Rich or Poor -- You Can Now Do Estate Planning Right

MaxiFi Planner's Remarkable New Estate Planning Capacity

A Quick Word to New Subscribers

To my surprise and delight, my Substack Newsletter/Podcast/Financial Ridder has gone viral. So, to all newcomers, welcome to Economics Matters and please check out the, to-date, 359 postings at larrykotlikoff.substack.com. You’ll find Robert Pinsky, reading poems about money, Joe Klein discussing the politics underlying “A Complete Unknown,” Sebastian Mallaby discussing Silicon Valley’s amazing contribution to U.S. growth, David Barboza revealing the true China, Martin Wolf comparing 2025 America and 1933 Germany, Roger Lowenstein explaining how Lincoln financed the Civil War, Larry Sulak detailing the history of particle detection, Glenn Loury arguing against DEI, Terry Savage helping you avoid a Social Security horror stories, and much more.

Economics-Based Financial Planning

Many of the postings deal with my passion — economics based financial planning. The notion that economics can have practical value to households, including your own, surely sounds too good to be true. It’s not. A Who’s Who of economists has spent the last century studying all manner of household financial decisions, including how much to save, when to retire, how to invest, what housing is affordable, how much to insure, how to handle risk, and even how much to bequeath. These economic prescriptions are conveyed in abstruse mathematical formulas published in forbidding professional journals and academic books.

The idea that one could translate this large body of financial theory into practical financial advice was unthinkable until the computer made its debut. I was in the first cohort of economics graduate students to have access to computers, called main frames, to calculate precisely what the profession’s financial math was prescribing. At the beginning, it was typing punch cards, submitting them to a massive machine, and waiting days to learn your program had a bug.

But within two decades we had desktop machines with massively greater computation power. At this point — in 1993, I decided to develop MaxiFi Planner, my company’s economics-based financial planning tool. I did so realizing, as discussed here, that Wall Street’s conventional planning tools were providing advice at complete odds to what economics and common sense suggests. This explains why not a single top finance or economics department teaches conventional planning.

MaxiFi was years in the making and we’re not done yet. We needed to develop revolutionary, patent-winning computation methods to simultaneously solve modern finance’s plethora of complex, non-linear equations and do so within seconds. We also needed to code up the incredibly complex rules of our Social Security benefit and federal, state, and Medicare Part B tax systems.

Economics-Based Planning Can Dramatically Lower Your Financial Anxiety

These days, we’re all extremely anxious about our finances. A major recession is, it seems, just around the corner, we’re at nuclear economic trade war with China and a major trade war with everyone else, and financial markets are going nuts — plunging one day, partially recovering, and plunging the next.

It’s tempting to buying one’s head in the sand. But financial peace of mind requires the opposite — taking immediate action to stay safe. This is where MaxiFi Planner comes in. It can help you decide how to reduce your heightened financial risk and help you form plans for responding to the loss of a job, a federal grant, far higher inflation, cuts in Social Security, higher mortgage rates, …, you name it.

MaxiFi is ideal for DYIers. But those who want to leave the driving to us, can sign up for full concierge planning with yours truly, right here.

I deliver one part money magic (see this award-winning book) and one part financial therapy. What I won’t tell you is how to invest your assets. But I will provide a simple strategy for experiencing only upside living standard risk when it comes to investing particularly in this environment.

MaxiFi’s Evolving Ability to Handle More and Tougher Questions

MaxiFi is 32 years in the making, but it’s still being improved. As discussed in this NY Times article, MaxiFi’s Roth Conversion Optimizer, introduced late last year, is the only tool that can determine precisely how much to convert in each future year to minimize your lifetime taxes and maximize your lifetime spending. Last week, we modified the program to let users or financial therapists, like me, determine the annual Roth conversions that will maximize a household’s terminal estate.

We developed the Conversion Optimizer, which took a year of superb computer engineering talent, in response to customer requests. The next major request — the object of today’s newsletter — is providing users with the ability to do estate planning and, as just mentioned, optimize their estate plans over Roth conversions, but also over Social Security decisions and start dates for withdrawing traditional IRAs and similar taxable retirement accounts.

We All Do Estate Planning — We Just Don’t Realize It

Leave aside estate taxes, trusts, and wills — all the peripheral aspects of estate planning — to focus on the core question. How much will I spend and how much will I leave?

That’s a universal question. You may be living hand to mouth. But keeping your hand out of your mouth for even a few hours each day will mean leaving more to your spouse, partner, children, friends, or charities if you kick in the next hour, day, week, month, year, or thereafter.

In we lived for just one day and cared solely for ourselves, we’d be choosing how to allocate our remaining money between our last supper, a trip to the spa, golfing, drinking to excess, and buying a casket with perpetual internet connection. But we live, or may live, for many future years. And we can die in any of those years. Hence, however we choose to spend through time, as we continue to miss our maker, we consciously or by default establish a set of contingent bequests — what we’ll leave if we die in each future year as well as the one we’re in.

