I posted last week about the arrival of Waymo in my city and did some quick math to come up with how much I would be willing to pay to own an autonomous vehicle. Not so much for its convenience taking me from point A to point B but rather as a way to create an alternative income stream, picking up rideshares 20 hours a day, 7 days a week.

My theory was that this investment wouldn’t correlate much with stocks and bonds but rather the supply and demand for rideshare in a particular urban area. What kind of range should we think about paying for a investment like that, and what kind of return might be possible?

A key part of doing this kind of speculative investment analysis, however, is that you have to do math correctly. And…

And…As it turns out, I have careful readers.

A more correct answer to “how much should you pay to own an autonomous driving car” using my assumptions is actually: $152 thousand.1

So here’s the problem: I spelled out my assumptions for monthly revenue in a baseline scenario. I assumed gross earnings per hour ($28.57) multiplied by the number of hours/day the car would be operating (20), multiplied by the number of months (11.33), multiplied by 30. That is an ok way to get an annual earnings number, which I calculated as $194,276.

Here’s the incorrect table again from my previous post:

That is a fine annual earnings number, but is totally NOT FINE as I labelled it monthly earnings and proceeded to do my incorrect analysis from there. I subtracted out monthly assumed costs from the the $194,276, to come up with a net earnings of $128,193, then inputted that as a monthly future cash flow. I discounted that back for 60 months as a baseline, and came up with $5.7 million. The pessimistic and optimistic scenarios, using this same ridiculously wrong (Again, I used Annual instead of Monthly!) net revenue number, were $1.6 million to $9.8 million.

A More Correct Analysis

A more correct monthly gross revenue for my baseline should have been something like hourly revenue ($28.57) multiplied by hours in the day (20), multiplied by days in a typical month (30), adjusted for assumed number of days in year operating in my baseline (340/365). If I do that (more correct) math, I get a monthly gross of $15,968. Here’s a table with a better set of numbers, keeping everything the same except not making the huge error of annual instead of monthly earnings.

If I use the same cost assumptions as before, my monthly net positive drops to $3,377 in my baseline scenario. With a range from pessimistic ($3,677 monthly loss) to optimistic ($7,174 monthly net positive).

So maybe a better way of thinking about the value of this Taylormo speculative investment is that you should pay between zero and $432 thousand for it. Hopefully none of you put a down payment for a $5.7 million investment based on my faulty analysis last week.

Alternative Analysis

So does that mean my Taylormo autonomous driving rideshare car is kind of worthless as an investment, or just worth $151 thousand, or worth only as much as $432 thousand? Not necessarily.

Like any speculative financial model, we could change assumptions and come up with a more or less positive expected value. I could lower my assumed costs of mechanical maintenance, insurance, electricity, and the revenue split between the investor and Taylormo.

If you tickle your assumptions and massage the numbers enough you could practically come up with any result you prefer. Obviously that is what entrepreneurs and speculators want/need to do when talking to potential investors. It is the job of potential investors to poke holes in assumptions and provide their alternative scenarios.

Here, I’ve done an alternative scenario lowering 3 input costs (mechanical maintenance, insurance, and electricity) to just around 2X my current costs, rather than 5X. Using those much lower cost assumptions I can get to a $362 thousand value, with a range between $53 thousand (pessimistic) and $677 thousand (optimistic). I actually think the higher costs are more realistic but wanted to show this for comparison’s sake.

The key obviously when pitching or evaluating this type of thing is to not make gross math errors and turn annual revenue into monthly revenue, as I had done.

You can have your alternative assumptions but you shouldn’t vear entirely into “alternative facts,” Kellyanne Conway-style, if you want to keep your money safe.

The Silver Lining

As I wear this math hairshirt there is some good news: I have smart readers!

And not only are they smart but they read carefully enough to go through my table of assumptions and to see if I am a bozo. And not only are they smart, and not only am I bozo, but they are also polite. More than one reader sent me a private message letting me know my math error. Thank you!

I have readers who are smart, diligent and polite. It’s a good day after all.

But Still

I am still crying inside because…

BIG EDITOR’S NOTE:

This post has an egregious math error, which I have pointed out in a follow-up post. If you enjoy spreadsheet puzzles and figuring out exactly where I went wrong, you can read through it and spot the math. I have also left it up because:

1. I am wearing my math hairshirt of shame.

2. There are some actual useful points in the post beyond my horrible math mistake.

3. Bottom-line though: Using much better math, the expected value of an autonomous vehicle which can earn rideshare revenue 24/7/365 is a lot less than the $5.7 million I claimed. A better value, as a pure revenue-generator, is maybe something closer to $153 thousand?

I want to suggest here how much I would pay to own my own driverless car, as an investment. My short answer: $5.7 million.

How I got to $5.7 million is the work of the longer explanation below, which I hope you will indulge me as I get into the hows and whys and assumptions I am using.

I also think there’s a very wide range of potential values, between $1.6 million and $9.8 million.

An Obvious New Financial Asset

The most obvious future business idea/ asset class is this: owning a driverless car, and letting it earn you money while you sleep. It would be non-correlated with stocks or interest rates, and more specifically correlated to the supply and demand of rideshare in your city.

Not my first driverless rodeo

Waymo arrived in my city (San Antonio) this week so naturally I had to take a ride in it, if only to respectfully welcome our robot overlords.

I rode from my house to the post office, and then back. Mostly just to do it.

It was pricier than a regular Lyft or Uber ($10.52 for .7 miles, and then $11.14 back from the post office) but maybe that is just the luck of the time of day (1-2pm) in which I rode.

The ride was better than a regular Uber/Lyft because I was greeted by name (“Hello, Michael” in a pleasant robot voice), at a temperature I had preset via the phone app, with zero human smells. Then it began to play music from my own Spotify. Also, no need to tip!

I, for one, do welcome an AI driverless car, as I am convinced this is much safer than a human driver. I have seen how some of you people drive. This was not my first ride in a Waymo. I actually wrote about my experience in Austin, TX in October 2024 before they fully rolled out in that city, which I found quite lovely.

The main point I want to get into here though is that this is the most obvious next retail investment asset class. Why shouldn’t a company allow individuals to purchase an autonomous car, then “rent it out” in their city to earn money during the 92% of the day in which they do not need to drive in a car somewhere.

Driverless car as an investment

As an investment, the idea here is that it sort of resembles the old NYC taxi medallions. In the pre rideshare era through the 2000s this was a very valuable niche investment, made especially valuable by scarcity (city limits on the number of total medallions available).

