If there is no such thing as opportunity cost, then there's no such thing as opportunity. Opportunity cost is essentially opportunity in reverse; it's the negative impact of that missed opportunity. In our exploration of this, we've used Truth Concepts Calculator to illustrate just that.
Opportunity Cost Illustrated
When you lose a dollar, you don't just lose that dollar, but you lose what that dollar can earn for you for the rest of your life.
In our detailed examination using the calculator, we made some assumptions:
- 9% net of fees and taxes during the accumulation phase.
- A more conservative 5% towards the later stages.
Calculations & Results
We discussed a hypothetical scenario using Truth Concepts Calculator, considering factors like income, taxes, and lifestyle. Here's a look at some significant figures derived from the analysis:
- From 35 years old to age 60, the potential earnings are $5.2 million with a simple accumulation without factoring in cost of living increases. With a 4% cost of living increase, this could rise to $11 million.
- Opportunity cost calculated alongside salary yielded almost $25 million potential when a 5% net earnings rate was assumed.
- 30% tax impact showed a steep decline from a potential $24.7 million to $17.3 million—a difference of $7.4 million due to opportunity cost.
Income as An Asset
The analysis emphasizes that our ability to earn an income is, in fact, our greatest asset. Often, individuals don't realize how much money truly flows through their hands during their working life, making strategic planning even more crucial.
Why Look at Opportunity Cost?
- Understanding the value of your lifetime income.
- Making educated investment decisions that consider more than immediate costs.
Potential Impact of Risk and Return
Many believe taking on greater risk will lead to greater reward. This common misconception ignores the likelihood of loss when chasing higher returns.
Watch the Full Tutorial:
Learn more about handling opportunity costs and maximizing your potential by watching our detailed tutorial video.
Full Transcript
| If there is no such thing as opportunity cost, then there's no such thing as opportunity. Because all opportunity cost is, is opportunity in reverse, right? It's just the negative impact of that. Those are almost 1.8 million. Yes. And it takes a tool in place to make that happen. Otherwise, we're just forced into a discipline mode. When you lose a dollar, you don't just lose that dollar, but you lose what that dollar can now earn for you the rest of your life. All of a sudden, that boxed it down to age 97, which is still pretty substantial. But what this does is, this seems we could do a 9% net of fees and taxes during the accumulation phase. And then we went to a more conservative 5%. All of a sudden, rather than the money lasting forever, that differs between 9 and 5. Knoxus Down Day is 97. Todd, welcome back to part 2. In part 2, we have a full series going through calculators. And the people have spoken. They want to see the numbers. And so we have truth concepts pulled up on the screen. And we're just going to be rolling up our sleeves and diving in. And I'm very, very grateful and excited to go through this with you. Great. You know, this is one of those things where the numbers really help. Once we understand kind of the concept a little bit. And so I think this will actually help drive both. And going back, watching it, seeing how the numbers, it really is pretty amazing the way this plays out. Because people really don't have any idea. There's just not enough information out there about how it really works. People talk about mostly just today, right, between today and next year. But what happens over a lifespan? What happens over a longer period of time? And what does that look like? And so I think taking a look out there in the future. And obviously, there's a lot of things they're going to change in the financial environment and other places. And so this is kind of like, I heard it referred to as trying to hit the moon with a BB gun, right? You've got air, you've got all these other things that are going to get in the way and knock that off course. But at the same time, if we can look out there in the future and see what that looks like and keep adjust in our trajectory to hit that, that's what we need to do over time. And we have to start in the direction of saying, hey, this is today, let's see what we can do to have our best possibility of getting out there to that shot based on what we know today, right? Well, what I love about this calculator is this is the first calculator that I learned on truth concepts. And it set the stage helping me understand opportunity cost, helping me understand full process. And what I love about this is it has nothing to do with products. So if you're here watching, please put your products hat aside and just listen and lean in. And then we can use the principles that we learn through this to then ask the question, should we do this strategy or this strategy or this product or this product. But it's very much big picture nor star. And I think a lot of the calculators that we're going to go into after if you understand how Max potential work, you'll understand some of the principles of how other calculators