The Financial Riddler 1-12-25

The Riddler is back and easier than ever. Ha ha

Please urge everyone you know to sign up at larrykotlikoff.substack.com for a free subscription to Economics Matters — the Newsletter/Podcast/Financial Riddler. Note: I transform all free subscriptions into lifetime free subscriptions. But if you can, please help me contribute to economic/financial/demographic education.

Here’s how. First, unsubscribe, then resubscribe, but on a paid basis, contributing whatever’s comfortable. Contributions of $100 or more come with a one-hour free financial consultation. You’ll just need to email me at kotlikoff@gmail.com to set up a time. Once you have contributed, you can unsubscribe anytime and resubscribe the next minute for free. Otherwise, Substack will prod you annually to contribute (not a bad thing!)

1. A year ago, inflation in Argentina was running at 25 percent per month. What was the inflation rate in October — the last monthly rate available?

   a. 45 percent

   b. 37 percent

   c. 21 percent

   d. 15 percent

   e. 3 percent

And the answer is …

The answer is 3 percent. President Milei has reduced tariffs, cut spending, and ended deficit spending. Free markets, domestic and international, are the name of his game. And it’s working. After a century of the economic mismanagement and decline, Argentina has a President who makes and implements economics’ common sense. Our once-again President should pay close attention to current economic events in Argentina and the eternal lessons of free trade.

2. How much times as high is China’s GDP per capita than India’s?

   a. 5 times

   b. 4 times

   c. 3 times

   d. 2 times

   e. the same

And the answer is …

The answer, as the chart below shows, is 2 times. China’s living standard — its GDP per capita — has been and continues to grow much more rapidly than India’s. On the other hand, China 2100 population is projected to drop by 770 million compared with India’s, which is projected to remain roughly stable at 1.5 billion people. If India had twice China’s population today, the two countries’ GDPs would be essentially the same.

Source: www.worldeconomics.com

3. What fraction of China’s population is rural?

   a. Less than half

   b. More than half

And the answer is …

The answer is more than half. This indicates that China has enormous capacity to expand industrial production.

4. Is China the most robotized country in the world measured by robots per manufacturing worker?

   a. Yes

   b. No

And the answer is …

The answer is no. Korea is the most robotized. (See the chart below.) But in absolute terms, China has the most robots — over half of the global total. China’s robot population exceeds that of the U.S. by 18 percent

5. The losses from LA’s wildfires already exceed $50 billion. What share of these losses will be covered by insurance?

   a. 100 percent

   b. 80 percent

   c. 60 percent

   d. 40 percent

   e. 20 percent

And the answer is …

The answer is 40 percent. And this assumes the insurance companies don’t fail. California’s mandated fire association — FAIR — has roughly $200 million dollars in reserves to cover tens of billions of liabilities. In addition to private insurance companies failing with potentially no state backup, there is nothing to prevent the states ten remaining insurers from heading out of state.

6. According to Zillow, what was the average price of a house in the Pacific Palisades?

   a. $1.2 million

   b. $2.5 million

   c. $3.5 million

   d. 4.7 million

   d. $5.1 million

And the answer is …

The answer is $3.5 million. LA homeowners covered by insurance are likely only covered for replacement cost — what it takes to rebuild one’s home. That can be far less than its market value. Those that rebuild in the Palisades may suffer an enormous loss because the market value of homes rebuilt there could end up being valued at or even below replacement cost — for three reasons. First, the devastation is so substantial, that it will take years to rebuild entire neighborhoods that have burnt down. Second, no one will want to be the first to rebuild in an area effectively destroyed by napalm. Third, who would wish to build a home in the Palisades if they can’t purchase homeowners insurance or can only do so at an astronomical price? Perhaps the most likely scenario is that the Pacific Palisades turns into a trailer park whose inhabitants can drive their homes away from firestorms.

When I was a postdoc in the late Seventies at UCLA, I spent many a day visiting a senior colleague at his and his wife’s marvelous home in the Palisades. What a magnificent area it was. What a terrible tragedy this is for everyone in LA living through this latest global climate-change horror story. It reflects, to paraphrase Dickens, our collective decision to recognize the blight upon us and resign ourselves to let it eat us away.

7. How much does it now cost, on average, to drive south of 60th Street in New York City between 7 AM and 7 PM on weekdays and between 8 AM and 2 PM on Saturdays?

   a. $19

   b. $13

   c. $9

   d. $6

   e. $3

And the answer is …

The answer is $9 per day. There is some evidence that traffic is thinning. By 2031, the toll will be $31 per day, producing an estimated $1 billion per year in additional municipal revenue. This will help NYC improve/upgrade its public transportation, particularly its subways.

---

Here’s Some Extremely Valuable Advice

It’s the new year and time to get serious about financial planning. MaxiFi Planner is the only economics-based lifetime financial planning tool. All other tools do conventional financial planning, which is Wall Street’s well-honed bait and switch. The tools and those using them “derive” “your” retirement spending target by asking what you’d like to spend in retirement. That’s the bait. When you say $1 billion a day, they say (This is the switch.), let’s use our tried and true income-replacement ratio that sets your retirement spending goal — your target — at 85 percent of your pre-retirement income.

This process leads to a spending target that’s invariably miles too high. Next you’re told you’ll never make “your” target if you invest as cautiously as you are. “Let me invest you in my high-yield funds. Here, I just ran a Monte Carlo simulation. You can make ‘your’ goal 80 percent of the time. Yes, there’s a fee, but you do want to make ‘your’ goal, don’t you?”

Of course an 80 percent chance of making “your” goal means a 20 percent chance of becoming destitute in retirement. But neither Wall Street’s software nor its “advisors” put it this way. Nor do they tell you that your potential day of destitution could be the day you retire!