Many investors owned medallions and then rented them out, for a fixed return on their medallion investment. Taxi drivers would be constantly patrolling the streets of the city that never sleeps, picking up fares. In theory the same cab with a medallion could be driven in two or three shifts, keeping the money flowing to the medallion owner, as those drivers essentially rented the right to operate a cab up to 24 hours a day. The medallions which conferred the right to drive an NYC taxi earned cash-flow like safe bonds, their money accumulating while their owners slept. At times medallions were also like stocks or real estate, as they also sometimes increased in value over time.1 They also decreased in value after the arrival of rideshare.

The NYC medallion investment is kind of the idea with owning a driverless car, only it’s better, since unlike a human it really never needs to sleep. For most of a 24hr-cycle, minus maintenance and battery recharge time, it can be out patrolling your city street, earning fares.

So how much should one pay for this theoretical investment which doesn’t exist yet but is pretty much the most obvious next evolution in driverless cars.2

That’s what I set out to determine. And $5.7 million is my answer.

Here, first, are a whole bunch of assumptions, followed by a whole bunch of math.

These assumptions are wholly off the top of the dome, so subject to plenty of arguments and refinement. But that will not stop me from sketching out some plausible assumptions to begin the process of putting a price on owning a driverless car.

I assume a new technology company - let’s call the company Taylormo3 - has developed a driverless car and made it available for individual purchase and investment. It’s basically invented a new asset class.

The deal offered by Taylormo to you the investor is that software and hardware maintenance has to be paid on an ongoing basis as a revenue split. Software and hardware is obviously highly proprietary for the company and nobody who invests and owns one of these autonomous cars is going to be allowed to hop over to Reilly’s Auto Parts to buy their own replacement for something. For the investor seeking a passive investment in the driverless car, revenues from rideshare will always have to be shared with Taylormo. I’ll pick the 70/30 split of rideshare revenue that Lyft currently offers drivers.

Assumed revenue per hour, which can give us a monthly gross revenue number - Originally for the purposes of a newspaper column, and then later to produce finance content and for fun, I actually have driven for Lyft in the recent past. So I have experience and reasons to think that $20 per hour is a kind of net average driver revenue, at least in my city.

If we assume the owner of a Taylormo keeps the gross revenue, it feels like we could assume earning $28.57/hour as a baseline4. Using a further baseline of 20 hours of usage per day, and 340 days of usage per year (a few days off for repair, cleaning or extreme weather) and we can get to $194,276 of monthly gross revenue for the Taylormo investor.5

Revenue share with the Taylormo company - However, I do think even an investor-owned Taylormo is going to rely heavily on the parent company for software and hardware maintenance, plus maintaining the rideshare app. So I assume a 70/30 split of gross revenue after it is earned. Using these same assumptions the parent company takes in $58,283 per month per vehicle on the road.

The cost of electricity recharge - This cost (Taylormo is fully electric!) is borne by the investor and is some multiple of annual gas costs. I know I paid $2,242.64 in gas last year.6 I’ll assume 5x that cost in electricity for a car that I intend to have running for 20 hours a day. So let’s say a $12,000 annual electricity bill, or $1,000 per month, to keep a round number there as a baseline.

The cost of insurance - We paid $6,213.96 in automobile insurance last year. Let’s say the cost of insurance would be about 5x that, since the car will be driving far more than we currently do and it’s only fair that insurance would go up significantly. Round numbers, let’s say $2,500 per month baseline assumption.

The cost of mechanical maintenance - This is a total unknown to me for an autonomous vehicle. Obviously it has all sort of cameras and sensors, plus AI-driven software. Replacement and repair will be far more expensive. Possibly it’s a longer process too. I spent $2,082.36 in auto maintenance last year. Maybe that should be 5x for the Taylormo car? I’ll say $4,300 per month for a baseline. Part of the scenario analysis for maintenance is just the assumed life of a Taylormo car.

Assumed Life of the Investment - I’m going to guess that, since this is at the technological edge, whatever version I purchase only has a few useful years in it. Partly that’s because something better will come along. Partly that’s because these may be built to optimize the new technology, but not to last for 20 years.7 I think it’s only fair to assume fast obsolescence. So I’m assuming a baseline 5 years of investment usage, with a range of 3 to 7 years, pessimistic to optimistic. In this sense, the investor is kind of “leasing” a Taylormo autonomous vehicle, hopefully for 5 years.

Given these assumptions, we can come up with a value to the investment.

This model I’m showing based on the assumptions spelled out in the text above says $5.7 million is a theoretical value, to achieve a 12% return on investment over 5 years. It also says an optimistic or pessimistic range widens out the theoretical value to between $1.6 million and $9.8 million in present value.

The math of my theoretical Taylormo investment

To go one additional step into the model: The value of any investment, fundamentally, is the sum of all future cash-flows derived from that investment, discounted back to the present day.

In plain language, if I knew I could earn $128K guaranteed every month for the next five years, there is a mathematically knowable answer to the question of “How much should I pay for that 5 year annuity?” Now, it is not guaranteed to be a steady $128K per month.

The number that I could toggle in the model is the “Discount Rate,” for which I inputted 12%. The scale of that input determines how valuable, or how discounted, future uncertain cashflows are. The more uncertain they are, the more they need to be discounted. That’s why I have a 15% Discount Rate in my Pessimistic Scenario, and a 10% Discount Rate in my Optimistic Scenario.

Not shown in this model, but rather calculated in a spreadsheet, is the discounted “present value” of every monthly net revenue number, for either 36 months (3 yr pessimistic scenario) 60 months (5yr Baseline scenario) or 84 months (7yr optimistic scenario.)

I’ve gone into detail on the math previously on this platform when I wrote about the Texas Lotto, and many times on my earlier blog Bankers-Anonymous.com, and dedicated an important chapter to it in my book from 2018.

This is the key math to all fundamental investing and I’m never going to miss a chance to talk about how important it is.

In fact here’s a Part I (of 3) video on my YouTube channel in case you want to try to learn the basics of discounting cashflows yourself in a spreadsheet.

Other things that would tend to set the price for this new theoretical asset class

One key to keeping the autonomous driving car investment valuable would be to follow the lead of the NYC medallion: restrict the supply. If the Taylormo company only sold a limited number of autonomous driving cars to investors, that would ensure against oversupply. That would be like a kind of franchise model in which only some owners would be allowed to have their Taylormo patrol the streets of certain cities, earning fares.

In an open competitive market, we could imagine instead the business model underpinning my pricing assumptions breaking down. With too many Taylormo vehicles on the road constantly patrolling and picking up fares, owners would see their profit-margins squeezed toward zero. As a rider/consumer, however, we can presume the heavy supply would be welcome as it drove down prices.8

Another major pricing factor would be the density of a city. The Taylormo doesn’t work quite so well in a rural area as the car could not drive all night continuously collecting fares while the owner/investor slept. A big city that never sleeps would be ideal. As a result, we could imagine that “franchise rights,” if they came with the purchase could be charged at different rates depending on the attractiveness of the city for rideshare.

