The miracle of tax-deferred compound interest

The dollar in the Old World bank paying 5 percent simple interest would be worth $26 today. The dollar in the New World bank paying 5 percent compound interest would be worth $39,323,260,000. What if Columbus had been taxed at a 50 percent tax rate all those years? His simple interest investment would be worth $13 today, and his compound interest investment would have fallen to a value of only $230,109. Not using tax deferral would have cost Columbus $39,323,029,891.

2. I show my prospects that a $100,000 investment at age 40 paying 9 percent and paying taxes on an accrual basis at a 33 percent rate will grow to $400,000 by age 64. If my client earns the same interest rate and defers taxes until withdrawal, that same investment will grow to $800,000. Even if tax rates increased to 50 percent and taxes were paid on the gain in a lump sum, at age 64, he would still net $450,000 after taxes. That is $50,000 better than paying taxes on an annual basis.

A good advisor would point out that 9 percent of $400,000 pays $36,000 per year in retirement income with $400,000 staying in principle. Meanwhile, 9 percent of $800,000 provides $72,000 per year with $800,000 left in principle. The two incomes of $36,000 and $72,000 would be fully taxable. Which would you rather have? Tax deferral would have doubled the retirement income of your client with no additional risk. That is a financial miracle. This concept will guarantee your success. Share it with everyone. Assume your client doesn't know. They don't.

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Van Mueller has spent 37 years working in the insurance business, and has held Top of the Table status with the Million Dollar Round Table for more than a decade and was also Senior Market Advisor's 2010 Advisor of the Year. For more information, go to www.vanmueller.com.