Magic Money by Lawrence Kotlikoff

Money Magic

Most personal finance books are written by financial advisors who rely on communicating academic research and financial best practices that have been tested over years. Very few (if any) are written by the academics / economists who do the actual research.

Magic Money is different – it’s written by an actual economist who applies research methods usually used by CFOs and corporate America to everyday personal finance questions.

What I Liked

I love reading personal finance books. I find the topic fascinating with real world applications. But, it is very hard to find a personal finance book that is different or truly ground breaking. I loved that this book had a unique perspective and unique recommendations.

I loved how specific the book got. There are no general recommendations. He gets super-specific about what is the correct way to behave based on lifetime expected value.

I loved that he dug deep into topics that most personal finance books simply do not touch – namely, social security, long term care, house carrying costs, etc. All three are massive topics that impact the last 30 years of every American’s life…but no one prepares for it.

I like how he takes an extreme position to force readers to seriously consider the tradeoffs of their life choices.

What I Did Not Like

The author has a firm point of view and he is correct about all of his recommendations…if you are trying to maximize your lifetime economic value. But here’s the thing. Humans are not supposed to maximize our lifetime economic value. Ask any 100 year old or anyone on their deathbed – no one is talking about their economic value.

Now – the flip side is that most everyone wishes that their past self had made different choices to make their current / future selves better off. His extreme position really forces you to consider the tradeoffs. Is spending years in an awful run down nursing home worth quitting your job a few months early? What dollar amount do you put on your life choices?

All that to say…I only figured this out at the end of the book. He could have had a better introduction so that I wasn’t rolling my eyes at some of the recommendations. The book was quite preachy and didn’t include enough stories to make the facts resonate.


The book is absolutely worth buying for reference & charts. All the information is evergreen – there’s nothing trendy to 2022. But here’s the main takeaways.

