older, starting to incur pretty serious health costs, not having enough money to be able to do all the kinds of things that you always thought you’d be able to do and that’s a terrible combination for individuals to go into if it could be avoided and I think the reality is that it can be avoided for most people.

John Rothmann – And what is the way to avoid it? What is the method you recommend?

Charley Ellis – First, be sure that everybody knows about social security and the 76% increase. Second, be sure that everybody knows about the benefit increase they can have in their 401(k).  Third, and this is something we haven’t talked about, but it’s very important, we could easily get to a very real strength of solution if as soon as you took a job, you’re automatically in the 401(k) plan unless you say you don’t want it and that you want to opt out or I want to get out of this deal.  Fine, you could opt out, but otherwise you’re in the plan automatically and you automatically match the match.  You get the free money that the company was prepared to put up automatically unless you say you don’t want that and then third you have auto-escalation.  Every time you get a raise, your choice, but either ¼ or 1/3 goes into increasing the savings that you’re putting aside for future use for when you need it later on and that auto-escalation could rise until you get up to something like 12% savings, but if you do it gradually, and only when you’ve already gotten a raise, it doesn’t hurt, it’s not causing you to change your behavior.  And then the investing- have the investing be done automatically for you in a balanced portfolio that is automatically rebalanced and is invested in index funds so that you don’t have to worry about a thing because you know in the long run it’s going to accumulate and accumulate and it’ll be very sensibly managed so that for you, but the time you come to your retirement years, hopefully 70 instead of 62, you will have accumulated a substantial amount in your 401(k) plan compared to the way we are today, which is, get this – half of the people in America who have a 401(k) plan, and are 65 have less than $110,000 in the plan and they’re about to start a 20-25 year retirement.  It’s not possible for them to make good on that retirement dream or plan that we all had with that kind of money.  If you’ve been putting money in all along and building it up, and been investing it in low-cost index funds, with somebody rebalancing it on their behalf, they would be in such a different position that you’d say “Well done!”

John Rothmann – And let’s point out that that’s precisely what Rebalance does.  It rebalances, it gives you individual attention and their investment method is the index fund, which is precisely what you’ve been recommending and why you’ve been so supportive of Rebalance is that correct?

Charley Ellis – Exactly so.  I mean I like Mitch, Scott and the team at Rebalance, but the reason that I’m interested in the program is because I know we’ve got a problem and when I can see a solution to that problem I want to get behind it.

Mitch Tuchman –  Charley, we’ve talked a lot about the type of investor that should get an advisor but when somebody is out there looking for an advisor, and of course I’m biased towards Rebalance we have a great service, but just in general, when you’re talking to people how do you help them pick an advisor?  What do you tell them, things to look for?  Obviously don’t go to a broker, go to a registered investment advisor, but what other things do you tell people when they ask your advice on that?

Charley Ellis – The reason it’s so important to go to a registered investment advisor is that they are required by the federal government to meet standards of fiduciary responsibility, which basically means they’ve got to put the interest of their client ahead of themselves.  The brokers have said we don’t want to be required to treat people that way and we don’t want to be held responsible for being fiduciaries.  We don’t want to have penalties if we don’t take care of our clients by putting their interests first, and it’s really embarrassing as a nation that the President of the United States was commenting that this is not right, this is not the way things should be.  The political process however, it looks like the people that don’t want to be subject to fiduciary responsibilities and are going to be continuing to “give financial advice” that they will be able to politically get this regulation not passed or approved and it’s a shame.

John Rothmann – Charley we only have another minute with you- what are your closing words of advice for our listeners?

Charley Ellis – Saving is a wonderful idea because the only person you’re saving for is your family, and yourself.

John Rothmann – And again, your new book “Falling Short”.

John Rothmann – Thanks Charley!

Charley Ellis – My pleasure.