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Missed Fortune – A Simple Quiz With Surprising Answers

Posted on | February 26, 2012

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A Few Simple Questions

Where would an average investor have realized the best internal rate of return, meaning net; after taxes, on a lump sum investment of $125,000 invested in January 1990 to an account value today worth in excess of $1,000,000?

  • a. A mutual fund that followed the S&P 500 or Dow Jones Index.
  • b. A variable annuity.
  • c. A municipal bond.
  • d. A maximum-funded, indexed Universal life insurance policy.

It’s remarkable how many financial advisors would choose “a” as the correct answer.  But according to DALBAR, the reality is that the average investor during that 22-year period only managed a rate of return of 3.83%.  This means that the original $125,000 investment would only be worth $289,910 today.

Compare that with a maximum-funded, indexed insurance contract that included rebalancing and lock and reset strategies, the same investment would be worth $1, 028, 930—tax-free.

Here’s another question: A dollar doubling every period for 20 periods would be worth how much?

  • a. $27,000
  • b. $72,000
  • c. $666,000
  • d. More than $1 million

Believe it or not, each one of these amounts could be the correct answer depending upon your tax situation.

If you were paying taxes as you earn the money in a 33% tax bracket, your dollar doubling every period for 20 consecutive periods would only be worth about $27,000.  Those who live in a state without an income tax might see that dollar grow to $72,000 after doubling 20 times.

If that dollar were in a tax-deferred account like an IRA or 401(k), it might grow to over a million, but the IRS would still claim about a third of that money in taxes, leaving you with just $666,000.

In a totally tax-free vehicle where the money accumulates tax-free under IRS Code section 72E and remained tax-free upon distribution under section 7702, you’d have over a million dollars.  And at the end of your life, the money would transfer to your survivors, tax-free.  This is yet another example where the maximum-funded, tax-advantaged (MFTA) life insurance contract comes out on top.

Another question: According to the rule of 72, at a 7.2% inflation rate, the cost of living will double every 10 years.  Therefore, 20 years from now, a million dollar nest egg earning 7.2% or $72,000 per year will be only worth how much in today’s dollars?

  • a. $4000 a month
  • b. $3,000 a month
  • c. $2,000 a month
  • d. $1500 a month

The answer is “d”.  This means that a million dollar nest egg that provides you with $6,000 per month in income will only have the purchasing power that $1500 per month can buy you today.  That’s just considering inflation and not taking the effects of taxes into account.

One final question: Let’s say you incurred a loss of 50% on the value of your retirement account.  What amount of gain will you need to realize to get back to where you were before the loss?

  • a. A 50% gain
  • b. A 100% gain

The answer is “b”.  You need a 100% gain to make up that lost ground.  Consider that if you started out with $100,000 and suffered a 50% loss, you now have just $50,000.  A 50% gain would only take you back to $75,000.  It take’s a 100% gain to make up the loss and get you back to where you started.

This quiz illustrates the importance of not only understanding the effects of taxes and inflation on your retirement nest egg but also learning how to position your serious cash to protect it.

You wouldn’t believe how many financial advisors don’t understand this concept.  They haven’t yet learned the proven Missed Fortune strategies that have helped our clients enjoy tax-free, safe, predictable rates of return for decades.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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