The miracle of tax-deferred compound interest

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 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 principal. Meanwhile, 9 percent of $800,000 provides $72,000 per year with $800,000 left in principal. The two incomes would be fully taxable.

Tax deferral would have doubled your client’s retirement income with no additional risk.
Next month: the greatest financial miracle of them all.