Uncertainty around either the supply of competing Taylormo vehicles, or the relative attractiveness of the urban market could be captured by toggling the discount rate in our model. With either too many competing rideshares pushing up supply, or uncertain demand of the urban market, we would require a higher discount rate in the model. That would automatically lower the expected present value of our theoretical autonomous car investment.

Final note: I have not really considered the personal usage of the autonomous car as an input into pricing. Mostly I think that personal use as a proportion of total value is quite small. If a car can get you from point A to point B for somewhere between $10 thousand and $80 thousand purchase price, and you keep that car for 10 years, that’s only a fraction of what the autonomous car is really worth as a revenue generator. We could imagine other incidental advantages, like you don’t have to pay for parking or for a valet service since your Taylormo can just go out collecting fares while you sit at the restaurant for the evening. Overall, however, I think those are financial small potatoes compared to the big picture idea that this investment can be earning 20-22 hours a day without rest.

What assumptions would you make about the relative attractiveness of this new investment asset class?

How much would you pay for this non-correlated investment?

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And also I did a quick dive into using a credit simulator from Capital One, in an exercise in obsessing over my own credit. (haha)

This is just a bit more on my thoughts via Q&A about how to, and how not to, obsess over your credit score.

Should I take out a credit card even if I don’t borrow on it?

No. Just only take a credit card you might actually need, and no more.

Should I keep my credit card and use it once in a while because using credit improves my score?

No. Having an open line, meaning unused credit on your credit card, is useful to your FICO score. But if you have any other current debts (car loan, home loan, student loan, other credit card) there is zero reason to be charging stuff just to improve your credit. The creditmaxxing guy was keeping a 0.5% or 1% balance on the 15th of the month in order to move his FICO score from 847 to 850, but that is because he’s a maniac. You should not be a maniac and you should not use your credit card more than necessary to “boost your score.”

Should I take out or keep my credit card open even though it has an annual fee, because closing it will hurt my score?

No! I recently learned from a client that she was not aware that many (in fact most!) credit cards do not charge annual fees. You really really should not have a credit card with an annual fee if you are worried about your credit score. You should save your money and use non-annual fee cards.1

Should you pay a firm that might engineer a credit score improvement?

No. The main method they might employ is to repudiate or dispute your actual debts, which is illegal and unethical. Or they may freeze your credit.

TransUnion (a credit bureau) offers a useful explainer on this attempt to manipulate credit scores.

There is no legal and reliable short-term way to improve your credit score. The only reliable way to improve your credit is to pay your debts, all your debts, on time, and then wait. This happens over the medium and long term. Improving your credit doesn’t really work in the short term.

How long does it take for my credit to recover from a bankruptcy or charge-offs?

It can be a surprisingly short time. Just 12-24 months after a bankruptcy, assuming you are paying the rest of your debts on time, your FICO will be approaching Prime again. Within five years you can certainly be a Prime borrower. The bankruptcy still shows up on your credit for 7-10 years, and will prevent you from having “perfect credit,” in 10 years but it won't prevent you from borrowing at reasonable rates.

Should you pay a “credit consolidation firm” to take care of your debts?

Very likely no. That is mostly a different question than creditmaxxing because the credit consolidation firm might be pitching themselves as a group that will improve your credit by negotiating down your debts, repudiating your debts, and making settlement offers on your debts. The short and medium term effect of that kind of service will likely be to wreck your credit, rather than improve your credit. So it’s kind of a whole different conversation than creditmaxxing.

Is there ever a point when you should pay up to improve your credit?

Well, yes, if that involves paying your debts.

In fact this week I was telling a client that the smart thing to do with respect to an old disputed multi-thousand dollar credit card debt which he disputed as fraudulent is to make an offer to settle it. In his particular case, the few thousand dollars to settle an old (possibly fraudulent) debt would be worth it because he’s contemplating buying a house in the medium term. Borrowing hundreds of thousands of dollars at Prime versus paying an elevated sub-Prime mortgage rate is worth more than a few thousand dollars. Just pay up to settle the debt, and your credit score will improve significantly in 6-12 months. Then you borrow at Prime mortgage rate, and you are laughing all the way to the bank.

Maybe you get these also from your bank, a button on your bank app that you can press to:

1. See your score, and

2. See your score history

So then I got curious and decided to see how different actions would effect my credit, according to their “Credit Simulator.” Without having to be a creditmaxxing engineer like the crazy Texan Michell, the app let me quickly see the effect of different actions. It looks like this:

So, I decided to play with it. There are 14 different scenarios I could simulate to determine the effect on my credit.

What if I suddenly declared bankruptcy?

That’s a pretty dramatic move. Not surprisingly, declaring bankruptcy would take me from perfect credit to pretty darn bad credit with a single action.

What if I just forgot to pay a single bill sometime?

Well, it’s a big drop for a single bill, but interestingly I would remain (just barely) above Prime. At least for that first month!

What about if I asked my bank to increase my credit limit on my credit card by $20,000?

Increasing your limit creates barely a blip! Noted.

Also as a side note: for about a decade I used to ask my credit card companies every year to increase my credit limits. Most of the time they would.1 I didn’t do it because I need to charge $35,000 on my card for a single purchase or $100,000 across three different cards. I kind of did it because I knew that FICO scoring had a lot to do with unused credit. My theory then was that if I just used $1,000 a month on purchases but I had $34,000 in unused credit, that would tend to buoy my FICO more than having used $1,000 on a $6,000 line. It was a mild form of creditmaxxing, I can admit now.

What about if I took out a new credit card?

That’s also a pretty tiny effect, just 10 points.

And what about taking out a $25,000 auto loan?

Also very minor. Just 5 points on my FICO for an auto loan. Also, it’s possibly interesting to note that if you apply for an auto loan at 3 different banks within a short amount of time, the requests should only ding your credit as if you applied to just one bank. And by “ding” it appears to just affect my/your/one’s credit by 5 points, which is meaningless. The algorithm understands or assumes that the borrower is just going to get one single auto loan, rather than three, so it treats the effect on your credit as such. Shopping for the auto loan in that sense is not punished, it is rewarded.

You can see my related Part I - Juicing One’s Credit - Creditmaxxing here.

You can also see Part 3 - asking and answering some questions about credit scores and trying to be chill and normal about them.

A year ago the Wall Street Journal ran a story about a Texan exactly my age who set out to achieve a perfect 850 FICO score.

