The MaxiFi Puzzler -- 6/15/25

Try this out on your fin advisor. If they can't answer these questions, have them run MaxiFi before providing you financial advice. Or, like tens of thousands, run it yourself!

Cover art from the 2022 SABEW-named top personal finance book, Money Magic.

Economics Matters -- Blog/Podcast/Financial Riddler/MaxiFi Puzzler

Help yourself to a free subscription to all four posts at larrykotlikoff.substack.com. I’ll immediately make it a lifetime free subscription. Paid subscriptions come with a one-hour, free financial consultation with me. Just unsubscribe, resubscribe on a paid basis, and then email kotlikoff@gmail.com to set up a meeting time. Thereafter, just unsubscribe and resubscribe forever for free. Also, please sign up kids, friends, employees, bosses, students, … !

Jean Chatsky’s MaxiFi Puzzler Question

Jean Chatsky is one of our nation’s most distinguished financial journalists. As you can see and purchase here, Jean’s written an incredible 32 books on personal finance. She’s CEO of HerMoney, works with AARP, worked for years for NBC’s Today Show, and is now AARP’s Personal Finance Ambassador. Jean, who’s writing her 33rd book (pub date is Fall 2026), asked me to use MaxiFi to answer the following key question.

Is the Cost of Leaving Bequests Lower for the Rich?

1. Yes

2. No

And the answer is …

The answer is no. Complete the Puzzler for the explanation.

But let me clarify the question. The cost (price) of something is always its swap rate. If one apple costs the same as two oranges, eating an apple means foregoing two oranges.

What’s the swap rate for leaving a larger estate? It’s spending less on yourself. MaxiFi just introduced estate planning. It’s ideal for determining how much, say, doubling your planned terminal estate will cost you in terms of annual as well as lifetime discretionary spending (the present value of annual discretionary spending).

Discretionary spending doesn’t include fixed spending on taxes, housing, special, project out-of-pocket healthcare expenses, future children’s college tuition, etc. Discretionary spending is what you can and need to sacrifice to raise your estate. Its the calculable swap rate Jean requested, which MaxiFi can immediately measure.

Meet Ethel Merman

Ethel has had a hard go. First, she was named Ethel. Second, she was left at the alter. Third, she’s an opera aficionado stuck in a small town in Indiana. Now 65 and retired, Ethel is planning annual opera trips — through age 90, her max age of life.

Ethel’s Financial Situation

Ethel receives $2.5K each month from Social Security, has a $250K IRA, a $250K brokerage account, and a $500K, un-mortgaged house with $12.5K in annual housing expenses. With inflation running at 2.5 percent and mid-length Treasuries yielding around 4.5 percent, Ethel’s real return is 2 percent, which she can secure by investing in inflation-indexed bonds — TIPS (Treasury Inflation Protected Securities). This year, Ethel will start smoothly withdrawing (taking out the same real amount annually) from her IRA as well as join Medicare. Ethel assumes that the Tax Cut and Jobs Act, now in place, but due to expire next year, will be preserved by Congress. Finally, Ethel wants to leave $100K in today’s dollars, plus her house, to her favorite niece as a terminal bequest.

A) How Much is Ethel’s Real (in today’s dollars) Annual, Sustainable Discretionary Spending? (Hide the answer to avoid peeking!)

1. $23,822

2. $34,326

3. $41,790

4. $65,481

5. $73,933

And the answer is …

The answer is $34,326. If you said $23,822, you were too low by 30.6 percent. If you said $41,790, you were too high by 21.7 percent. What about $65,481? That’s 91.0 percent more than Ethel can afford! As for $73,933, that’s 115 percent too high!! These are huge mistakes. They entail either severely scrimping when young to party when old or the opposite. Given compound interest, spending the wrong amount for a long time can have major consequences down the road.

If You Were Miles off, Don’t Feel Bad

Getting the right answer is immensely complicated — something for which our brains aren’t wired. The reason is that everything depends on everything. In particular, what you can spend through time depends on the net taxes you pay through time, which depend on what you spend through time and on and on. Economists, by the way, are no better than anyone else in intuiting, on the spot, the right answers to such chicken and egg problems. They are just far more embarrassed because much of economics assumes people can precisely and either instantly answer these, and, indeed, far more difficult questions without a moment’s thought or get the right answers on average.

No way!

To make matters worse, behavioralist finance economists waste their careers studying the precise forms of human irrationality and/or degree of financial illiteracy underlying over- or under-spending and other bad behaviors. This is akin to studying the relative failures of different people to dig ditches with their hands compared to using a front loader.