were put together. And it's very much based off of this. So I almost see this as like very foundational to truth concepts. Absolutely. Yep, it starts like you said, introduce the idea of time value of money. It's a critical piece when we're talking about more than just today. And that's a piece that quite honestly, a lot of financial advisors leave out. It's like you can't go over time and just accumulate numbers, right? You have to apply the time value of money over when we're talking about more than just, you know, today. So that's what we'll do. We'll start to introduce it. Like you said, this will be an idea of how that gets formed. And that can just, that information will play into the other calculators we go on in time, right? I'm amazing. One last plug is if you are an advisor, someone that wants to help clients understand money, you can go to the other side. And this is kind of interesting between now and age 70. I mean, that's 6. Sorry, I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. And this is kind of interesting between now and age 70. And age 60 is about 6. Sorry, it's 5.2 million dollars over that time frame. And you know, that's a simple calculation, right? We could just take 35 times 150,000. We're going to get there. But what happens is people forget how important our ability to work is and how much income that is. And so really for most people, I mean, this is their greatest and best asset. And yet they just take it for granted. And just to step back occasionally and looking at that, and I'm saying, wow, my ability to earn an income is quite substantial. That's a lot of money that's going to be passing through my hands. And yet this is really on the small side. And I say that because this doesn't include any cost of living raises over this time. And if we look at a cost of living increase of 4%, so I'm not talking about a major change in position with the work, which we expect to happen over time. I'm just saying, staying in exactly the same job. But just get an increase of 4% cost of living in that same job over this time frame. And now we're talking about $11 million. That's going to pass through our hands. So that is by far our greatest and best asset, right? Our ability to earn an income over time. And it's huge. And this right now, what I'm going to do is I'm going to apply an opportunity cost or savings value for these dollars. And we could save and invest every dollar because we had no expenses. Yeah, that's a little ridiculous. But it's a starting place just to see what that impact is, right? And so if we apply a 5% net earnings rate, so that's after taxes and fees, and we look out there over time, we're talking about a maximum potential of almost $25 million, right? $24.7 million. And this is for somebody making $150,000 a year. Okay. And again, we don't have any costs, any taxes or anything else in here of what would happen across this time frame. And so we're going to start to add that and just see how those things impact this maximum potential of $24.7 million. Right? Yeah. I think the big takeaway here is when we say that you are your greatest asset, your ability to earn income, provide value, and continue to earn greater and greater income because you're providing more value to the marketplace, is incredible. And I know that we're not showing any taxes, we're not showing anything right now, but the idea that someone at 35 starting to make $150,000 and you increase it a little bit each year, the fact that their max potential in this scenario is almost a quarter of a hundred, like $25 million, like that's pretty impressive. And I think that people take a step back and say, wow, like that's incredible. Yep. Yep, it is. And because of that opportunity going up, any cost that we have in here, we're going to see the opposite happen. And that's what we kind of want to take a look at here. And so, you know, if we start with, and we just look at what would the impact of taxes at 30% be? And so we're just looking at 30% where income being taxed. Yeah, not all that's income tax, but we've got state tax, we've got faika, we've got a lot of pieces in there. And when we look at this based on 30%, what we see is cumulatively in tax, that would be $3.3 million. Right? That was actually paid in taxes, if we paid 30% of this each year in tax. However, we went from $24.7 million down to $17.3 million for a difference of $7.5 million. Right? So $3.3 million paid out, actually took $7.4 million away from the tax. And this is what happens when we take the dollars out over time. Because we stop earning money on those dollars for the rest of the time frame. So the impact is way more than just the cumulative dollars paid out. Now, if we could wait until the end and pay the taxes, that'd be great, wouldn't it? Because then it would only be $3.3 million. But because we can't do that, and those dollars come out along the way, the impact to our future is almost twice that, right? $7.4 million. So actually more than twice that. And so that's the impact, like you said earlier, of opportunity cost across that time frame. And so it's interesting because if there is no such thing as opportunity cost, then there's no such thing as opportunity. Because all opportunity cost is, is opportunity in