Although it was not me, but rather a guy named Steve Michell, I could totally relate. While I would not literally to go the lengths he did to get a perfect score, my internal voice absolutely wonders about that kind of maximization. Maybe yours does too?

I want to be able to borrow at the most competitive rates. I care strongly about not overpaying to borrow money. I take a (probably inordinate) amount of pride in making correct financial choices.

Am I competitive about objective scores by which I could compare myself to others? Is the Pope Catholic?

But even so, doing what Michell did isn’t advisable.

Creditmaxxing

A toxic internet trend called Looksmaxxing encourages the inherently insecure and chronically online to increasingly dangerous steps to try to look outstanding. Looksmaxxing usually means not just the usual tips - hydrate, exercise, get sufficient sleep, reduce your sugar intake - but a much more aggressive inward - supplements, hormones, steroids in non-prescribed ways - and outward - surgical improvements of jawline, waistline, lips, butt, breasts - set of steps for men and women.

When you look at the “before” picture of Looksmaxxers seeking advice, a typical response a healthy person would have is, “wow, you actually look really great already.”

Which sort of implies that the person seeking to optimize has a kind of dysmorphia about their own appearance.

For people with a credit score above 720 FICO already, here’s the analogy: you do not really benefit from trying to get above the baseline of being a “Prime” borrower for banks. A 720 FICO is all you need to aim toward and you’re getting the most important low rates on your mortgage and car loan.1 Going into weird financial gymnastics to boost your score is not as toxic as looksmaxxing, but it is kind of silly and unnecessary.

So What Should You Do?

Instead, the right thing to do is analogous to the boring but correct approaches to looking your best - hydrate, exercise, get sufficient sleep, maybe cut down on the processed sugars?

The equivalent in credit scoring is boring but correct: Borrow only as much as you can reasonably pay off in a reasonable amount of time. Pay all your bills, always and on time. Don’t forget any bill, however small. (Ignoring a $50 utility bill or a $75 medical bill will submarine your credit.) Pay more than the minimum on your credit cards and ideally pay the balance to zero every month. That’s about it. The rest is creditmaxxing and unhelpful.

Side Note on Credit Scores

FICO (originally the Fair Isaac Company) has a trademark on FICO scores and a near-monopoly on licenses for scores based on credit bureau data. There’s a FICO BASE score which ranges on a scale of 300-850, and then there are specialized FICO scores for credit card underwriting or mortgage underwriting for banks, and those go up to 900. The credit bureaus attempted to break the monopoly by creating a competing VantageScore. You will have multiple “credit scores” depending on which creditor is buying it, or which bank is showing you your score. It’s confusing. Here’s the comic explaining how that confusion came about.

Still, I’ll repeat, the only actionable target you should really care about is a 720 FICO, sufficient for Prime mortgage rates. Taking active steps to increase your credit above that and you are creditmaxxing.

Fine, I get that he is crazy but still tell me more about that Texan and how I can also get obsessive about my own credit score

Still, what did the crazy Texan do and can you learn from it?

The crazy Texan Michell had followed all of the correct boring steps to perfect credit, before he decided to creditmaxx. He had 20 years of flawless debt payment, but still had not gotten an 850. He’d gotten close, but no cigar.

According to the WSJ story, he figured out that a zero balance on his credit card wasn’t as helpful as having 0.5% of his credit line used for achieving an 850 FICO, which is what he wanted. He kept coming up just a few points short of the perfect 850. So he experimented with keeping a tiny balance on his card. Using somewhere between 0.5% and 1% of his available credit line seemed to make the difference of a few FICO points upward toward achieving his hoped-for 850.

He also figured out that the timing of what day of the month he paid off the debt balance mattered. According to the story, credit bureaus send payment and balance data to be inputted by FICO on the 19th of the month. Michell worked backwards and through experimentation found that balances on the 15th of every month seemed to be what got calculated in his score. So he would make sure to have that 1%-of-available-credit balance on the 15th of the month, before paying down the balance to zero. Again, this is kind of nuts to do. I’m just noting it because it tells us about the FICO algorithm.

The article notes at the end, importantly, that Michell has gotten zero additional perks from regularly achieving an 850 FICO as compared to his daughter. She has a much lower score and only a 4-year credit history, but will be treated the same by banks. Because again, the only FICO score that matters is getting to a minimum of 720 FICO to qualify for a Prime mortgage.

Please also see Creditmaxxing - Part II about me playing with something called Credit Simulator for further insights into the FICO algorithm.

And then Creditmaxxing - Part III mostly about not Creditmaxxing and trying to be chill about your credit.

The Holy Grail of retail investment management is to offer a single product which does two different things at the time:

1. It Achieves High Returns

2. At Low Risk.

But like a zoological hybrid half-beast, half-man, the result is a chimera. Or a monstrosity.

Markets being what they are, and human nature being what it is, I believe achieving this dual purpose in a single investible product is, essentially, impossible. Or ill-advised. Or just expensive. The reason it is axiomatically impossible (in my worldview) is that, were this chimera widely available, all available capital would flow into it. That inflow of capital itself would raise the price of it, and thereby lower the returns to all investors. Prices (or costs) would rise until such time as the high returns for low risk no longer existed.

The fact that these two different things - high returns at low risk - are inherently contradictory does not stop the investment management world from trying to provide it.

That’s how we get variable annuity monstrosities, which promise exactly this sweetest combination of high stock-market returns with moderate bond-like safety. The way in which these mythical half-beast, half man investment products get sold is that the fees are very high, and the liquidity is very low. A variable annuity is a roach motel that’s easy to get into and hard to get out of. That’s what typically happens when you try to combine the two in a single product.

Anyhow…The year 2025 saw the rise of a new product called a Buffer ETF which promises to …

…wait for it…

wait for it…

1. Achieve High Returns

2. At Low Risk

Yay! We’re doing this again. The Wall Street Journal Headline from this week on Buffer ETFs is “Are Buffer ETFs Too Expensive For the Protection They Offer?”

Here’s a decoder ring on Wall Street Journal headlines. When the headline question is posed that way about certain products carried by major investment managers who may or may not regularly advertise in the pages of the Wall Street Journal, you should remember to just translate the interrogative into a declarative statement by shifting the verb to a different part of the sentence. It should have said “Buffer ETFs Are Too Expensive For the Protection They Offer.” There! Fixed it for you!

Now it is still worth knowing about Buffer ETFs. As the WSJ explains, they have attracted tens of billions of dollars of investment capital.

As the WSJ further explains (in the fine print after you get past the headline), the 1% fee is probably not worth it. And you could achieve the same results yourself in a simpler manner.