Computational Economics to the Rescue

MaxiFi delivers the right answer for Ethel inside a second. And it doesn’t use AI, as in neural networks, to guess the wrong answer. Personal finance is precision business. It’s either exactly right or, generally speaking, terribly wrong. (I’m referring here to the software Wall Street foists on the unsuspecting public.)

The economics computation challenge, which MaxiFi overcomes with its patent-winning algorithm and trade secrets, gets particularly tough when there are cash-flow issues. Fortunately, like observing a front loader at work, you can see, at a glance, that it works. In this case, its obvious from MaxiFi’s output that the program correctly figures out all aspects of Ethel’s lifetime planning problem to the dollar.

If you think you can solve Ethel’s planning problem or your own with Excel or some other spreadsheet, forgetaboutit. It will potentially take a lifetime of trail-and-error guessing to calculate what MaxiFi computes faster than you can read this paragraph. This is particularly the case for the roughly two thirds of American households who are cash-flow constrained — whose desire to achieve a sustainable living standard (discretionary spending per household member with adjustments for economies of shared living and the relative cost of children) figure out the answer) — is limited, in certain years, by their cash on hand (their inability or reluctance to borrow). In this case, consumption smoothing entails achieving the smoothest possible living subject to not going into debt or further into debt.

Wall Street is enthralled by the prospect of AI prediction machines becoming our financial advisors. But precise economic computation, not guessing financial answers, is essential. There are countless articles these days about AI, but no articles pointing out the enormous improvements is economics computation over the past five decades — improvements that permit answering all manner of economic questions, including any and all personal finance questions, which were previously impossible to address.

B) How Much More Lifetime Discretionary Spending Can Ethel Do If She Doesn’t Specify a $100K Terminal Bequest?

1. $28,987

2. $51,209

3. $64,823

4. $71,185

5. $92,174

And the answer is …

The answer is $71,185 reflecting an increase of $3,449 in annual real discretionary spending. In not having to save up for the $100K bequest, Ethel gets to spend more on herself and do so each year starting immediately. Also, she doesn’t pile up savings, interest on which is subject to taxation. One way to view these results is that the $100K terminal bequest costs Ethel $71 cents on the dollar.

C) If We Quadruple Ethel’s Financial Assets, Her Housing Inputs, Her Past Earnings, and her Terminal Estate, By How Much Does Ethel’s Sustainable Discretionary Spending Rise?

1. 60 pecent

2. 87 percent

3. 199 percent

4. 335 percent

5. 611 percent

And the answer is …

The answer is only 60 percent!

How can this be? Ethel now has four times more assets — a $1 mil IRA and a $1 mil brokerage account. Yes, but Ethel’s Social Security benefits don’t double, let alone quadruple. Her Social Security benefit is now $3,300, not $2,500. This reflects the progressive nature of the System’s benefit formula and its annual ceiling on taxable covered earnings. Those covered earnings govern the value of average indexed monthly covered earnings, which enters the benefit calculation.

The other major factor besides Social Security is taxes. Ethel’s lifetime taxes (the present value of her annual federal taxes, including those on her receipt of Social Security) plus her annual state income taxes plus her Medicare Part B IRMAA premiums increases by a factor of almost nine!

Finally, there is a major disproportionate rise in Ethel’s housing costs. Housing wealth quadruples, but so do all the costs associated with so much more housing. These include four times the annual housing expenses, four times the housing bequest (trapped equity), and four times the housing holding costs — the cost of not earning a real return on the asset value of one’s home. Total lifetime housing expenses, of all forms, rises from 41.2 percent of lifetime resources for poor Ethel to 61.8 percent for rich Ethel.

D) How Much More Lifetime Discretionary Spending Can Ethel Do, With Quadrupled Inputs, If She Doesn’t Specify a $400K Terminal Bequest?

1. $165,645

2. $292,125

3. $328,747

4. $351,733

And the answer is …

The answer is $292,125, permitting Ethel to spend $14,156 more per year on real discretionary spending. Ethel’s $400K bequest comes at a cost of 73 cent on the dollar in lifetime discretionary spending.

The Morals of Ethel’s Financial Story

Ethel’s case is very revealing. The first big lesson is that someone can be four times as rich in terms of financial wealth and housing and only be able to sustain 60 percent more annual real discretionary spending. This reflects the substantial progressivity of our tax and benefit systems.

The second big take away is that the cost per dollar of Ethel’s increasing her terminal bequest, measured in terms of foregone lifetime discretionary spending, is pretty much independent of her resources level. Bequests are neither more nor less expensive at the marginal — the bequest/discretionary spending swap rate is neither much higher or lower — for the rich than the poor.