reverse, right? It's just the negative impact of that. And so here we can clearly see what happens with opportunity across this time frame. We'll take those dollars out. Hey, it's Caleb Williams here. I'm just interrupting this video quickly to invite you to check out our Ann Dessert Vault. You may have been there. We've actually re-revamping it. And if you are somebody that wants to learn more about is life insurance right fit for me? Does this end asset make sense? Like, does this actually help me be more efficient? We've put together a 10-minute documentary style video. And I can test a really, really good job giving the history why the end asset is that different setups and designs that we use. And then we have an end asset vault that gives like case studies, calculators, handbooks, and so much more. We are here to serve you whether it's a conversation, whether it's education, or the video. So make sure to go check out anddessert.com slash vault. Learn more. All right, so we see that. And I'm going to skip over the debt payments. Some people have them, some people don't. And I'm going to use lifestyle, both as, kind of like fixed lifestyle. So we have expenses in our lifestyle that I like to break down between our fixed lifestyle and our discretionary lifestyle. And so our fixed lifestyle, you know, falls into like our house payment, our electric bill, those things are food, those things that we have to do, right? But a huge portion of people's lifestyle is discretionary, right? How often we buy a car going out to the movies, going out to eat, going out to eat, going on vacation, those kind of things. And so I'm going to separate those two out here. I'm going to put 25% on lifestyle or fixed lifestyle. And then I want to use, and we can see here actually when we did that, what happened? Again, the same thing that had with taxes, 2.7 million dollars paid out in lifestyle with an impact of 6.1 million dollars on our future. Yep. It's, it's, it's, it's powerful. It's powerful when you start seeing that. And that's that for me was very eye opening when I started to see that what, when you lose a dollar, you don't just lose that dollar, but you lose what that dollar can now earn for you the rest of your life. And when you start looking at it from max potential, you're now seeing it lost versus a lot of most people don't even have that knowledge. And so it doesn't hurt them. Many people are like, you know, you Directory doesn't, you know, I don't know. I don't know. I mean, it lost versus a lot of most people don't even have that knowledge. And so it doesn't hurt them mentally, because they didn't even know. They didn't have any place. They didn't have an anchor point to view that. Right. And that's the problem with looking at just today in that. Yeah, right. We have to look out over time to get some perspective on what's really happening to us. another $3.3 million paid out, which impacts us by $7.4 million. And so what we've done is we've turned $24.7 million into $3.7 million. Now that's if we're, you know, by today's standards that we're saving 15% of our income. And that's pretty substantial for a lot of people, right? There's not a lot of people saving in that range. But if we did that, then that's kind of what this looks like. So really on the optimistic side, you know, that we're dedicated savers. And we can get to this $3.7 million out there in the future. But while $3.7 million, I mean, that again is something we need to put in perspective. You know, here we are making $150,000 a year, $3.7. That's, you know, that's over 20 times our income. That's, you know, that ought to do us pretty well. But what we have to remember is our expenses are also going up across that time. So it takes a lot more to live out there at the, at that point in time. And if we put our curse over the $3.7 million, we're going to see that what it tells us is that would last about 12 years. Right? And we could even look at that. We can look and see what it looks like in that pay down time frame. And so we'll run a little macro here and take those in dollars and see what happens when we pull that off of there to live on. Because it seems how, how in the world could $3.7 million? I'll improvied 12 years of income. So here's what we see. If we had that $3.7 million, we pulled out again, just our expenses, just our livestock. Because we're no longer going to have to pay income taxes in theory, right? Because we're no longer working. We're not going to be retired. So we just have to cover our, our fixed lifestyle and discretionary lifestyle expenses. And when we do that, would that continue to increase? Look at this. We're out of money. Way shorter than most people would have thought. And so what this does is, if somebody does see this, the knee-jerk reaction is, well clearly we're going to have to get a higher rate of return. We're going to have to take on some risk. And somewhere in the vernacular, across time, this idea of when you take on risk, you automatically have more reward. I don't know how that got into the space. Because what it's literally saying is, we have to take on a likelihood of loss in order to have more money. And that just really doesn't make much sense, right? But that's what most people think or most people