The article specifically states that in a side-by-side comparison of Buffer ETFs with a balanced 50/50 stock/bond portfolio over the past 5 years, the Buffer ETFs achieved a slightly higher return at a slightly worse rate of volatility (their measure of risk.) That took into account the higher fees (.7% to 1%) on the ETFs compared to a balanced portfolio (.2% on average). Any comparison for a 5-year time horizon will be specific to the market returns of the time studied, the specific Buffer ETF chosen for comparison, and the chosen ratio of stocks to bonds. As is almost always the case with in investment management world, you can choose comparisons that make things look better or worse. When you strip out the component parts of an investment management product, however, what remains indisputable is the cost.

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The Buffer ETF offering is this: You can choose something like a 10% Buffer ETF or a 12% Buffer ETF or a 20% Buffer ETF, which means you will get 10, or 12, or 20% downside protection against a stock market crash. If the market goes down 20% and you have a 10% Buffer ETF, the most you can lose is 10% on your investment (10% buffer minus the 20% drop = maximum -10%). If you have a 12% Buffer ETF and the market goes down 15%, you’ll have lost just 3% that year on your investment (12% buffer minus 15% = -3%). This likely feels very comfortable for the retail investor.

In exchange for that reduced loss, you cap your market gains. The market gains cap is proportional to your downside protection, although not necessary mirrored. A 20% Buffer ETF, because it protects you from a huge down market, should have a tighter (worse) upside cap than a 10% Buffer ETF. Since the 10% Buffer ETF only protects you against the first 10% of loss, you can retain more of the upside. The band around your up and down returns can be shifted lower or higher to fit your view of what might happen, or more specifically what you are afraid might happen.

For institutional investors these banded results, if necessary, can be efficiently achieved through options positions. Specifically, buying out-of-the-money puts for downside protection and selling out-of-the-money calls to cap the upside. This kind of paired put and call trading sets the band. The more you need to spend on market insurance by purchasing the put, then the more upside you have to give up by selling valuable calls. Most retail investors should not be messing with options, so this narrower result via a single ETF presumably seems attractive.

In a reasonable presentation, hedge funder and finance theorist Cliff Asness of AQR Management expressed the right amount of skepticism about Buffer ETFs back in September 2025.

As Asness says, a simpler approach to hedging downside is to simply hold less equities or to sell equities. My own version of that same advice would be: Only hold as much in equities as you can be reasonably certain not to need to liquidate for the next 5 years.

The WSJ’s early coverage on Buffer ETFs in June 2025 pointedly quoted a Bloomberg analyst who called them “Boomer Candy.” What I called an impossible chimera - high returns, low risk, they call exactly what most retirees want. It’s financial candy!

The simpler, lower-cost mousetrap

So what is the better way to achieve market returns while also protecting the downside? The simplest thing is to own two mutual funds, or two ETFs, in some pre-determined ratio. Maybe it’s 60/40 stocks/bonds, or maybe it’s 70/30, 80/20, or 50/50. I don’t know, I’m not your investment advisor.

What I do know is that you can create the proper result by owning a very low-cost all stock index, then also owning some very low-cost all bond index. This will provide roughly the same result as a Buffer ETF, but at a fraction of the cost. If your ratio changes over the course of a year, you can rebalance. Yay! You’ve got this.

I once read Juggling for Dummies1 when I was 13, so I’ve been aware of this style of self-help book for a while. This was my first time reading Personal Finance For Dummies.

Personal Finance for Dummies is comprehensive. The author will leave (almost) no topic undiscussed in its 22 chapters and 430 pages. Format-wise, there’s an abundance of little symbols in the margin and side-boxes to indicate certain types of sections: “Warning,” with a yield sign graphic, “Remember” with a little string around a finger graphic, “Tip” with a little lightbulb graphic. Other graphics in the side margin include “Eric’s picks,” “Investigate,” and “Technical Stuff.”

Is this the right level of simplicity v. complexity?

The vocabulary used is not necessarily for “dummies” at all. As is often the case with personal financial books, the author cannot resist referencing “complex” concepts with technical terminology, if only to remind the reader of what they don’t (yet) know, and what the author, by contrast, does know.

In a check-in on investing knowledge, for example, he wants readers to determine whether or not they “understand how to evaluate a stock, including reviewing the company’s balance sheet, income statement, competitive position, price-earnings ratio versus its peer group, and so on?”

In a check-in on insurance knowledge, he wants readers to answer “whether your insurance companies have good track records when it comes to paying claims,” and whether “you carry enough liability insurance on your home, car (including umbrella/excess liability), and business to protect all your assets.”

I would argue that it is self-evident that a reader of a “Personal Finance For Dummies” book would answer No to these questions, as we’d expect only 0.1% of people to answer YES. So, what exactly is the point of this query? I’m guessing the point is falling into the typical finance-expert trap of establishing their own mastery of complexity, but at the risk of turning off the “dummies” who are presumably the beneficiaries of an explanation targeted to their level.

An early nitpick

A small nitpicky doubt but one that was off-putting early in the book: The author claims to have “coined” the term bad debt - meaning credit cards and high-interest auto loans - as distinguished from good debt - like students loans, mortgages, and business loans that will more likely produce a positive return on investment. “I used this term back in the early 1990s with the first edition of this book, and I’m flattered that others have since used the same terminology,” Tyson writes.

I…I just don’t know. The idea of bad debt is such a general and universal pairing of two words that I have a hard time believing this phrase and the idea of bad debt doesn’t actually date back to 19th-Century England, or 1st-Century AD Rome, or probably 6,000 BC Sumeria. We’ve had high-interest money lenders for millenia. Was Eric Tyson really the first person to call it “bad debt?” That seems…unlikely.

Financial Media

The initial chapter covers the difficulty of getting good personal finance information from the usual sources, and I agree. In my own book, Chapter 2 is dedicated to warning readers about the Financial Infotainment Industrial Complex, which has both a conflict-of-interest problem with financial experts and a striking tendency to choose headline shock value over long-term wisdom.

I appreciate that the warning about sources of good personal finance information comes early in the book.

Interestingly to me, since I just read and reviewed one of her books, Dummies author Tyson goes after well-known personal finance Suze Orman in particular for misrepresenting her Wall Street credentials and her main sources of income.2 Financial gurus, alas, are rarely pure.

The (mis)use of Tables in the book

Like many personal finance books, this one makes use of a series of “tables,” lists for the reader to fill out. A list of monthly expenses to calculate your budget. A list of assets and liabilities to add and subtract to arrive at a net worth number.

