The use of the word annuity will conjure up as much passion in the financial services industry as a Yankee jersey will at Fenway Park anytime between April and October. Annuities are not the “be all and end all” as many advisors would have you believe. Nor are they worst thing that has ever been invented as some regulators would have you believe. If used properly (and that’s the key phrase), annuities can and will provide a guaranteed stream of income that maybe used to help supplement any Social Security, Pension, and systematic distribution from an investment portfolio. 

I recently came across an article

published in the Wall Street Journal on   March 8, 2011 written by Lavonne Kuykendall, entitled, “Making the Case to Buy an Annuity.” I was impressed with the article because it gave both positive and negative aspects of an annuity purchase, something which usually does not occur.  The article talks about the differences between immediate and variable annuities and how they can serve a place in a retirement portfolio.

According to the article, a 65 year old man has a 33% chance to live to age 90, women a 44% chance.

One of the greatest challenges in retirement planning is to make sure that people do not outlive their money. Annuities, while providing guaranteed streams of income, help to achieve that goal.  Immediate annuities provide an income stream in exchange for loss of control of a lump sum of money. Variable annuities with “withdrawal riders,” can provide income for life while retaining control of the corpus. Since immediate annuity payments are a combination of both principal and interest, they also pay a higher monthly amount.

This subject is complex.

 It should be done in conjunction with a qualified advisor who makes disclosures regarding expenses, fees, and surrender charge periods. It is not a “one size fits all” product.  The above referenced article can answer these and other questions, in greater detail.

Variable annuities are long-term investment vehicles designed for retirement purposes.  The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claim-paying ability of the issuing insurance company.  Riders are optional, come at an additional cost and are often subject to specific restrictions and limitations.  The investment subaccounts of a variable annuity are subject to market risk and loss of the principal amount invested.

Consumers should understand the differences between IRA transfers and rollovers. They may sound similar, but are not. Distributions may occur differently, but in both instances, if not handled properly, onerous tax consequences may result.

IRA rollovers typically occur once an individual has left their employment.

The IRS has called this a “triggering event,” and allows the employee to rollover money from the 401(k) plan to an IRA plan (or the employee’s 401-K plan at their new employer) tax-free.  The circumstances surrounding the rollover may vary from company to company, but in most instances a phone call is first made to the trustee of the 401(k) plan. The employee tells the trustee the new trustee’s name (whether it be the employee’s NEW 401(k) plan, or an IRA of their choosing) and the check is issued payable to the new trustee “for the benefit of “the employee. Example: ABC Mutual Fund FBO John Doe. Caveat: On a rollover, if the check is not made payable as listed above, the existing trustee MUST withhold 20% for income taxes. Ouch. The check is then sent to the employee’s address of record and then deposited to the proper account. Note: The employee does not have to endorse the back of the check as the check is made payable to the trustee of the new plan, and NOT the employee individually. 

An IRA transfer works in somewhat the same fashion, but there are some distinctions.

If an individual has an IRA at their local bank and they wish to transfer it to a mutual fund, they may go to the bank, receive a check and deposit it into the new IRA within 60 days and it will NOT be taxable. They need to maintain a proper paper trail and fill out their 1040 properly. If not, it’s likely IRS scrutiny could come into play. The bank may make the check payable to the account holder and NOT the new IRA plan.  Unlike the rollover as listed above, taxes are NOT withheld.

Please refer to our article published on July 7, 2010 for more information on this subject.   http://silvertalksmoney.com/ira-transfer-vs-rollover/

Publication 590 is a government document found online which is the “bible” for all things IRA. Please resort to it for more finite details, as well as a qualified investment or accounting professional. http://www.irs.gov/publications/p590/index.html

All information is believed to be from reliable sources:  however we make no representation as to its completeness or accuracy.  NPC is not engaged in the business of rendering tax or legal advice: the above information in this article should not be used for this porpose.  Please consult your Financial Representative for further information.