As discussed here, conventional planning is as removed from what economics and common sense suggest as it gets. Economics-based planning adheres to basic reality. What you can spend is what you can afford — no more and no less. The first goal of financial planning is to determine the most you can afford to spend on a sustainable basis. The second goal is to determine safe ways to raise your sustainable spending — by maximizing your lifetime Social Security benefits and reducing your lifetime taxes. The third goal is to convey the life insurance needed to maintain your survivors’ living standards if you die prematurely. The fourth goal is to price out, in terms of living standard costs, your various life-style decisions. The fifth goal is to guide your investing to limit downside living standard risk.

What MaxiFi Can Do For You

• If you’re 18, use MaxiFi to decide what college to attend, how much to borrow, and what major to choose — so you can repay your debts!

• If you’re 28, use MaxiFi to decide whether getting an MBA on line or at Harvard (It only costs $110K per year for two years!) will raise or lower your lifetime resources and spending.

• If you’re 40, use MaxiFi to determine if taking a better paid job in Seattle, with a crappy 401(k), high housing costs, but no state income tax beats, in terms of lifetime discretionary spending, staying in your lower-paid Kansas City job, with a great 401(k), low housing cost, but a state income tax.

• If you’re 55, MaxiFi can tell you how much less you can spend this year and every year for the rest of your life if you retire at 62 rather than at 67.

• If you’re reaching retirement, MaxiFi can tell you what Social Security benefits to collect and when to maximize your lifetime benefits.

• If you’re whatever age you are, MaxiFi’s Roth Conversion Optimizer will find how much to convert each years to minimize your lifetime taxes and maximize your lifetime spending.

• MaxiFi can also measure the cost of having another child, the gain from downsizing your home, the living standard hit from getting divorced, and how much life insurance you really need given that your spouse will hire an au pair, go back to work, and downsize your home if you kick the can. (I.e., MaxiFi does contingent life insurance planning. No other life insurance calculator comes close.)

• MaxiFi also lets you invest for the upside, building a floor to your living standard and using risky assets to raise that floor but only when they’ve been converted to safe assets. Its Upside Investing combines both investment and spending behaviors. You invest in the stock market and in TIPS (Treasury Inflation Protected Securities). But you treat all funds in the market as lost entirely until they’ve been found — used to purchase more TIPS. I.e., you always spend out of TIPS, which means your sustainable living standard can only rise. By not touching your stocks until your specified conversion period, you avoid sequence-of-return risk giving the market maximum power to achieve high cumulative returns and produce a significant living-standard upside.

• Finally, MaxiFi lets you compare different investment strategies and determine which is best given your tolerance for risk. Unlike conventional planning, which sets your retirement spending (at your target) on autopilot independent of whether your assets are going to hell (How nuts is that?), MaxiFi adjusts your spending up or down annually based on each year’s good and bad returns on your risky holdings, both inside and outside your retirement accounts. MaxiFi’s Comfort Index lets you choose an investment strategy based on lifetime expected utility maximization.

Expected utility maximization was developed by the famed physicist, John von Neumann (who was critical in developing the atomic bomb), and economist, Oscar Morgenstern. Their fundamental work on the economics of uncertainty was adapted to the question of investment under uncertainty by a series of finance gods — all economics’ Nobel Laureates. The list comprises Harry Markowitz, William Sharpe, James Tobin, Franco Modigliani, Paul Samuelson, and the Isaac Newton of Finance (Samuelson’s description), Robert Merton.

In short, MaxiFi conforms precisely to a century of research, starting in the 1920s by Yale’s Irving Fisher, on the economics of finance, the economics of life (longevity) and death (life) insurance developed by another finance god, Menachim Yarri (who deserved the Nobel decades ago).

Conventional planning, sanctioned by FINRA — the so-called Financial Industry Regulatory Authority, has enormous hubris in ignoring each and every detail of these geniuses’ work and pretending that bait and switch actually meets a fiduciary standard. It doesn’t.

If your financial planner is using a conventional planning tool on you, tell them to run you through MaxiFi. If they refuse, do what tens of thousands of people just like you are doing — shell out $149 and run the program yourself. It’s far easier than operating the three remotes controlling your widescreen TV — something I have yet to master!

And it’s far cheaper than paying 1 percent of your assets (that’s $10,000 a year for each $1 million in assets) to someone with absolutely no training in the economics of finance. Worse, the vast majority of “advisors” have known for years about economics-based planning and have failed to even run a free demo of MaxiFi. Why bother when you just care about charging fees on AUM — assets under management and have a sure-fire scam for gathering AUM.

PS, If you want to pay for someone, including me, to maxifi your plan for you, those options are available at maxifi.com. Not everyone wants to run software on their own. In addition to our own staff, we have a large number of advisors who do use MaxiFi to assist their clients. Most are licensed to give you investment advice, something neither I nor may colleagues are able to do. But they and we can explain and help you explore MaxiFi’s investment guidance, which may be all the investment education you need.

PPS, No insult here to the financial advisors who are forced to use their company’s tools/scams to keep their jobs. And no insult here to planners who understand the scam and try as best they can to recommend to their clients what economic common sense implies. Every day I meet with financial advisors doing conventional planning with their clients. Why do they meet with me? To have me run them through MaxiFi to sort out their own personal financial moves. They realize the tools they are using are dangerous, not just to their clients’ own personal financial health, but to their own. Almost all tell me their Wall Street firm picks the software they can use and they have no say in the matter. So, if you are an FP who needs a real financial plan based on a century of brilliant economics analysis by the gods of finance, step right up.