Tag Archives: opportunity cost

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Millionaire Next Door: Jack Gsantner

I came across this article from Omaha.com about a maned named Jack Gsantner, who was a small-town billing clerk who managed to build an economic engine and keep it a secret from everyone in town. This case is interesting to me as it is a great example of so-called “stealth wealth”, as Jack Gsantner always drove around in an old car, drank cheap beer, and stocked up on toilet paper in bulk.

In total he had $5.28 million of assets. He could have had $17,600 (pre-tax) deposited into his checking account per month and not run out of money, even under a depression-like scenario. He was, apparently, very frugal and did not spend much of it, drawing criticism from some of the comments.

Craig Smith: “‘How to be rich and not enjoy it’ – By Jack Gsantner”

Nancy Jacobs: “This is sad. His wife deserved better than her remains in a jar and probably rarely having a new dress in 55 years.”

If they were able to afford everything they wanted (they were), then who are you to judge that they aren’t living life enough (a.k.a. spending enough) or that they are deprived. Perhaps they were using their surplus making anonymous donations around the community as an investment in the future. The gem of the article, which really prompted me to cover it, was this:

But Kyes, a retired airline sales representative, said he’ll never forget his cousin. He spent $120,000 of the roughly $325,000 he inherited to buy a speedy new luxury car: a glacier-white Audi A8.

Wowza. Briefly viewing some estimates of salaries for airline sales reps, it appears a generous estimate for what this guy pulls down is they earn around $40k a year. His portion of the inheritance could have provided him with around $13k a year of income.

Instead he spent over 2/3 of it on a shiny brand new car. Using a low rate of depreciation from money-zine, over 8 years he will pay  $76k in depreciation. His car would cost me $150/month more than my current car in insurance, or $1.8k a year x 8 years = ~$15k insurance. He also lost out on over $71,000 of gains he could have made on the invested money. That’s about $20,000 per year of expenses over 8 years.

For a holistic estimate, MotorTrend estimates the following cumulative expenses over 5 years:

$4.5 – maintenance
$1.8 – repairs
$16.3 – fuel
$82.8 – depreciation
$19 – insurance
$25k a year total

Presumably he invests the other $200k making 4% withdrawals of $8k a year. Of the 8k, 25% is going to increased insurance for the car.  15% goes to maintenance and repairs. 20% goes to taxes. That leaves him with a pitiful $200 a month net allowance from his inheritance.

Plus his perceived enjoyment of the car.

If he is already set for retirement, fine. If he had saved $4k/year (10% of his salary) for 45 years and made 6% annually after-tax, he could have around $850k, which produces maybe $34k of income. (I’m going to go out on a limb and say I doubt it). He could have increased his monthly income by 38% or more.

Instead he bought a depreciating asset (a car that does the same damn thing every other car does) that will cost him much of the inheritance.

Maybe its worth it to him. You have to decide for yourself, but you should know the true costs.

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AP Credits Are The Best Scholarship Around

In high school I was lucky enough to already know what I wanted to major in at university, and I was pretty sure about what university I would end up going to. I was also fortunate enough to go to a school with a lot of AP Credit, which made this much easier, but it is still very possible at many high schools… Of course, as the future-obsessed, Judging-type I am, I entirely planned out my high school schedule to maximize the amount of credit I could earn towards my college degree. My thought was: If I am going to have to take these classes already, why the hell should I take them again? Just so happens that I was able to bring in 64 degree-applicable credit hours (out of 128 needed for my degree). This has given me leeway to take interesting classes, a lightened load, double minors, and still graduate a year early. But that is not the interesting part of AP classes; today we are going to look at the economic advantages of AP credit for an average student..

Requirements

Yes, you have to do a bit more work than the person next to you. But in today’s world you have to work harder and better than the person next to you in order to succeed. You won’t be rich if you don’t work hard. Period. Unless you win the lotto, but then you wouldn’t be reading this blog. Say you or your child or cousin is a high school Junior that chooses to work a bit harder than everyone else and signs up for the following AP classes:

Junior Year

  • English Language and Composition AP (>=3)
  • United States History AP (>=4)
  • Psychology AP (>=4)

Senior Year

  • English Literature and Composition AP (>=4)
  • Physics B AP (or Biology or Chemistry) (>=3)
  • Calculus AB AP (>=3)
  • Macroeconomics AP (>=4)
  • United States Government AP (>=3)

Each year you paid attention in class, studied, did test preparation, bought an AP Study book (which you read and practiced with), and took the AP tests you needed in May. You tried hard, got a little bit lucky on the grading, and made the minimum required scores for, say, the University of Texas to take your credit (those minimums are in the parenthesis).