The critique I have of this choice in a personal finance book is that nobody should be putting these numbers onto a physical sheet of paper with a pen or pencil. The (only) correct way to use a table is to actually use a table in an Excel format - so that the numbers you list can be added up or subtracted or multiplied or divided, as the need arises. Paper is a waste of time and a missed opportunity.

Things I Don’t Like

In Chapter 4, known as “Establishing and Achieving Goals,” we receive a tremendous amount of information about retirement accounts, retirement philosophy, and Social Security, in addition to information on purchasing a house, and establishing the right amount of spending versus savings. It’s a lot. I actually think it is (way) too much.

Personal Finance For Dummies isn’t necessarily designed as a book you will want to read straight through from start to finish. But I found myself wondering why - in the quest for total completionism - why there was so much information?

Is it odd to complain about a book that covers everything? I think it’s a problem. If you are purporting to explain personal finance to a non-expert, I would maybe look for more editing, and more prioritization?

The point when I finally figured out what I didn’t like about the book

The combination of Chapter 6 “Reducing Your Spending” and Chapter 7 “Trimming Your Taxes” are typical of the approach of the book. There is no stone left unturned in the listing of ways to reduce spending. Avoid brand names. Pay cash for your car. Deeply research expenses before buying your pharmaceuticals or medical supplies. Don’t buy sodas or alcohol at a restaurant. Spend wisely on technology. Shop at a wholesale superstore…the list of ideas extends to maybe another 3 dozen more “helpful hints” throughout the chapter. While none of this is wrong, this kind of list is both boring and basically, nagging. I mean, we humans in the real world do not have unlimited capacity to research and achieve the best price on everything.

“Trimming Your Taxes” achieves a similar “everything and the kitchen sink approach.” Some hints are for people who make less than $25 thousand per year. Others are for people with high incomes who should know about the Alternative Minimum Tax.3 Investing in tax-free money-market funds (A very much wealthy-person approach) was listed shortly after listing auto registration fees for an itemized tax deduction. There are deductions to be had everywhere you look - in theory - and this chapter is dedicated to listing all of them. The net effect is that, were I to read this chapter straight through, I remember none of them.

I think a major problem with this Dummies book comes in to focus here, which is that by covering every topic, the author leaves the reader with too much information, with too little focus. The information is presented flat - by which I mean it’s presented as if it were all of equal importance. For any individual, maybe 10 percent of the “tax trimming” ideas are relevant? As are the ways to “reduce your spending.” Without better targeting or organization, the everythingburger approach is boring and un-memorable. A personal finance dummy (the theoretical audience here) likely has even less patience and capacity for absorbing this information than I do.

Investing Section

Part 3 on Building Wealth Through Investing had the potential to improve my outlook on the book. Investing is inherently more fun and interesting than saving money.

Alas, it is not fun when Eric Tyson explains it.

Also, he continues to explain every aspect of something, but without appropriate prioritization. He begins by explaining some differences between stocks and bonds, and the importance of not day-trading. But in the next page he has a section on “discovering low-risk, high return investments,” which include “paying off consumer debts” “investing in your health” and “investing in friends and family,” and “investing in career development.” C’mon man, I know what you mean, but now you are just writing about topics using the same word “investing” but actually referring to totally different concepts.

In the subsequent investing chapter, he does define everything you’d want defined. Mutual funds, ETFs, investment advisors, real estate, and money market funds.

As in a typical personal finance book, he gives the typical advice to the reader that they should read the company or fund’s annual reports, despite the fact that nobody is going to do that, certainly not someone reading a Dummies book. You should look up and minimize all the expenses. You should assess historical performance, manager reputation, and tax-efficiency. Again these are not wrong, they are just an overwhelming mandate for action which zero real humans reading this book are prepared to do, in reality.

In the further investment section, Tyson recommends different specific mutual fund portfolios that readers could follow, depending on their risk appetite. I would personally not have the confidence to advice book readers to purchase specific name brand funds in this way.

My summary thoughts

This book could not keep my attention. I wanted to stop after Chapter 2. I pushed on, but the trouble remained.

I have a much higher recommendation for a book4 that covers all the personal finance bases, but does so with an entertaining and funny voice: The Only Investment Guide You’ll Ever Need by Andrew Tobias actually lives up to the claim of the title. He also covers how to save money, how to be wise about taxes, and how to avoid making bad investment decisions.

The Dummies book covers all the bases. There is nothing wrong with the information. I just found I wasn’t interested in reading it. Maybe you’ll have better luck, but I don’t recommend it.

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Weirdly, or maybe not weirdly, I’ve never read her stuff. I have a vague impression of seeing her face on TV doing something (15 years ago?) but I’m not sure. Anyway!

The Road To Wealth

I’ve personally assigned myself the project of reviewing some popular finance books1, and one of Orman’s seemed like as good as any place to start.2 The format of this one - which stretches to 582 pages and could easily double as a powerful door stop on a windy day - is a series of more than 2000 questions, asked and answered by Orman.

In Orman’s introduction, she clarifies that a central premise in her previous books (again none of which I’ve read up until now) is that emotional and psychological factors are just as important as financial knowledge to “doing it right” in your personal financial life. I strongly agree. She clarifies that this book, The Road To Wealth, is a complement to those more emotionally-grounded books. This one will focus more on the knowledge (plus common sense) side of decision-making.

Why personal finance books?

One of my most deeply-held beliefs is that there is only one good form of financial content, because there is only one format that is designed to last for decades, the correct time period for financial decision-making. The usual content formats3 we consume - TV, radio, podcasts, newspapers, magazines, blogs, financial sites, Reddit, X, Instagram, TikTok - all share this is common: The shelf-life of the information can be measured in hours, or weeks at best. Rarely in months.

This is the premise of this embedded TedX talk I did a few years ago.

While most financial content is stale by the next month, Books have a shelf-life of say, 3 to 30 years.

Personal financial decisions should be made with a view to what will happen in 3 to 30 years. Personal financial decisions should (almost) never be made on what will happen hours or weeks or even months from now.

As a result, books are the only good form of financial content.

So that’s part of why I’m reviewing Suze Orman’s work in book form.

As a book, The Road To Wealth does not have a narrative. It’s closest analogy is to an encyclopedia reference book, through questions and answers. The right way to engage with it therefore is to probably skip forward to the section that you most need at the time you need it.

Her topics, in order, are Managing Debt, Financial Intimacy, Home Ownership, Insurance, Paying For College, Retirement Planning, Stocks, Mutual Funds, Bonds and Bond Funds, Annuities, and Wills and Trusts.

Her first chapter, on managing debt, is extremely sensible. She outlines the psychological traits many people have that lead them to overspending or carrying balances month to month. She gets into the detailed differences between charge cards, credit cards, and debit cards.

