Let’s use a Cash Flow Calculator from www.truthconcepts.com to tell the whole truth about what happens to an account when it gets taxed. We’ll put in $20 in 1913, the year the tax system started. We’ll show the account earning 20% per year.

We can see below that the account has $798,784,476 (that’s $798 million) in it.

 

 

This assumes no taxes or management fees were taken out during this time. 

If we adjusted the account for inflation, assuming a 4% annual rate, it would have $18,502,442  ($18 million) in it assuming no taxes or management fees.

 

 

It’s interesting to note that this income tax was intended to be temporary when it started, was only at 8%, and affected only the upper income earners.  The person who owned this account was in a 50% average tax bracket over those 96 years, using the table below as a guide.

 

 

So, applying the 50% tax bracket to the $798 million account would cut it in half, right?  NO, it brings it down to $188,247.  Notice below in the government only gets $188,227.

 

 

How is that?  It’s due to the fact that taxes are predatory or confiscating in nature.  Every time taxes are taken out of the account, those tax dollars can no longer earn the 20% rate of return the account is earning.  This is also known as opportunity cost since the tax dollars lose the opportunity to earn interest.  Let’s see what dropping the tax to 40% would do.  Watch both the End of Year Account Value on the far right and the Tax  Payment in red next to it to see how to increase both the owner of the account’s estate and the government’s take as well.

 

 

Lowering taxes to 40% shows the owner at $1,061,598 and the government at $707,719.

 

 

Lowering taxes to 30% shows the owner at $5,806,250 and the government at $2,448,384.

 

 

Lowering taxes to 20% shows the owner at $30,831,664 and the government at $7,707,911.

 

 

Lowering taxes to 10% shows the owner at $159,111,913 and the government at $17,679,099.

 

 

Lowering taxes to 5% shows the owner at $357,715,937 and the government at $18,827,154  If we really want the government to get the most, we’ll try 6.65%.

 

 

So we could surmise that if one is talking about 20% rates of return, a 6.65% tax bracket is the most efficient.  According to our studies, if we are talking about a 9% rate of return, a 15% rate of taxation is the most efficient.

 

So now that you know the whole truth about the matter, what do you do with this information? Focus on accounts that do not get eroded by taxes and/or implement strategies that mitigate the taxation on these types of accounts such as taking dividends, interest and capital gains in cash instead of re-investing them.

How to Calculate the Lost Opportunity Cost of the Typical way to Educate Kids.

A college education that cost $30,000 in today’s dollars with a  6% inflation for a 4 and a 6 year old will remove $2,187,493 from the parents wealth by the time they are 68 years old. How? The actual cost of the school plus the opportunity cost of the money removed from the parents’ estate assuming it was earning 5%.  We’ll use a Cash Flow Calculator from www.truthconcepts.com to tell you the whole truth about the cost of college. 

First we see in cash flow column 1 (fourth from the left) the result of $30,000 inflated out at 6% for 12 years since the child is 6 years old.  Notice we’ve assumed a 5 year college attendance time frame.  Then in column 2, that same $30,000 inflated out at 6% for 14 years since the second child is 4 years old.  You get these by putting in the $30,000 at the top, copying the 5 years you want saved, deleting the whole column, then pasting the 5 years back in.

  
 

The $824,443 shown is the compound cost of 10 tuitions that will start 12 and 14 years from today. 

So, if we wanted to know how much of our current assets would be needed to fund this education, we use the Present Value Calculator which shows we need $342,619 today, assuming we could earn 5% net on the money.

 
 

To confirm that number, copy (don’t type) the $342,619 with all its decimal points from above and paste it into the Present Value box on the top left in the Cash Flow calculator .

Then highlight the 5 years of Annual Cash Flow, right click, Select “Change Sign” and this will confirm your Present Value number is correct because it depletes the account to zero over the 18 years as shown below.  Make sure to do this for both columns.

 

Or we could use the Payment Calculator to figure out that we would have to put away $27,914.08 a year for the next 18 years to accomplish the same thing, again assuming a 5% net rate of return.

