• Stephen Gardner

The upside of interest

Most Americans are not saving as diligently as they should. Before the great recession the national average savings rate was -1%, meaning people were actually spending more than they were making. There are be many reasons people struggle to save. Perhaps they aren't earning enough income. Maybe they are living beyond their means. It could be that interest rates are so low at the bank that they would rather spend than save.


There could be any number of reasons for not saving, but I think one of the reasons is due to lack of vision and understanding of how interest earned over time can help you. Recently, I was showing a client how his money would continue to grow in his whole life plan even when he was using it to purchase a company truck. I showed him how uninterrupted compound interest on $35,000 at 5% interest would increase to $44,670 5 years later. He said, "there's not way money would grow like that these days".


This client and business owner had become so accustomed to low interest rates that he forgot how 5% compound interest uninterrupted by fees and market loss could grow over time. He was excited! All of a sudden he had vision for how his money could grow. Knowing his money would grow and not lose made him want to save even more. I've seen this over and over again with clients as they catch the vision of compound interest again.


Most savings accounts at banks have been under 1% for over a decade. Admittedly, I have a savings account with the largest credit union in Utah and my account currently pays .1%. It's easy to see why people don't want to save money at these low rates or why they leave the realm of safe products to enter the Wall Street Casino in hopes of high returns.


I saw this same scenario with a client from California. She was discouraged by high taxes in her state, low interest rates at her bank and the stock market being too volatile. So we looked at a cash value insurance plan that would protect her from loss, allow her to legally avoid taxes in the future and provide her the ability to participate in the upside of the stock market. But it was seeing how much her account value could reach at retirement time because of interest that sparked the greatest amount of excitement. She caught the vision for her money.


The plan we looked at has averaged 7-9%, but I showed her an average of 6% growth. I do this because when someone becomes a client, they are a client for a long time. I would much rather under promise and over deliver than over promise and have an angry client.


This client felt comfortable saving $1000 a month. She was already saving more than that but didn't want to over extend herself and I agreed with her. She wanted to place money each month until age 65 with the option to continue to save money in case she didn't want to retire at that time. However, I built the plan until age 65 and we discussed not touching this money until age 75. This would allow her money to continue to grow while she lived off her 401k account, getting her taxable money out of the way first.


Over the next 20 years, she would contribute $240,000 to her tax-free insurance contract. This would protect her daughter and husband in the event of premature death which also made her happy.


By the time she gets to age 75, her $240,000 has increased to $791,126 using the 6% average we discussed. That means $551,126 of her tax-free nest egg came from compound interest. This is also $551,126 she gets to legally avoid paying taxes on. Would your future be better if you owed taxes on $500,000 or had full use of the money tax-free? The obvious answer is yes your life would be better, much better, but most will continue to save in programs that must be taxed during retirement.


This is the power of eliminating market loss and growing your money over time. The client was blown away by how interest had grown on her money over the 30 year period. Seeing the possibility gave her a vision for where her money could grow to by the time she is ready to use it and depend on it.


**Side note - Because she is allowed to take $240,000 of her already taxed money back out and then switch over to loans until she dies, this money is not considered income. This means she won't have to count this on her taxes and further reduce her social security benefits or end up in a higher tax bracket.**


The client then asked me to show her where her money might be by age 95 if she never had to touch it. As you can see the account is showing $1,524,200 with $1,284,200 of that value being from her interest. Compound interest when understood and harnessed really is the 8th wonder of the world. The key is to use it in your favor and be on the right side of interest.


When the client finally does pass away, she will pass a large lump sum of tax-free money on to her daughter. The client told me it would bring her great joy to know she used her money to ensure her daughter would be well taken care of in her absence.


I hope this helps you see the importance of avoiding losses and the power of compound interest for getting your account value to a place you can feel confident about and pleased with. This amount of money will allow the client to retire with peace of mind that she will not run out of money, won't be overly taxed during the years she isn't working and producing income and the knowledge that her hard work will pass to her family. Or as the client told me, "this is a good life and death plan for my family's future".


Seeing how your money can grow and to what level it could increase to by retirement gives people a workable plan. It provides them with vision for what their future could look like 10, 20 or 30 years from now. Most other plans leave people groping in the dark and hoping they will have money in the future. Real hope comes from knowing what could be when a plan is followed and time is allowed.



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