The Flaw In The Rule of 72

We are all familiar with the “Rule of 72.” You know, we can find out how long it will take for an amount of money to double at a certain interest rate. Example: if a financial instrument will earn 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 being taxed every year, it will take longer. Yes, an annuity that grows at 6% annually will double in 12 years. A taxable investment will not, as taxes have to be paid each year. So, I am not suggesting that your clients should forgo equity and taxable investments. I am just pointing out the beauty of this annuity product 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 looks like it won’t stop. Maybe it’s a good time to remind ourselves that the US 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 you and I must pay for these spending sprees. Now, I am not here to judge the benefits of any of the programs the government has enacted. I am here just to state that they must be paid for and tax rates will increase all across the board. So therein lies the beauty of tax deferral.

Can I also remind all of us of a great benefit to non-qualified annuities? There are no required minimum distributions with the non-qualified annuity. What a great place to accumulate money to be passed down. And, in the FIA, a client can change the allocations inside the product without selling an investment product and paying tax on the gains. In an annuity, first dollars out are taxable as they would be the gains. And after that, it is just a return of principal.

Can I just state one more thing? Many people have a portion of their portfolios in fixed income and many have that money with a fee based advisor. I do, and he does a great job. But, it was pointed out that if a client was earning 1.5% in the fixed income account and paying a 1.5% fee, it was a wash… no gain. But, what if your clients had a portion of their fixed income account in annuities? No annual fee and a minimum guarantee. If it was a MYGA, there is a gain every year.

So, remind your clients of the beauty of tax deferred growth and the ability to make their own decisions as to when they want to start drawing money from their account. And as always, if you're looking for behind the scenes assistance or more sales tips, schedule a quick call with one of our knowledgeable marketing consultants.

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Until next time… good selling!
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Raymond J. Ohlson
Founder & Retired CEO
Ohlson Group
​1-877-844-0900