You may be familiar with the “Rule of 72”. It is an easy way to find how long it will take for an amount of money to double at a certain interest rate. Example: If a financial instrument earns 6%, you divide 6 into 72 and the money will double in 12 years. Simple… right? Well, not so fast. If that annual 6% earnings rate is taxed every year, it will take longer!
On a recent Zoom call this concept was re-explained to me. It reminded me of the benefits of tax deferral. So, how about I get to the end of this commentary now? Yes, an annuity that grows at 5.25% annually will double in 13.7 years. A taxable investment (such as a CD or savings account) will not, as taxes must be paid each year. So, I am not suggesting that you should drop taxable investments. I am just pointing out the beauty of using an annuity. And I believe it will be more important in the years to come. Why do I say that? Please read on.
There is a change going on in America. We are printing more money than ever. And it won’t stop. Maybe it’s a good time to remind us that the U.S. Government is not handing out “Their Money”. They are handing out “Our Money.” You see, we all know that our federal government is not building products, making new inventions, or making payroll. We do that as Americans. But My Fellow Americans (as all leaders like to say), you and I must pay for these spending sprees. I am not here to judge the benefits of any of the programs the government has enacted. But, to state that they must be paid for. And tax rates will increase across the board. So, therein lies the beauty of tax deferral.
There is another great benefit to non-qualified annuities. There are no required minimum distributions with non-qualified annuity. What a great place to accumulate money to be passed down (also Life Insurance). And, in a Fixed Index Annuity you can change the allocations without selling your investment and paying tax on the gains. Yes, in an annuity, when you take money out, the growth is taxable – but not the principal.
One more thing, I was reminded that many people have a portion of their portfolios in fixed income. And many have that money with a fee-based advisor. But it was pointed out that if you are earning 1.5% in the fixed income account and paying a 1.5% fee it is basically a wash… no gain. But what if you had a portion of your fixed income account in annuities? No annual fee and a minimum guarantee. A gain every year!
So again, no investment advice given here. Just advice from a veteran in the business who has “Been to this party before”. The beauty of tax deferred growth is the ability to make your own decisions as to when you want to start drawing money from your account. Next, I will write on our ability to provide a product that can provide an income that you can’t outlive… regardless how long you live and regardless of market fluctuations.