are told to think. And so this 5%, it's not going to cut it. What if we could do 9% instead? So we're assuming that you can make that every year. Right. Net. This is net of fees and taxes. And so what people don't understand when they throw that off, and it's very deceiving. And so a lot of people get fooled into this because what they say is, we say, well, you know, the S&P for the last 30 years is done in excess of 12%. So 9 ought to be possible. But what people don't realize is there's a lot of taxes and fees that go into that. So even if you could do that 12% every year, after you add the impact of the security of bonds and the fees and taxes in there, it would be difficult to end up with 9% net. But let's just say that we could. Okay. Just for a minute, we'll play this game and say we could do it in that nine after all those fees and taxes. Now that when we look out there in the future, what we see is, wow, this is going to run basically from now on. And so let's go actually draw a picture of that just real quick. And this is kind of interesting. This is actually something I've just kind of discovered the impact of it. I knew it was there, but just in the last little while is this assumes that we did the 9% now between now and retirement. And that we could continue that again, no down years during the retirement phase. And what do people do? Let's say that they did that during the accumulation, which is asking a lot. I know, but let's say they could. They're going to get a lot more conservative once we start that distribution phase, right? And so even if they could do this during that time, what if we knock this down to 5% during the distribution phase? Got a little bit more conservative and realistic during that time frame. We got lucky over the 35 years when we were able to do the nine. And then just go to the last full year of their top. All of a sudden that knocks it down to age 97, which is still pretty substantial. But what this does is this assumes we could do a 9% net of fees in taxes during the accumulation phase. And then we went to a more conservative 5%. All of a sudden rather than the money lasting forever, that difference between 9 and 5 knocks us down to age 97, which for a lot of people would say, well, you know, 97 is good. It is interesting. I saw an article just recently that most people's goal now is to live in excess of 100. And so we're not quite there and we've taken some risk along the way to get it quite a bit. And who knows where we might be to make this happen. And so what I'd like to do is look at something a little more realistic. What if we could hit those same numbers of age 97, but do it without, again, what it would take risk wise to get there? Wouldn't that make more sense if we could? Yeah, it would make a lot more sense. And I think it's like we hear things sometimes that 12% is like easy to get. But I mean, there's studies out there that say the average investor doesn't make more than 5. And so we have to sit with that and say like, hey, we got to be, I would rather be conservative when looking at this, then assume the best. And then know that there's not a way that we can actually reach that. So I appreciate you walking through that, but saying like, hey, what what needs to be done if we're not going to assume a number like 9%. Right. What if we got more efficient with our dollars because here's what's happening. You know, it's the savings part that's really tough for people, right? That's the part we want to know. We don't want to save more. That means we have to do without right under the typical scenario. But let's just look at this. Let's take this nine back down to five. And let's start looking into making this a little more efficient. Okay. So if we did that, and what if we looked at the taxes that were currently being paid. And what if we could see where maybe we could trim some of your tax bill back by being more efficient, more effective in the way we're handling our assets. And what if we could trim 10% off our tax bill. And that doesn't mean going from 30 to 20%. That would be, you know, a 30% reduction. I'm just talking about taking 10% off of here. And so basically 10% of 30 is three, which would knock us down to 27%. What does that do? That added over a million dollars that we would have here. So that made a big difference. And then what if, and this is really the critical piece, what if we had a way to slow the rate of increase? Not get rid of our discretionary expenses, not back up on them drastically, but just slow the rate of increase. And so how do we do that? And this is an important piece, I think, to understand is because the problem with saving in America is the method that people have in place to handle the finances. Right. So for the most part, what people do is their check-in account is the place that accumulates their income. Right. So the check they get for working goes into their check-in account. Their expenses come out of the check-in account. Everything's in that one account. And the result is that automatically, subconsciously, people are spending everything that's in that check-in account. If there's money left over, it gets spent after the expenses, right? And so because of, there's nothing in place for the discipline, and I