  1. Invest with someone you know yourself by paying off your debts.
  2. Use retirement-account contributions, conversions, and withdrawals to cut your lifetime taxes. And make sure to contribute enough to get your employer’s match!
  3. Almost everyone should wait till age seventy to take Social Security retirement benefits.
  4. Don’t borrow for college. It’s far too expensive, it’s far too risky, it can haunt you for life, and it can keep you from pursuing your dream career.
  5. Choose careers and jobs that everyone but you hates.
  6. Mortgages are tax and financial losers. Pay them off as fast as possible
  7. Your living standard is your bottom line. Simulate its potential paths based on alternative investment and spending strategies to see where these strategies can land you.
  8. Marry for money. You’re worth it. And yes, money can buy you love. (Okay, fall in love, too!)
  9. Price your lifestyle decisions to get the most joy for money.
  10. The richer you are, the less you should invest in stocks.
  11. When it comes to holding risky assets, diversify across the gamut of securities that you can buy at low transaction costs.
  12. Your perfect home may be far cheaper several time zones away. Or it may be a state away that has no state income tax, no state estate tax, and no state inheritance tax.
  13. Holding a mortgage or retaining other fixed spending obligations while investing at risk is borrowing to gamble.
  14. A sure way to beat the market is to buy I-bonds.
  15. Stocks are riskier the longer you hold them. Avoid bucket strategies, which dangerously pretend otherwise.
  16. If you’re a stock, buy bonds. If you’re a bond, buy stocks.
  17. Credibly signal your loyalty to your company, strive to make it succeed, but protect yourself by selling it short financially.
  18. Retiring early is, for many, financial suicide. You can end up retired longer than you worked.
  19. Longevity is an emotional dream and an economic nightmare.
  20. You can get the best of both worlds: an elite education at a dirt-cheap price.
  21. Conventional financial planning is dangerous to your financial health. It bears no relation to economic theory and recommends patently absurd financial behaviors.
  22. You can’t count on dying on time. Plan to live to your maximum, not your expected, age of life. Deal with longevity risk by spending at a higher level at younger ages, not by assuming you’ll die for sure before you might.
  23. Free “trapped” equity by downsizing, renting, cohabiting, or establishing a leaseback with your children. Reverse mortgages are expensive and risky. Best stay clear.
  24. If you’re widowed and in your early sixties, starting survivor and retirement Social Security benefits simultaneously can cost you a fortune.
  25. Divorce war has no victors. Agree to a fair living-standard ratio with your spouse and then jointly optimize the settlement.
  26. HSAs and other merit-goods savings vehicles are the best tax loophole going.
  27. Tap your retirement-account money to delay taking Social Security retirement benefits.
  28. Aggressive spending can be as risky as aggressive investing in producing downside living-standard risk.
  29. Avoid income-driven federal student loans unless you’re absolutely sure you’ll always be a low earner.
  30. Inflation represents a potentially enormous financial risk. It will reduce the real purchasing power of any nominal future receipt, be it wages, annuities, interest payments, etc. The US is dead broke and both borrowing and printing money out the wazoo to pay its bills. This makes, in my view, medium- and long-term nominal bonds, including Treasuries, extremely risky. Therefore, in forming portfolios to build LS cones, I recommend including TIPS, not conventional bonds.
  31. Fixed-rate mortgages have one great feature: they hedge against inflation since you repay in watered-down dollars.
  32. Conventional investment advice is, to be nice, of dubious value. It’s predicated on your making four major economic mistakes: saving the wrong amount when young, putting your preretirement saving on autopilot, spending the wrong amount when old, and never adjusting to market conditions.
  33. Career shop, job shop, and house shop till you drop. Understand your options at all times.
  34. In retirement, hold an increasing share of your investments in stocks and other risky assets with each passing year.
  35. Did you take your Social Security retirement benefit early? Suspend it at full retirement age and grow it till age seventy at 8 percent per year (albeit, not compounded).
  36. All lifestyle decisions – switching careers, moving homes, getting married, having children, getting divorced – come at a price. Measure these prices in terms of your sustainable living standard.
  37. You can be any age and still raise your Social Security benefits if you earn enough. Anyone age sixty or over earning above the taxable earnings ceiling is in this boat. So are those with very short or spotty (lots of small values) covered earnings records.
  38. Social Security has thirteen use-them-or-lose-them benefits. Make sure you get what’s yours.
  39. The biggest 401(k)/IRA/Roth tax benefit isn’t deferring taxes but shifting taxes to low-bracket years.
  40. Economies of shared living are enormous. Move in with Mom if it comes to it. She’s likely a better cook.
  41. Are you losing Social Security benefits by earning too much? No worries you’ll almost surely get them back. The earnings test is a diabolical policy. It convinces people who take benefits early that they face massive taxes on working, which generally is completely untrue.
  42. If you’re very worried about downside risk, play the stock market like a casino. Set a floor to your living standard and spend only out of stocks that have been converted to safe assets.
  43. Social Security’s Program Operations Manual System has hundreds of thousands of rules, which its staff routinely get wrong, in part or in full. Talk to multiple offices and do your own research.
  44. If your parents are borrowing for your college, discuss who will repay. And consider whether they’re blowing your inheritance or sacrificing their welfare by “helping” you attend an unaffordable college.
  45. Consider working for yourself. It comes with maximum job security.
  46. Withdrawing from a Roth or even a regular IRA to pay off a mortgage can pay off big-time.
  47. There’s a major tax break to homeownership. It has nothing to do with having a mortgage (Imputed Rent!).
  48. In deciding whether to rent versus own, don’t ignore the value of trapped equity. Leaving your house to your kids or keeping it as a financial security blanket to buy into a nice Medicaid facility is not a housing cost.
  49. When you get married, count on getting divorced. It’s as likely as not. Protect yourself and the love of your life with a prenup.
  50. Raise, tilt, and narrow your living-standard cone by following this book’s safe moneymaking secrets, spending cautiously over time, and investing less aggressively by limiting and diversifying your holdings of risky assets. Unlike upside investing, this entails absorbing downside living-standard risk. But the reward may be worth the risk.
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