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This first section on debt covers everything including bankruptcy, collections, the specifics of IRS and student loan debt. She gets deep in the weeds on these topics. But if they don’t concern you, you can skip forward to other questions or other topics.

One of the strengths of this book (although maybe a weakness for some readers) is that she is highly informed and detailed on the literal legal questions of finance. In the Financial Intimacy section, for example, the level of detail on pre-nups, communal-property states, and joint-liability debts is one you would ordinarily only get from a lawyer.

Wills and Trusts Chapter , e.g. Revocable Living Trusts

Similarly, in the chapter on Wills and Trusts, there is an entire law school semester’s level of detail and nuance here. A reader of this section could get 90+% of their questions answered in advance of hiring an attorney to finish their documentation process. For a do-it-yourself person, this kind of detail may be exactly what they crave for understanding their finances.

As a non-lawyer, I do find myself sometimes wondering things like “What exactly is a revocable living trust and why do people have them?” That’s its own series of questions and answers in this book. In fact, Orman is quite adamant that people need a revocable living trust for nearly all of their assets, with the goal of reducing or avoiding probate time and costs after their death. There are 15 pages of questions and answers on revocable living trusts. I don’t have one for my own household, but Orman’s emphasis on them is giving me food for thought.

Annuities

I was pleased to see that Orman and I are in full concordance on annuities, to which she dedicates a whole chapter, and 78 separate questions and answers. Her main answer, given in the introduction to the chapter on annuities, is:

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In my recent 5-part review of retirement income books, I stated that fixed annuities were both inadvisable and in some cases impossible within a 401(k) defined contribution plan or IRA. This is a correction and update post to those statements.

I wrote “impossible” because 401(k) investment menus often did not offer fixed annuities. I wrote “inadvisable” because fixed annuities are more tax efficient in non-retirement accounts. A second reason why annuities are inadvisable in an IRA has to do with the difficulty of calculating RMDs when some of the assets are tied up as annuities.

Two developments happened just as I hit publish on the fifth post of my 5-part series.

One is that the investment advisor who supplied the “retirement income” books sent me a bunch of new info about recent developments in annuities within retirement accounts. I include links to those at the bottom of this post.

Vanguard’s December 2025 announcement

The second is that Vanguard announced their plan to offer fixed annuities as part of their standard suite of retirement products, in a departure from their typical focus on brokerage products like stocks and bonds, mutual funds and ETFs.

To offer this new plan, Vanguard teamed up with Teachers Insurance And Annuity Association (TIAA) whose customers are often positioned to annuitize their retirement funds. A standard practice for a retiring teacher with a school 403(b) run by TIAA is to meet with their TIAA advisor, who then presents a plan to take their savings and convert some or all of it into lifetime income in the form of a guaranteed annuity.

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Some resources on SECURE Act 2.0 changes to annuities and RMDs that came from my investment advisor friend:

Aggregating Individual Retirement Annuities and Accounts for RMDs

SECURE 2.0 brings more changes to required minimum distribution rules

Annuitizing a Traditional IRA

Worried about taxes on huge RMDs? Consider this alternative to Roth conversions.

I have previously written about how I’m a pretty big fan of Trump Accounts.1 The big news last week is that Michael Dell announced a $6.25 billion plan to fund 25 million Trump Accounts for kids to receive $250 each.

Some details: Eligible kids age 10-and-under need to have been born before January 1, 2025. This is specifically complementary to the Trump Accounts written into law with the OBBBA this past summer: Official Trump Accounts will fund $1,000 per child born between January 1 2025 and December 31 2028.

There is a kind of means-testing component to the Dell philanthropic gift: Kids are made eligible by living in a zip code with median household income below $150 thousand.

In Texas (where I live) that covers 80% of zip codes. But means-testing will lead to “unfair” results in both directions, and undoubtedly will complicate this gift.2

Philanthropically, this breaks new ground. We’ve never seen anything like this.

The Wall Street Journal celebrated this with a “Billionaire Cash For Kids and Capitalism” headline on their Op-Ed page. They applauded that kids will get a lesson in compound interest and private markets rather than pure redistribution. Indeed if these work as designed, a 1 year-old gifted $250 could see that account worth $1,264 in 17 years, a 5X return over that period.3

Of course another big idea with these accounts is that family members and also employers could give up to $5000 per year, thus spreading the joys and gains of stock ownership throughout more households.

ChatGPT tells me there are an estimated 43 million kids between the ages of 0 and 10 in the United States. Dell has estimated in his announcement that 25 million kids could benefit from his philanthropy.

This kind of billionaire philanthropy in support of a signature Trump plan from the OBBBA is pleasing to the MAGA set, but it could also be seen as a left-coded thing. It’s all about framing.

New Jersey Senator Cory Booker has advocated legislation for $1,000 “baby bonds” since 2017. His advocacy stands alone as a signature idea, but also in some national conversations around slavery reparations, the idea of giving young black children financial support in this form has also blended with Booker’s advocacy.

On the other side of the aisle, Texas Senator Ted Cruz has pushed for a similar idea. In Cruz’s telling, “this [Trump Account] provision will create an entire new generation of capitalists.” This is because, Cruz, said “every child in America will benefit from the miracle of compound growth.”

Both Senators publicly, and jointly, endorsed the Trump Accounts idea last summer, with Cruz credited for pushing the version that became law with the OBBBA.

On the heels of the Dell announcement, a further strong endorsement from the Right arrived: Texas Lieutenant Governor Dan Patrick announced he would support creating $1,000 accounts for Texas babies during the 2027 legislative session.

It is interesting to see how popular free money is, on the Left and Right.

When a billionaire entrepreneur like Michael Dell offers it, and funnels it through a MAGA-coded account, then it’s all good.

As a fan of Trump Accounts myself I think it is good.

And yet I keep thinking about this gift, its unprecedentedness, and I keep wondering how it will go wrong. Here are nine more thoughts on the gift:

1. In the fever dreams of the Eat-the-Rich Left, likely the idea of taking many billions of dollars from a rich person like Michael Dell and then distributing them voluntarily to 25 million young people would be considered a dream too far. Free money for the masses? And then restricting it according to socialist ideas of means-testing the gift according to an income limit by zip code so that it targets lower-income families? Talk about Diversity, Equity and Inclusion! That could never happen! Not DEI in Trump’s America!