There are many items, which consumers must understand in order to become reasonable investors and to have an understanding of why the markets work the way they do. In many instances, these items are somewhat counter intuitive, meaning that you need to go “against the grain” in order to make your long term strategy pay off.

Two of these items are diversification and rebalancing. Learn and memorize these terms as they are crucial for any investor to know and understand.

“Putting all of your eggs in one basket” would be the opposite of diversifying.

All too often, people want to buy what’s “hot,” they don’t  buy what’s appropriate.  The best explanation I have ever heard about diversification concerns a baseball analogy. Let’s say during a baseball game five hits in succession go to right field. Does that mean the manager should call time out, remove all of his position players from their normal positions on the field and place them in right field? Probably not, as there is no guarantee the NEXT ball in play will go to the same area. Just because one investment lead the market today does not mean it will lead it years into the future. Should you have some money in these areas…absolutely, but make sure there is proper diversification over all segments of the market. This means you will not have to worry when sectors go in and out of favor.

Rebalancing a portfolio

is a term that is used in conjunction with diversifying because it means going back to your original portfolio objective to continue to maintain balance and take profits.

Let me explain in a bit greater detail. Assume your base portfolio as constructed was one third each in bonds, domestic stocks, and international stocks. As we all know, markets do not move in tandem and percentages in each category can become “skewed” over time. Let’s assume, in this example, that after one year, the portfolio was 40% domestic stocks, 35% international stocks, and 25% in bonds. Rebalancing would mean taking 7% from the domestic category, 2% from the international category with proceeds being used to buy bonds. This is one of the few ways that consumers can take regular profits and continue to buy low. If bonds are out of favor today, they may not be a year from now, and taking the opportunity to buy them when they are out of favor, as difficult mentally as that may be, may put you in a better position in the long run. Rebalancing is something you should consider annually, and should be done without any emotion. It is the reason why having a baseline understanding of asset categories and percentages is essential in understanding and following the markets.

Neither diversification nor rebalancing can guarantee a profit or protect against a loss.

There are often times when professionals should just adhere to their individual disciplines. When they choose to go outside of their known realm of expertise, they can give incorrect advice that can cost a client thousands of dollars. Consider the following hypothetical situation: A person, on the suggestion of his attorney, wants to change the beneficiary on his IRA from his wife to his estate. His wife was placed into a nursing home because of Alzheimer’s, so the change in beneficiary was prudent. The mistake may be making the estate the beneficiary for the following reasons:

1. Any property with a named beneficiary is property which passes outside of the probate estate directly to the beneficiary.
2. If the children are named as beneficiaries, they are eligible for the “stretch” IRA strategy,  which allows them to take withdrawals over their life expectancy.
3. By using a “stretch” IRA provision, taxes are paid on amounts withdrawn during the year of withdrawal.
4. If the estate were named the beneficiary, the amount of the IRA may have to be probated and would not pass expeditiously to the beneficiaries.
5. With the estate as beneficiary, the IRA, by law, would be liquidated forcing ALL of the taxes to be paid at the time of the liquidation. Stretch IRA provisions would not be allowed.

Conclusion…You should consider naming an individual as beneficiary of an IRA if you are interested in utilizing the stretch IRA provisions. This means that all monies can continue to accumulate tax deferred, and the only current taxation will be on the amount required to be distributed each year.  Make sure to check with a CPA or investment professional before any property is sold or liquidated to confirm any adverse tax consequences. Once liquidation is done…it’s too late. Try placing toothpaste back in the tube or un-ringing a bell.

One of the biggest mistakes consumers make is in the area of IRA rollovers. Typically, when this happens, paperwork is generated by the trustee of the plan so the funds may be rolled over to an IRA. A rollover may be done once per year, and, if done correctly, it may be done tax- free.  A person can roll money into an IRA while still employed.