like to think about it in these terms. It's kind of like with weight loss, right? There's a million weight loss books out of there. What do they ultimately say? You have to eat less, eat less, eat less, eat less, eat more things, and work out, right? That's what they all are, right? Is there anybody in the country that doesn't know what it takes to get into better shape? I'd say no. Everybody knows what it is. Why are there a million books and still nobody does it? It's because there's an element of discipline in there that that is really the piece, right? It's not that we don't know how to do it. It's that we don't do it or won't do it. And the same thing happens with our savings, right? So what happens is because of the process that we have in place, and that is our income goes into our checking account, which goes out to our expenses. There's nothing in between there. There's no tool in between there to help us keep from doing what is human nature. Because we feel good. We see an Amazon ad. We see whatever it is, and we just press the buy button, right? What if there was something out there that would allow that to be just as exciting as the thrill we get from buying stuff, but on the savings side? That'd be really cool, wouldn't it? There happens to be something out there called currents. And I would encourage you ask your advisor if they're familiar with currents to get you connected there, because it's something that goes in between that checking account in our expenses and our income that allows it to happen automatically. So the same way we're subconsciously spending money, we could actually subconsciously be saving money. And I'm going to demonstrate what kind of impact that would have, which is pretty surprising for a lot of people. So, you know, if we look at our lifestyle expenses here, so we have our fixed lifestyle, we can't really do much about that, right? Our electric bill goes up, we can't say, oh, we're not going to pay that additional amount, right? It's something that's just going to happen. But on our discretionary stuff, what if we slowed the rate of increase? So, on inflation is pushing everything at 4%. What if we still increase that discretionary side, but we chose to do it more at like a 2% rate instead of the full four in this case? What is the impact of that? Wow. Yeah. Right? That's over what is that? Over almost 1.8 million? Yes. Wow. Just by slowing the rate of increase, not back and up on it, not reducing it today, but slowing the rate of increase. And it takes a tool in place to make that happen. Otherwise, we're just forced into a discipline mode of just like the weight loss. It's probably not going to happen. It could. There could be some very disciplined people out there, but it's difficult and it's painful, whereas this is not. And so now what's the impact? If we look up there at our $6.3 million, now how many years will that run? With earning a reasonable 5%, and let's just look at it on the macro here to see what happens over time when we get to that distribution phase. And see what kind of impact it might have. You'll still, numbers are correct. You'll still be short of 97. No. Actually, this is what's really cool about this. Look at this. It actually ran out to 103 instead of only 97. So not only. So there's two pieces to the, well, there's a bunch of pieces. But let me see if I can get them all across. Yes. So here's what happens in the previous example. It took 9% during the accumulation phase just to get us to 97. Now we're earning a more reasonable attainable rate of 5% both through the accumulation and the distribution. But you look at it and say, well, wait a second. How could we get out even further and have more likelihood that it's happening, but we're not taking on all that risk. And the reason is because we have been automatically tuned in to only increasing our income by 2% or expenses by 2% a year instead of the full four. It takes less money because we're in that mode when we get to the distribution phase. So it works on both ends and the impact is huge. This is actually possible where the other one. Very unlikely. Yeah. And I love, I love that number one. This is very, this feels very attainable. It feels like, okay, we're dropping your, your grow SNET tax by 3%. So overall 10%. But it's like, okay, it went from 30% to 27. And then in this case, we didn't even touch your consumption. We just slowed the grow of that by half essentially. And that, that difference changes everything and it's pretty remarkable when you start breaking that down. It does. What's interesting about it is if there's not something in place to, you know, to help you do that. Even if you said, hey, this is what we're going to do. You'll end up spending it because it fits, if it sits in the same checking account. Now, you could manually go around it, but it would be, it would be difficult to make that happen. And here it happens painlessly. And you know, it's something that's actually attainable, right? Yeah, it's powerful. That's really, that's really, that's really powerful. I was, I was going to say, my devil's advocate was like, who, who do you know that's saving 15% off right off the bat? You gave people the benefit of the doubt by assuming right in the beginning of your