2. How, literally and logistically, does Michael Dell’s foundation identify 25 million unique Americans under age 10 to create an account for them? I know that eligible recipients have to have a Social Security number, so that’s one way. But also, putting money into an account for a child accessible starting at age 18 is pretty complicated. You need their physical address for mailing statements. You need a valid email of the parents, or one parent, (since under-10 year-olds won’t necessarily have an email yet.) It feels like this gift may need to be $7.25 billion not $6.25 billion, to account for the billion dollars it will take to administer everything. Dell’s been a successful tech entrepreneur almost as long as I’ve been alive, but still this seems like a daunting task.

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3. My strong guess is that parents have to “opt-in” to receive funds for a child’s Dell contribution to a Trump Account, because otherwise Dell would just be putting money into a child’s account, linked to a Social Security number, that never gets claimed. Because of the opt-in though, this means that the least organized parents will not do the basic thing to a) register for a Social Security number in time b) figure out whatever bureaucratic hoops have to be cleared to get $250 funded into an account c) track the account over time. This will automatically skew the recipients to the more competent families.

4. How do you keep the parent from taking the money out themselves? The prospective 2 year-old recipient who doesn’t even know what money is will not be aware for a long time of their Dell-funded Trump Account. Only the parent can manage that, with an address, an email account, the password, and the know-how to track financial accounts. Out of an eligible pool of 25 million kids and parents, do you guess there are a million parents who will figure out a way to scam that money from their child? Three million? Addiction, crime, and overwhelming family-need could easily be a problem in 10 percent of families? More? I’m not saying this a reason to not try this experiment, only that there will be hundreds of millions of dollars stolen from kids by their parents, unless they’ve got a really really solid plan here.

5. How will the money be invested? I understand there are good restrictions in place - US stocks only, low-cost index-oriented funds - but within that universe are hundreds, maybe thousands of options. In my humble experience and opinion, few adults have any idea how to do this. This is a solvable problem, in that the Dell Foundation could just auto-pilot every account into the same exact starting fund, but they definitely need a plan. If the money just sits in cash it will have been a huge missed opportunity for the kids.

6. A Bloomberg opinion columnist has recently argued that every child born in the United States should be gifted $10,000 into a locked-up investment account which, given enough time to retirement, would blossom into a very large nest egg years later. The idea is this would provide a better solution than Social Security. I basically agree.

   Left to grow for 67 years, $10,000 becomes $5.9 million. Yes, the purchasing power of $5.9 million will be lower in 67 years but I can say with 100% certainty that this will be a better return than what is provided by Social Security, while at the same time not creating an unfunded liability that puts both the federal government and retirees at risk.

7. But here’s another dark side, in addition to the logistical doubts listed above: If it becomes politically appealing that private billionaire philanthropists are the ones responsible for young people in the United States, and that seems more appealing in addressing intractable childhood problems like food insecurity via free/reduced lunch or food stamps paid by taxpayers, does that justify massive federal cuts to the childhood safety net? I’m obviously making a few logical leaps forward in the thought process, but it’s where the mind goes.

8. Clearly the fever-dream on the far Right is that we could dismantle large federal bureaucracies. Let the wildly successful heroes of the entrepreneurial class fund - at their own option and at the own chosen scale - the needs of the least successful. That would be a return to a kind of 18th and 19th Century aristocratic model. The noblesse oblige of the top, addressing the charitable needs at the bottom. With very little intervention by clunky state bureaucracies through annoying taxation. My reading of Dickens makes me think that wasn’t a better world back then.

   

9. The Dells are currently estimated to be worth $148 billion. So this represents something like 5% of their wealth. In no way does this extraordinary gift threaten their position at the uppermost tippety-top position of global wealth. If we imagine the mood of the country that will elect Alexandria Ocasio-Cortez as President in 2028, a wealth-tax could be a bigger bite than 5% of the top class’ wealth. It is certainly cheaper for the likes of Michael and Susan Dell to volunteer 5% of their extraordinary net worth than to have it taken forcefully by taxation, or worse.

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Part 1 - Introduction to Reviews of 3 Retirement Income Books

Part 2 - Pensionize Your Next Egg by Moshe Milevsky

Part 3 - Retirement Portfolios: Theory, Construction, and Management by Michael J. Zwecher

Part 4 - Redefining Retirement: A Safe and Secure Way Down the Mountain by Wade Pfau

My point is reading and reviewing the books was to force myself to engage with a set of ideas I was pretty sure I disagreed with from the beginning.

(I put a paywall on the last few points below but you could watch the 6-min video linked here and hear them all. Or you could access the subscriber-only content in another logical way…)

But in that disagreement, what could I learn to change my mind or to reinforce my priors? Some summary thoughts:

1. I like the framework used by Wade Pfau that retirees (and their investment advisors) can choose a “safety first” approach or a “probability-based” approach. I am still “probability-based” in my outlook but the disadvantage I should acknowledge is that there still some chance (5%? 10%?) that the odds will not be in my favor. I could live too long in terrible markets and run out of money.

   

2. I should give stronger consideration to the idea (in my own life, and in giving advice) to the idea that covering known lifestyle costs throughout late life is a pretty big deal. It’s a worthwhile problem to solve.

3. Many people - for perfectly reasonable risk tolerance and personality reasons - will accept a lower average standard of living in order to eliminate the even-remote possibility of “failure.”1

4. The classic Bengen Rule of 4% withdrawal rate for 30 years - we should remember - was invented as a “no fail” rule. So even though it is too conservative, it was not built for 98% success. It was built for 100% success. As such, it introduces the big problem (addressed by the retirement income crowd) of being way too conservative with investment portfolio draws. Thus lowering funds available to cover lifestyle costs and also leaving “too much” money for legacy rather than lifestyle comfort, for most people.

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5. One potential reason some people are blind or indifferent to the value of “income in retirement” is that it matters a lot more to middle income and middle wealth people. The outliers above and below see much-diminished benefits from creating a pension or carefully covering lifestyle costs. They either have plenty no matter what, or not enough no matter what.

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I’m sending out this video version to everyone, with a text version to follow shortly.

This post #4 continues the series already begun of reviewing retirement income books

Post #1 - Introducing the Safety v. Risk in Retirement Series

Post #2 - Pensionize Your Nest Egg by Moshe Milevsky

Post #3 - Retirement Portfolios by Michael Zwecher

Of the three authors reviewed in this Safety v. Risk in Retirement series, Wade Pfau is the most academic as well as the best known. His book Redefining Retirement: A Safe and Secure Way Down The Mountain seems the most targeted to the financial planner and practitioner, rather than the retail prospective retiree.

This is the strongest of the three books, but a large margin. It is also the least “accessible” to the average retail investor. It is meant as a resource for professional practitioners.

Pfau clearly sets up the binary distinction between what he calls the “probability-based” approach to retirement and the “safety-f…

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