Proper procedures

must be in place for a rollover to be considered tax- free. A rollover will not be considered tax- free if the proceeds are made payable directly to the participant. In this case, when the check is made payable directly to the participant, the trustee is required to withhold 20% for income taxes. In order to be considered a tax- free rollover, the check must be made payable to the new trustee of either the IRA or the qualified plan to where the funds are being transferred. For example, the transferring trustee would be notified that the check should be made payable to the “ABC trustee FBO (for the benefit of) John Client.” In this example, ABC is the trustee of the new IRA or other qualified retirement plan.  Having the check drawn in this manner helps assure the rollover will be tax- free. Typically, the check is sent to the address of record for the client to deposit in the appropriate account. Please note the check does NOT have to be endorsed, since it is not payable directly to the client, but rather to the trustee of the new account. This area has confused many people in the past.

Rollovers

typically generate a form 1099-R in January of the year following the rollover. Please note that a 1099-R is different from a form 1099. A 1099-R must be noted on your 1040 on line 15 (a,b). Assuming that nothing was withdrawn, a “0” is placed on line 15 (a,b), more informationwhich denotes the rollover to be tax-free. Please note that any unpaid 401(k) loan is considered a taxable event, and will be taxed in the current tax year with applicable early withdrawal penalties. If there is a loan on your account, we would suggest that you pay it back PRIOR to doing a rollover, so you do not suffer these adverse tax circumstances. While a rollover is not required, even if you change employers, we would suggest strongly that this be done, since it allows you to control which investments you will choose.

IRA transfers

are looked at differently.  For example, if you have an IRA in a CD at your local community bank and wish to transfer it to a mutual fund, this can be accomplished in two different ways. First, the monies can always be transferred on a trustee-to-trustee basis; simply go to the community bank, fill out the requisite paperwork and the asset should be transferred timely. Another way is to take advantage of the “60 day rule.” You can go to the bank and have them make the check payable directly to you, and you then have 60 days to deposit the EXACT amount into your new IRA.  This will not be considered a taxable event. You will have to account for it the same way as an IRA rollover, as listed above, but the bank does not have to withhold 20% for income taxes.  The advantage of the 60 day rule is that you have the use of the money for 60 days. Remember, when you write the check to the new trustee, do not “round up” or “round down,” since it may be considered a premature distribution or an excess contribution, depending upon the circumstances.  Make the check payable for the EXACT amount.  Please note that if you choose the second option you run the risk of missing any returns you may have received had you left it invested.

There are semantical differences in doing a rollover or a transfer. Having a complete understanding of the law should allow you to make the proper decision.

Annuities represent as much misunderstanding as any product or service in the financial services industry.  The primary reason is that no two situations are exactly alike, as no two person’s level of risk tolerance and suitability are exactly alike.  For this discussion, we would like to focus on different types of annuity settlement options and definitions to try and clear up as much of the maze which clouds today’s landscape.

What is an annuity? An annuity is a method of systematically liquidation of a set sum of money.  Annuities may be purchased on either a deferred or immediate basis.  A deferred annuity is when a lump sum of money is given to an insurance company and grows until the annuitant decides to remove it, either in a lump sum or in monthly increments.  Normally, when a lump sum is annualized, the client exchanges the control of the lump sum for a guarantee that monthly payments will continue for the rest of the annuitant’s life.

What is a life income with no refund option? A life income with no refund option is exactly as it was written.  The client will receive a monthly sum for the rest of their life, whether they live 30 days or 30 years.  For example, if a 65 year old male gives an insurance company $100,000 under this option, he is guaranteed and income of $…..   If he dies the day after receiving the initial payment, the insurance company retains all of the proceeds, and no additional payment to any beneficiary or contingent payee is required.  Given the exposure of the insurance company, this option would provide the highest possible income, because even though there is a life income attached, there is no minimum guarantee that payments must be made for a certain period of time.  Obviously, this option should only be used in extraordinary circumstance.  For instance, if a single individual has no heirs and is not concerned with leaving any money to anyone, and wishes to maximize the amount received, this option would be considered appropriate.

