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Personal finance

Retirement course may leave you with questions — and that’s good

Stanford’s Joshua Rauh aims to empower people to make better financial decisions.

Stanford University via New York Times

Stanford’s Joshua Rauh aims to empower people to make better financial decisions.

In an ideal world, a master class available to everyone would reveal all the secrets to retirement planning, telling you how much to save, where to invest, and what to do when the stock market crashes.

After all, there are few conflict-free places where investors can educate themselves on the topic, and there is little to no money-related guidance offered in the public schools, which is where the financial groundwork should really be laid.

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Joshua Rauh, a finance professor at the Stanford Graduate School of Business, is acutely aware of that. And it’s why he felt compelled to open his graduate-level course on the finances of retirement and pensions to the masses.

“My goal is to try to empower people to make better decisions about their finances with an eye toward retirement and for retirees who are thinking about managing their money,” Rauh said, “whether it is buying an annuity or having a spending rule.”

The course, offered free online, began Monday. I sat for nearly half of his online video lectures — on topics like “saving for retirement” and “making smart decisions as a stock market investor” — last week. Watching remotely means you won’t be party to the discussion that will emerge from the Socratic method Rauh uses in his traditional classroom on campus.

And there are already 13,000 students, so it’s hard to expect any personal attention.

But there’s plenty that students will take away from his lessons, which you can watch any time after the lecture is released, much as you might watch any series on your DVR.

“A person that would really benefit is someone who is 40 and realizing they really need to start putting together a plan for retirement and haven’t thought much about it,” he said, though he said he believes that it will be equally helpful for people of all ages.

There aren’t many other places to turn, particularly where it costs nothing but your time. When I informally polled financial literacy advocates, financial planners, and other experts if they knew of any other comprehensive retirement courses, they couldn’t come up with any, though one person mentioned the instructional videos at Khan Academy.

Without any instruction manual, “people have to be their own chief financial officer,” said Annamaria Lusardi, a financial literacy advocate and economics professor at the George Washington University School of Business, who teaches a class on personal finance. “The large majority of the population lacks the knowledge of basic but fundamental concepts, from the power of interest compounding, to the effects of inflation, to the workings of risk diversification.”

This course may be a good place to start. Each of the 10 video lectures is about 45 minutes long, but they’re broken into bite-size segments, all of which were well produced and relatively engaging. As Rauh explains each concept, animated visuals and colorful graphs appear alongside him, which helps make the concepts easier to grasp.

Each lecture includes a mix of financial theory and prescriptive advice, some of which people with a reasonable base of investment knowledge may already know: Actively managed mutual funds aren’t worth the money, so buy index funds. Don’t time the market. Stocks don’t become less risky the longer you hold them.

But the illustrations that accompany the advice — how retiring in 2009, for instance, would have resulted in a nest egg 28 percent smaller than one resulting by retiring in 2012 — are instructive.

“It’s not a rocket science idea, but people don’t see it without having it illustrated for them,” Rauh said.

All of the lessons are rooted in what he calls “the economist’s view” of personal finance, which is built on the idea that there are no free lunches in financial markets, and that you can generate potentially higher returns only if you take substantial risk as well. It’s a message woven through his lectures. At times, it almost seems as if there should be a red blinking sign behind Rauh that reads: “Proceed with caution. Stocks ahead!”

He clearly wants the lesson to linger long after you leave his virtual classroom and find yourself in a commission-based stockbroker’s office.

“Too often, people just budget on the basis of an ‘expected return’ on their assets without thinking about the range of possible outcomes,” he explained.

He also explains why economists believe that more people — not all, but more — should buy annuities. Not the high-priced complex contraptions sold to unwitting senior citizens, but the plain-vanilla immediate annuities, where you pay a giant pile of cash to an insurance company in exchange for a guaranteed stream of income for life.

He breaks all of this down in a lecture about making your money last, which offers the kind of practical advice that will be of particular interest to people in their late 50s and older who are wondering why annuities feel so expensive: As he points out, for $100,000, a 65-year-old woman can expect to receive about $450 a month.

But he explains another alternative that is about a tenth of the cost, known as longevity insurance. (You buy this annuity in advance and it begins paying income a decade or two later, when you’re in your 80s and may have spent all of your other savings). In the same lesson, you’ll be expected to sit through perhaps more than you may want to know about the inner workings of the mortality tables used to price annuities.

As Rauh points out, it’s a university-level class. There will be moments where you may feel a sudden urge to check your e-mail (like when the first mathematical equation with a sigma symbol appears on the screen). Indeed, a basic understanding of statistics is helpful, and you should not be easily intimidated by a simple spreadsheet.

The course ends with two lectures that explain the basics of pensions, the trouble erupting within our public pension system, and how it affects taxpayers and municipal bondholders.

Students are then tasked with a pretty serious group project: analyzing a state or local pension plan’s solvency — whether it’s the New York State Teachers’ Retirement System or Calpers, the big California public pension plan — and coming up with ways to make it stronger. The five teams with the most promising ideas will get to present their proposals in January, all expenses paid, at the Stanford Graduate School of Business to a panel of faculty and experts.

“We are sitting on the likelihood that there will have to be very large tax increases to pay for public employees’ pensions, and that is a very important aspect of our portfolios as well — how much we will be taxed,” said Rauh, who has written several research papers analyzing public pensions.

That’s likely to incite much debate in the forums, where most of the interaction between students will take place.

As much ground as this course covers — from asset allocation to the investing in different types of tax-deferred accounts — there’s still plenty of material that needs to be explained.

Should I pay for advice? If so, what sort of adviser should I work with? How do I figure out my risk tolerance for stocks?

Should I take Social Security now or later? What should I make of these guaranteed return products that my brother-in-law keeps talking about?

At the end of some of the lessons, you may still be left with questions, but that may be Rauh’s point: Now, at least, you know what to ask.

“There is some ‘Do this, not that,’” he said. “But that doesn’t give them the complexity to operate in life.”

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