Every dollar we spend while we remain upright is a dollar (plus interest) we deny our heirs. We might, for example, think that each day’s $6.48 Cinnamon Dolce Latte at Star Bucks has nothing to do with our contingent estates. But suppose we die in 20 years having foregone coffee entirely. We’ll bequeath over $3,500 more in today’s dollars based on safely investing the coffee-savings at today’s market’s real rates.

The Essence of Estate Planning Is Knowing the Spending-Bequest Tradeoff

The big question about estate planning is not how to avoid taxes, what trusts to use, and how to frame your will. The big question is how much more you can bequeath if you limit your spending. In short, bequests have a price and deciding how much to bequeath requires knowing that price.

Illustrating the Price of Bequests

Consider retired, single, CA resident, 66 year-old John. John has $1.25 million in his IRA and $1.25 million in regular assets. He’s investing in a TIPS (Treasury Inflation Indexed Securities) ladder earning 2 percent above inflation. John will start collecting $59K at 70 in Social Security and a $40K nominal pension. John has one daughter, Sarah, who is struggling financially.

If I run John through MaxiFi tell it to spend all his resources in maintaining his real living standard through his maximum age of life — age 100, the program calculates John’s sustainable spending at $94 K per year. If John makes it to 100, he’ll die broke. But even this policy of not leaving anything for sure to Sarah entails his leaving her contingent bequests. As the program shows, if John passes at before 80, he’ll leave roughly $600K in regular assets and $1.3 mil of his remaining IRA. If he kicks at 95, these figures fall roughly in half.

John Does Estate Planning

In his first use of MaxiFi, John didn’t explicitly think about his estate or Sarah. But as he checked out the tool’s estate report he realized that he was, effectively, turning Sarah into his insurance company. If he died early, she’d be richly rewarded. If he died late, she’d be forced to take care of him, but be left with bubkes.

He then copied his base profile under another name, Estate Planning, clicked on Settings and Assumptions and then Estate Planning. There he found four ways to lower his spending and raise his terminal estate as well as all other contingent estates, which, again, references what he’d leave each year if he died in that year.

The four dials are a) setting an annual spending limit, b) limiting the withdrawal of retirement account assets apart from what’s needed to meet RMDs — required minimum distributions, c) specifying a special bequest — money he’d like to leave, perhaps to a brother, no matter when he dies (This tells the program that John may need to purchase life insurance if he indicates he’d want to do so.), and d) setting aside specific regular assets or shares of regular assets to be held for his estate, i.e., not to be spent.

Illustrating John’s Estate Planning

Suppose John sets his spending limit at $80K and limits non-RMD withdrawals to 50 percent of his retirement account. Here’s what his terminal estate report (recall it was zero) now shows. Under this plan, John leaves $342,978 to Susan if he reaches age 100. That figure is in present value and is more than four years of John’s $80K real spending. The actual amount that John would leave Susan at age 100 is $646,355 in today’s dollars.

What about John’s contingent bequest path? It rises. John will now leave more to Sarah no matter when he passes. For example, at age 80, he’ll bequeath and extra $250K. At age 90, it’s an extra $450K. (Neither of these amounts are present values, btw.)

Had John owned a house, rather than rent for $4000 a month in CA, he’d also be able to consider leaving his home to Sarah or downsizing at a given age. Housing and real estate net equity bequests show up in the estate report.

Comparing MaxiFi’s Estate Planning with Conventional Planning

Conventional planning has you spend a desired spending target (with no fundamental connection to what’s affordable) and then simulates the probability of your a) investing a significant risk and b) either going entirely broke or c) leaving a goodly sum when you pass. This analysis of estate planning is very different along many key dimensions from MaxiFi’s. Perhaps the biggest difference is that the desired spending target may be miles too high unless you invest at considerable destitution risk. Best to know the most you can safely spend before before deciding how much you can afford to give away.

Optimizing Your Estate Over Roth Conversions

I’ll reserve another post to consider MaxiFi’s Roth Conversion Optimizer for Estate, but let me tease that discussion: The optimal annual conversion amounts if the goal is to maximize your terminal estate can be night-and-day different from the optimal annual conversion amounts if you are simply focused on raising your own lifetime spending.

Summing Up — Given Economics Based Planning a Try on Your Own or With Help

The worse the national and global economy looks — and it looks horrific — the more everyone should ensure they aren’t unwitting victims of events outside their control. Economists have been working this problem for a century. We have answers as these amazing testimonials show. So, my parting words — Get out of the headlights and act on your finances, if not for yourself, for your children and other heirs.

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Economics Matters — the Newsletter/Podcast/Financial Riddler

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