What is a life income with period certain option? A life income with period certain option means that the insurance company will guarantee payments for a particular period of time.  For example, if an annuitant accepts a “Life with 10 years certain” guarantee, the annuitant is guaranteed to receive payments for at lest ten years.  If they live beyond ten years, payments continue until their demise.  If they die within the ten year period, the beneficiary will continue to receive the monthly payments until the ten years has elapsed.  This option will provide less income than the life income with no refund option, as the insurance company is GUARANEED to send payments to someone for at least ten years.  In the “no refund” example, payments end upon the annuitant’s death, no matter when that may occur.  Insurance companies will typically guarantee payments in five year increments up to as much as twenty years.  The longer the guarantee, the LESS the amount of monthly income will be payable, as the company has a liability for the longer period of time.

What is life income with refund option? As it states, life income with refund guarantees a return of principle to either the annuitant or their beneficiary.  Should the original annuitant die before receiving all of their money back, payments would continue to the beneficiary until all principal has been received.  At that time, payments would cease.  Should the annuitant live after having received back their principle, the monthly payments would continue as this is a “life” income, first and foremost.

These three examples are showing how a “single life” annuity would work.  Also common are joint and survivor annuities which would be out over two lives, a husband and wife for example.  We will discuss those options in a later piece.

Guarantees are based on the claims-paying ability at the issuing company.

Social Security represents the only guaranteed stream of income for many Americans, and throughout the years it has surprised me the lack of understanding that most people have about the social security system and how it works. The more knowledge you have, the better the choice you will make.

Americans pay into the system and may begin taking a stream of income at age 62.

If you are counting down the years waiting until that day to start taking your money, you may want to reconsider. First, if you begin taking Social Security at age 62, you can only earn up to a certain amount ( $14,160 for 2010) before your benefit is reduced. For every $2.00 you earn over the limit, your monthly income is reduced by $1.00. In addition, for each year you wait to receive your income after age 62, your monthly stipend will increase by 6%, meaning that if you wait until full retirement age of 66, you have essentially increased your payout by almost 25%.

(Full-retirement age has been 65 for many years. However, beginning with people born in 1938 or later, that age will gradually increase until it reaches 67 for people born after 1959.  www.ssa.gov)

For each year you wait to receive income after the normal retirement age of 66, your income goes up by 8% per year. In addition, after the normal retirement age of 66, you may earn an unlimited amount of money each year and NOT have your Social Security benefit reduced. Please do not confuse the reduction of benefits with the taxation of benefits, as they are two entirely different matters.

The taxation of social security is somewhat convoluted, but I will attempt to briefly summarize.

The initial step is to determine your provisional income, which is done by adding up your adjusted gross income (AGI), tax- free income, and 50% of your social security benefit. If you are married and filing a joint return, and the sum of these three numbers is over $35,000, then at least 20% of your SS will be considered taxable. If your provisional income is over $44,000, then 85% of your SS is taxable.  The results would be the same for an individual taxpayer, except the brackets are reduced.  At least 20% of the benefit is taxed when provisional income is at $25,000, and 85% of the benefit is taxed when at $34,000.

If you are still working full time at age 62, it may not make sense to begin taking your SS income for three reasons.

One, the amount of money you can earn before your benefit is reduced is quite nominal (14,160 for 2010). Two, your benefit is at its lowest point, and waiting will allow the benefit to grow by at least 6% each year, and three, the taxation of the benefit may result in putting you in a higher marginal tax bracket and having your SS benefit taxed at higher rates.

There are many other resources that can be used to investigate this issue in greater detail. Speaking with the representative of the local SS office is always an option. Boston College’s Center for Retirement Research has many “white papers” definitionon Social Security, and there is always your local CPA who would be available to discuss the taxation issues involved with Social Security.