This too can be proven so you know you’ve done the calculations correctly by copying the $27,914.08 and all its decimal places from above and pasting it into a third cash flow column as shown below.  Make sure you remove the Present Value number as well.

Now comes the really hard part (as if putting away $28,000 a year isn’t hard enough).  Let’s say the parents were 30 years old at the time you looked at this.  That means they are 48 when the second child finishes her 5 years of schooling.  If they had not paid for college, the $824,554 could have grown to $2,187,493 by the time they were 68 years old.

That amount of money would kick off a pay down (spending principle and interest over the next 20 years) of $167,171 per year (only partially taxable due to pay down or spend down strategy) from age 68 to age 88.

What could you do differently now that you know the whole truth about your money?  You could find a way to get your dollars to do lots of jobs instead of just the job of educating your children.  Then the dollars sent to the school don’t create such huge opportunity cost that pulls against your own wealth.  See the article entitled “How to Get One Dollar to do Lots of Jobs” for examples and ideas.

Would you buy a $50,000 car yet only insure it for $30,000 because you only NEEDED a
$30,000 car? NO! and yet the life insurance industry does this all the time with people by completing a “needs analysis” to determine how much life insurance you “need”.  YOU don’t “need” any, but you family may.  However, trying to figure out how much THEY need is an exercise in futility.  Oh, and the thought that single people don’t NEED life insurance? It’s as correct as saying they aren’t worth anything.

So, how does one figure out their own Human Life Value?  Life Insurance Companies have rules of thumb they use, such as 15-30 times income or 1 x net worth.  Typically for someone between the ages of 20 and 30, Human Life Value is 30 X income.  Age 30-40 HLV is 20 or 25 X income.  Age 40-50 is 15 X income.  Age 50-60 and beyond is 10 X income.  Any age can use the 1 X net worth rule of thumb and this can be up to 2 X depending on business owned and asset base in existence.

We can use the www.truthconcepts.com software to figure it out more specifically.  There are 2 ways.  The quick way is to use the Maximum Potential calculator, the slow but potentially more accurate way is to use the Cash Flow calculator, the Present Value calculator and then the Cash Flow calculator again.

Looking at the Maximum Potential calculator, put in the number of years until 65 (that’s a retirement fallacy, addressed in another article) the income and NO other data.  So in the case below, we have a 30 year old with 35 years until 65 and currently earning $100,000 per year.  Obviously the income will increase over time, but for this snapshot, the information is accurate.  Human Life Value changes over time as income and net worth change. 
 
 
 

You’ll notice above on the right, the potential is 3.5 million for this person.  While that is slightly higher than the rule of thumb mentioned above, it is a guideline for Human Life Value.

A more specific way to determine HLV (and a way to tell the whole truth about what it would take a family to live in their current world if the main income generator dies) is spelled out below using 2 Cash Flow calculators and a Present Value calculator.

We’ll take a 35 year old earning $100,000 with 4% annual raises, and a 5% earnings on assets capacity.  The Future Value of that scenario is $16,484,000 in the bottom right. 
 
 
 

Then you take that $16,484,227 Future Value and using the Present Value calculator reduce it back to figure out that it would take $3 million of today’s dollars to replace that future earnings stream, assuming a net 5% rate. 
 
 
 

More importantly, that $2,998,430 goes to zero in 35 years, so the widow will have to save a portion of that $100,000 – just as the family did when everyone was alive – in order to have a continued income stream past the 35 year period.  Notice the account rises a bit first, and then shrinks to zero. 
 
 
 

Moral of this story?  Most people are insuring their $50,000 lives for $30,000 because some “needs analysis” calculator told them they only “needed” $30,000.  A person’s Human Live Value is the only way to figure out the insurance “need” and so for many, that means using a combination of whole life and term insurance since most can not buy their HLV in all whole life at the outset.  There is nothing wrong with term insurance when it is used for a term of time, is convertible to whole life, and the owner works to convert it slowly over the course of time so that by age 65 or so, it is all whole life.