What you can learn from a Harvard economist's retirement screw-up

Just because you have a Ph.D. in economics doesn't mean you know how to invest for retirement. Alicia Munnell, the director of Boston College's Center for Retirement Research, was a member of the president's Council of Economic Advisers for two years before joining Boston College as a professor of management sciences in 1997. Before the council, she was assistant secretary of the Treasury for economic policy for two years. That was after working for the Federal Reserve Bank of Boston for two decades. And that was after getting her Ph.D. at Harvard. But taking responsibility for your own investing is "too hard," she says. Like everyone else out there, Ms. Munnell, 72, is nervous about whether she's doing the right thing. She did make a couple of smart financial decisions in her early 50s that firmed up her financial footing. They had nothing to do with stocks or bonds. Now Ms. Munnell tries to help people learn from her mistakes by talking about them as often as possible. The "not-so-smart things," she calls them. THE SITUATION Ms. Munnell and her 76-year-old husband, Henry Healy, a lawyer, both still work. She analyzes retirement issues, works on papers, writes a retirement blog and suggests changes to policy. You don't get rich in academia, but "you get in benefits what you don't get in salary," she says. She loves working and has no plans to stop, though she has broadened her interests in recent years. She's taken up duplicate bridge, plays in tournaments and daydreams more about such things as cruises down the Danube. Ms. Munnell says that like many people she probably has too much money in cash — she guesses she has a third in cash, a third in stocks, and a third in bonds. She'd have much less in stocks if her son weren't a private wealth manager at Goldman Sachs. "He probably got us out of hoarding our money under the mattress," she says. "He only intervenes when he's kind of horrified." SMART THING NO. 1 One Sunday in the mid-1990s, when she was around 50, Ms. Munnell began to wonder about how much she and her husband were spending and how much they might have to live on in retirement. This was after she worked in the Clinton administration and was back in Boston looking for a job. She looked at their earnings, savings and mortgage payments to get a rough idea. The result: A "mind-boggling mismatch" between the money they needed to maintain their present and future lifestyles. One of the couple's major assets was a stately home on Boston's Beacon Hill. It was a "huge single-family house with six bedrooms and a garden," Ms. Munnell says. "We could've had people living upstairs and would never have known it." She and her husband talked with a financial planner she knows from her work at the center, who emphasized that they had a budget constraint and needed to set up their budget to reflect that. In other words, get rid of the house. Then, one day, someone just showed up at their house to buy it. "Normally I would have said no," Ms. Munnell says. "And we could've been fine in that house for a good number of years. But because I did that [budget] exercise, I took advantage of the opportunity when it arose." The couple still lives on Beacon Hill but in a co-op, and they have no debt on either that or a house they own in Vermont. SMART THING NO. 2 Working longer is a solution to inadequate retirement savings that Ms. Munnell is passionate about. It helps you postpone taking Social Security so you get a far bigger monthly benefit, and it allows tax-deferred retirement savings to grow. What both of her smart retirement moves have in common, she stresses, is that neither had anything to do with investment options. "One was controlling your spending, and the other is a labor-force decision," she says. "If I have a message, it's that I'm stymied like everyone else about how to invest my money, but for one reason or another I made good lifestyle decisions that saved me." THE NOT-SO-SMART STUFF Most of Ms. Munnell's mistakes involved using retirement savings for current lifestyle needs. When she worked at the Boston Fed, she had a defined-benefit pension plan, now a coveted rarity. When she left that job to work in Washington, she asked a neighbor there whether she should take her benefits in a lump sum. He said yes, that she could invest it and make more money than if she left it in the defined-benefit plan. Wrong. She spent it all. She wasn't buying anything particularly lavish, but she and her husband were maintaining two homes. "I should have just left it in there, and it would have turned into a meaningful amount," she says. She also tapped the money in her 401(k) plan at the time, albeit from her after-tax 401(k) savings. "I used my after-tax account like a bank account," she says. "I was a little cavalier. I'd tell anyone else not to touch it, ever." Another, smaller regret is moving money out of the government's thrift savings plan. She wanted to consolidate her accounts in one place to get a better feel for her asset allocation. "I'm not happy I did that," she says. "It has such low fees." THE BOTTOM LINE Ms. Munnell spends a lot of time thinking about other people's retirement rather than her own. She worries that a whole cohort will arrive at retirement without enough money to live comfortably. Instead of fretting over whether you should be in stocks or bonds, she recommends that people focus on the things they can control, such as their lifestyles. For many people, that won't be enough, and Ms. Munnell says a lot needs to be done on the policy front. That's why she keeps working.