We know – by the rule of 72 – that money growing at 7.2% will double in 10 years. So $100 pre-tax dollars grows to $200 in 10 years; and $75 after-tax dollars grows to $150 in 10 years. That’s their proof.
However, when that $200 is taxed at the same 25% rate, the qualified account ends up with – surprise – $150. There is no mathematical advantage to tax deferral.
If I have $1,000,000 in an IRA – the reality is – I really only ‘own’ the after-tax equivalent – say $700,000 if my tax rate is 30%. The rest belongs to Uncle Sam – I’m just ‘holding’ it for him, temporarily. So if my account grows by 10%, my portion of that growth is $70,000, and my deferred tax liability (debt) grows by $30,000.
If you didn’t know something as seemingly old and boring as life insurance could do all those things, perhaps it’s time to visit with your agent. Especially those of you in your 20s, 30s, and 40s should take a look into Indexed Universal Life – unless of course, you want to be sitting in an audience someday lamenting the fact that nothing good financially – happens to older people.
Let that sink in a minute – the 30 year cost could easily top a half a million dollars. Worse still – the meter is still running. Thirty years may represent the accumulation phase of our life, but the distribution phase (retirement) can last another 30 years. The math is exponential – meaning that figure can more than double over a lifetime.
… the advisor lives in a world where all growth is taxed. I live in a world where no growth is taxed. In my world, the $1,400 ending balance would bear no tax liability whatsoever – in which case my original statement – “there is no mathematical advantage to tax-deferral” – is 100% true and accurate.