The book has a striking dust jacket. It’s easily worth more than a thousand words. It pictures a top hat with an emerging rabbit. The rabbit is made of origami-folded cash.
The book is Laurence J. Kotlikoff’s “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life.”
Most offers of money magic come from investment managers. Their special hat, they say, will produce a multitude of investment rabbits. But every hat trick requires that you pay a fee. More important, the only lever on your future these magicians offer is a possible higher investment return.
Kotlikoff is different.
He’s an economist, a professor at Boston University and a prolific researcher. (Full disclosure: I’ve co-authored three books with Kotlikoff, two of them for MIT Press. I can personally testify that he is a close relative of the energy bunny.)
Money Magic Isn’t about Investments
His money magic has almost nothing to do with investments. Indeed, other than inflation-adjusted Treasury bonds, there are few references to investments in the entire book. Instead, his money magic has everything to do with regular and very personal decisions real people make about:
— education and debt,
— job and career choices,
— marriage and children,
— our shelter choices,
— when we choose to retire,
— and how we manage promises of income such as Social Security and pensions.
He deals with empowering choices we can make rather than investment returns that are beyond our control.
The Power of Consumption Smoothing
Will his mundane rabbits advance your secret desire to achieve world domination by age 40? Sorry. Not a chance. But all those highly personal decisions, made correctly, can transform your life from one of quiet desperation to one of financial security and fulfillment.
His magic isn’t done with a wand. Instead, he uses the concept of “consumption smoothing” — the idea that we try to maintain an even keel of consumption throughout our lives. Then, using consumption smoothing software, we can measure the impact of any of the decisions we make. In effect, we can measure the lifetime economic consequences of ordinary – but important — decisions.
Here are some examples:
College debt may not “pay off.” Everyone knows education debt is a serious problem, but most people still assume it’s worth it. Measured in lifetime standard of living, it all depends on your chosen career. Indeed, in one of his examples he demonstrates that college education debt was mutually exclusive with having a job in the career for which a student prepared.
His chapter on college education, by the way, should be required reading for everyone thinking about where to go to college. It gives an insider perspective on where the true value is. (Chapter 8)
Plumbers trump doctors. While doctors in general practice may enjoy more prestige, the long years of education and training, not to mention debt, make plumbing a better choice if your focus is on lifetime standard of living. (Chapter 1)
Marriage is one of the best investments we can make. Due to what economists call “shared economies of living,” the journey from single to being a couple can work to increase your lifetime standard of living by about 25 percent. (Chapter 6) But if you divorce, he shows how to share the damage equitably. (Chapter 7)
The greatest benefit of home ownership isn’t appreciation. It’s the invisible and tax-free “imputed income” of residency we enjoy compared to renting. The second greatest benefit is that it serves as our reserve fund for long-term care. Mortgages, it turns out, have very little relationship to home ownership (except being a necessity for most people). (Chapter 5)
Social Security is our biggest lifetime asset. Kotlikoff was an early advocate of taking Social Security benefits later, not sooner. Because benefits increase so much for each year of deferral, it’s almost always better to spend down other assets to maximize benefits. (Chapter 3)
I’ve written about this for decades. Many people take issue with this. They are correct in one respect. Kotlikoff assumes everyone will live to age 100, an age that increases the value of Social Security relative to everything else. It’s also a certainty that 98 percent of all people won’t realize the full value of Social Security as he calculates it because they will die much sooner.
Another Measure of Importance
But that’s a technical quibble. The importance of Social Security, for everyone, is an amazing reality.
Skeptical? Then consider this. A National Bureau of Economic Research paper that measured the value of Social Security as a virtual asset found that its value was larger than the value of investments, home equity or defined-benefit pensions for all but the top 10 percent of all households.
Yes, you read that right. Social Security is the most important resource for 90 percent of all Americans.
Retirement isn’t all about “the number” – the mythical financial wealth figure required to retire. Like the rest of life, retirement is about managing your personal decisions.
Related columns:
Scott Burns, “A better measure of retirement security,” 10/21/2016 https://scottburns.com/a-better-measure-of-retirement-security/
Scott Burns, “The great equalizers: Social Security and pensions,” 2/22/2016 https://scottburns.com/the-great-equalizers-social-security-and-pensions/
Scott Burns, “Your wealth is not your standard of living,” 3/1/2009 https://scottburns.com/your-wealth-is-not-your-standard-of-living-2/
Scott Burns, “At least you still have your human capital,” 10/26/2008 https://scottburns.com/at-least-you-still-have-your-human-capital/
Scott Burns, “Living Standard Risk,” 1/2/2007 https://scottburns.com/living-standard-risk/
Scott Burns, “The Thinness of Wealth,” 5/24.2015 https://scottburns.com/the-thinness-of-wealth/
Scott Burns, “The “N” factor and retirement planning,” 6/8/2008 https://scottburns.com/the-n-factor-and-retirement-planning/
Scott Burns, “The incredible importance of Social Security,” 9/8/2013 https://scottburns.com/the-incredible-importance-of-social-security/
Sources and References:
Maxfi software online: https://maxifiplanner.com
Money Magic on Amazon: https://www.amazon.com/Money-Magic-Economists-Secrets-Better/dp/B09JV19PM5/ref=sr_1_2?crid=BK9II31EYT83&keywords=money+magic+book&qid=1639516383&sprefix=Money+Magic%2Caps%2C205&sr=8-2
Barton Waring and Laurence B. Siegel, “The Only Spending Rule Article You Will Ever Need,” Financial Analysts Journal, January/February 2015 http://www.cfapubs.org/doi/pdf/10.2469/faj.v71.n1.2
William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994 https://www.onefpa.org/journal/Documents/The%20Best%20of%2025%20Years%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Artem Beliaikin from Pexels
(c) Scott Burns, 2022
4 thoughts on “Money Magic Is Real Life Magic”
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Excellent article. A 60K yearly Soc Security payout is the same as 1.5M in assets using the 4% Rule. The income is inflation-protected (try getting that in an annuity) and generally taxed at a lower rate than regular income. No chance of default. Coordinating with spousal benefits maximizes income while both spouses are alive. Mike Piper’s calculator is superb.
Thanks. Just as the cited James Poterba research found, what I’ve seen in reader communications is that Social Security benefits loom large as share of income until household net worth is at a very high level. Higher, for instance, than the top 5 percent of households. This would be even more true if Social Security benefits were not taxed, as originally promised. But the lack of indexation in the formulas for the taxation of SS benefits has caused an ever rising percentage of retirees to face taxation of the benefits. The recent COLA increase, the highest in decades, will increase the number paying taxes on their benefits.
I’ve really enjoyed reading your blog posts – so much so that I wanted to sign up to automatically receive them when published. However, I can’t find where to sign up…??
I’m looking for a way for people to sign up for automatic delivery. Currently, you can arrange to receive automatic notification when there is a new post.
I currently write two posts a month. That may increase with some special series. In addition, if you check the archive schedule, you’ll see that I’m filling in earlier time periods. My intention is to provide links to columns back to the late 1990s. Some people might think that foolish but the past can always teach us.