Had you successfully followed this regimen, you would graduate high school with 32 hours at the University. Since these hours should all be applicable to (most) degrees (which is why you pick them based on your planned degree, duh), you would basically have just saved yourself a year of college.

No Tuition Paid Senior Year

This means you would have saved yourself 1x year of tuition, books, late-night energy drinks, and beer.. Since you probably borrowed against student loans to pay for this, the interest that you would have paid is also gone. So the $20,000 of expenses you would have incurred, which would have cost you about $200/month on a 3%, 10-year loan. So now instead of going to pay interest, your money gets to compound. Each month you take the $200 you would have spent on college loans and put it into a Roth IRA.

Extra Year Working

With the extra time you have in college you could work a part-time job (covering expenses), or you could graduate early. Say you had chosen to graduate a year early and start working. Let’s pretend you make the median household income with your degree ($54,000), and you lead a Mustachian lifestyle, spending only $20,000 that year. After taxes, you would be able to save around $25,000 that year, which you contributed to your 401k and Roth IRA.

Results

If you could earn a 6.5% real rate of return with both the money you would have paid to student loans and the extra money you made from graduating early, you would have $460,000 in real dollars sitting in the retirement accounts by the age of 60. You could reasonably spend $18,405/year (4%) using this money from age 60 on.

The small amount of work you put in when you were 16 paid you off nearly a half a million real dollars by the time you were 60. Using the extra cash saved from not paying tuition and being able to work 1 year earlier, you were able to generate enough income in retirement to keep you out of absolute poverty. Most people don’t think about the massive opportunity costs of their decisions when they are young, and the ones who do are usually handsomely rewarded.

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Only Save For Retirement For 6 Years

If you are planning on retiring much earlier than the typical person, who retires at around 60-70 years old, one thing that you have to do is plan exactly how you will access my money in retirement. My plan is to split up savings into two “buckets” – Old Money and Young Money. The idea is that my retirement accounts will be funded exactly to the point where they will provide me with enough traditional retirement income. In order to take advantage of the time value of money, these contributions only occur at the absolute start of my career, between 21-27 years of age.

Try to max out the 401k and Roth IRA when you start working. Right now the IRA contribution limit it $5,500 and the 401k limit is $17,500+Match (say, $3,000). Maxing out both of these accounts would come to a total contribution of $26,000.

Assuming 3.5% inflation, and a 6.5% after-inflation rate of return (this is the 100 year annualized market return and inflation value), after 6 years of contributions I should have approximately $227,000 in the accounts ($180,000 after inflation). Assuming that I stop making any contributions at age 27, and the accounts can grow at the same rate of return until I reach traditional retirement at age 60, the accounts would be worth nearly $5 million nominally. In today’s dollars, it would be worth nearly $1,400,000 and it would produce about $56,000 in annual income before tax.

That seems like a great deal doesn’t it? All you would have to do is max out the accounts for just 6 years, allow compounding to do the rest, and be able to enjoy the median household income every year once you reach 60.

In practice, however, the opportunity cost of taking money out of these tax advantaged accounts is relatively high, and you might be inclined to not take withdrawals until age 65 or even later. In our scenario, those extra 5 years of compounding could create nearly $500,000 in real extra wealth, which would allow someone to spend $75,000 annually in traditional retirement.

The Other Way Around

In reality, what one should do is work backwards using some initial targets in order to determine what their savings level needs to be. For example, if your goal was to have $100,000 in annual passive income from your retirement accounts by the age of 65, you would do the following calculations:

$100,000 in Annual Passive Income

/ 4% = $2,500,000 in today’s $ needed

* (1.035^45) = $11,800,000 in 2058 dollars needed (inflation)

/ (1.1^35) = $420,000 needed to be invested by age 30

pmt(10%, 10, 0, $420,000) = $26,000 needs to be saved annually for 10 years.