saving 15, but it only gets more dramatic. If you take someone who maybe isn't saving or is only saving like 3% or 4% and you're able to actually help them maybe cut things out. But you pretty much said we're going to pay a little less in taxes. We're not going to touch your consumption. We're just going to slow the growth. And now we're past 100 without taking on more risk and, and, and using a 5% net growth rate, which I think even the conservative people out there would say I'm comfortable with that number. And so, you know, that's amazing. Well, and the thing about it is, like you said, starting from somebody who's not saving at all, it's, it's hard to get excited about savings because people feel like, you know, $100 here or a couple hundred dollars there is not going to make any big, any, any difference in the big picture. They can't see it year to year because it's a small amount that grows. But what happens here, if this becomes automatic, people are amazed. And that's what the results have shown. People are amazed. They all of a sudden get the same high, if you want to call it that, of saving as they did on spending. Because all of a sudden it drives them towards that. So those people that aren't starting out at 15% and most aren't, this is something that might get you to a place where you're doing that and more. That's awesome. I love this and this is what's cool about the way that this is developed is this is a more in-depth version of what I was used to when I first started Truth Concepts with Max Potential. And so I love the concepts the same, but you're able to go more in-depth and have more scenarios to show people. If we had to summarize this whole concept, how would you kind of land the plane here? So to me, there's a couple of things that we need to understand that people need to understand. And that is over time we need to really see how big opportunity, and opportunity cost, basically the same thing, one is just plus and one is a minus, over time. And that chasing interest rates is not going to be the cure. That we can achieve that same thing and actually achieve it, right? Because the 9% from now over the next 35 years, I can't say it won't happen, but it never has. Right? So chasing interest rates isn't the answer. So how do we get there and be realistic and be able to sleep at night and not be stressed out over what might happen or portfolio gets cut in half or whatever else. And so let's use more reasonable rates and figure out a strategy rather than a product that gets us there. Kim, can we go back to the max potential idea? The other thing that I think is important, I know I'm going off the cuff here, is if you just waited 10 years, that the power of compounding is huge. And like that's another thing is there's people that are watching this that are younger than 35. And then there's people that are might be older and it's the concepts, the concept, but I think time has something to do with it. And then the other thing is to really see the impact of losing money early on and the compound effect of that. I think a big thing for me was when you start looking at, you know, going back to taxes, a cost of, you know, 2.8, I believe that is. But that really ate up over 6.6. That's another thing that kind of is imprinted in my brain of really understanding the that everything has a cost. I know we've said that a couple times, but that was like a key takeaway. And that's where good strategy and understanding comes in. I don't know if there's any other takeaways that you have before we move on to the next calculator, but those are, those are just some things that continue to come up for me when I look at this. Yeah, it's amazing. Even like you say, being in the financial industry for a while, those a haz come up. You start to see how the big picture works over time. And it's pretty amazing. And that's why, you know, getting the word out there to people about how that really works over time when they accurate math is put in place is, you know, it gives people a shot at making it out there in the future. And because, you know, most people, they don't have the ability to look at this all the time, right? They need an advisor in place to help them with it. It's amazing. Again, if you are interested in learning more about truth concepts, we'll have a link down below. And if you're not subscribed to this YouTube channel, please take a second out of your day and subscribe. We would love to hear from you. We're in a series. We're going to go through different calculators. And so if this is something that you like, make sure to subscribe, hit the notification bell. And the more people that like and comment, it just tells YouTube that we're relevant. And they show these videos to more people. So we'll see you on the next video. What are our long-term marathon dollars doing? And that's what's important about what's happening here. What have been some of the a-haws of people that maybe have been in the industry have sold, you know, life insurance. But then like, how does this enhance what they currently do, this calculator does such a good job? It really does elevate our view of where life insurance should be. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. And so, we're going to go through this. |
