Triple Compounding of Interest
Annuities provide 3 levels of compounding:
- Interest on the principal
- Interest on interest
- Interest on deferred taxes
Keep in mind that the taxes you do not pay today, remain in your account and earn interest that you keep. Let’s take a quick look at a hypothetical example (the example below is based on a $100,000 investment which we have found not uncommon for retired investors with accumulated capital):
|
$100,000 Invested |
Taxable Account at 8% |
Annuity at 8% |
|
Year 5 |
126,417 |
146,932 |
|
Year 10 |
159,813 |
215,892 |
|
Year 15 |
202,031 |
317,216 |
|
Year 20 |
255,402 |
466,095 |
When you look at the above table, notice that because of the triple compounding, there is $200,000 more in the annuity. You might then think that you won't be around for 20 years but you might want to think again. The life expectancy tables show that someone age 65 on average has a 20 year life expectancy. Would you rather be drawing money in your senior years from an account with $466,095 or $255,402?
Even though the deferred taxes eventually get paid, they very likely may get paid after your death while you’ve had the advantage of living off a larger sum during your life time.
To learn more about triple compounding opportunities and the power of tax deferral to potentially increase your future net worth, check off on the coupon.
(Note that the above rate of return illustrated is hypothetical for this fixed annuity example. Investment earnings are taxed as ordinary income upon withdrawal and annuity withdrawals prior to age 59½ may be subject to a 10% penalty).