Important summary information from SSA.GOV

• If you are under normal (or full) retirement age (FRA):When you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2010 that limit is $14,160.  Remember, the earliest age that you can receive Social Security retirement benefits remains 62 even though the FRA is rising.
• In the year you reach your FRA: $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach FRA. For 2010, this limit is $37,680.
• Starting with the month you reach FRA:, you will get your benefits with no limit on your earnings.
• If a child or spouse on your record works while receiving benefits, the same earnings limits apply to him or her as apply to you. If your child or spouse is eligible for benefits this year and is also working, you can use our earnings test calculator to see how those earnings would affect the child’s benefit payments. (Your child’s or spouse’s earnings affect only his or her own benefits. They do not affect your benefits or those of any other beneficiaries on your record.)

The required minimum distribution (RMD) table shows the factors consumers over the ages of 70 ½ must follow in determining the appropriate amount that must be removed from their IRA or other qualified plan during a calendar year. The amount withdrawn is determined by dividing the previous year end value by the factor, which represents a consumer’s age during the current year.  

For example,

if a client were to turn 72 during 2010, and their 12/31/2009 value of all IRA accounts was $100,000, $100,000 would be divided by 25.6, and the amount needed to be withdrawn during the 2010 taxable year would be $3,906.25. Failure to remove AT LEAST that amount of money by 31 December 2010 could result in a penalty of up to 50% of the amount need to be withdrawn.  There is a separate table which must be used if there is age differential of more than ten years between spouses. Please check with your advisor or tax professional for any additional information.

Required Minimum Distribution Table

for a printable pdf file click here RMD table

source: IRS.gov, tableIII(uniform lifetime)

The word annuity conjures up multiple thoughts and reactions from multiple sources. Some advisors would say that an annuity is a “one size fits all” solution to every financial problem. Others would tell you that purchasing an annuity is equivalent to committing financial suicide. Frankly, both of these opinions are wrong. We will be covering annuities in detail throughout this site. For purposes of this discussion, I would like to discuss some frequently asked questions regarding annuities.

1. What is the definition of an annuity? An annuity is a systematic payout of a sum of money. When annuitized (not to be confused with systematic distributions) every payout is part principal and part interest. Depending upon the payout chosen, a consumer can never outlive any annuity. Annuities are only issued by insurance companies who provide the contractual guarantees.

2. What is the difference between annuitizing and taking a systematic distribution? As said above, each annuitized payment is part interest and part principle. A consumer exchanges the use of the lump sum for the contractual guarantee that the payments will be made for life. A systematic distribution keeps the principle intact (based upon the terms of the policy) by paying out only “interest”, or a set percentage during each payment.

3. What happens to the principal upon the death of the contract owner?Based upon options chosen, if a contract is annuitized, payments may continue to the beneficiary upon the death of the contract owner. For example, under a ten year certain payment option, should the annuitant die within the first ten years, payments would continue to the beneficiary for the balance of the ten year period. If the annuitant dies after the ten years has expired, payments would cease upon death. If the consumer had chosen only to take “systematic distributions,” then the remaining principle would be payable upon death to the named beneficiary. Contractual provisions would determine if the principle would be payable in a lump sum or over a reasonable (5 years) period of time. These disclosures should be discussed at the time of inception with the insurance representative.

4. How can annuities be used? Annuities provide a guaranteed stream of income and they are beneficial when used as a hedge, or to provide additional guarantees of principal. If a consumer has moderate risk tolerance, I believe the use of annuities for 20-35% of a portfolio would not be considered excessive. The consumer must have reasonable liquidity to provide for emergencies, as most annuities allow for only a certain percentage (5-15%) to be removed annually without any penalty. It is imperative that the consumer have additional streams of income and sources for emergency cash so the annuity is not his only investment.

5. Why do annuities receive such a “bad rap?” There are horror stories of some insurance companies which charge excessive fees, as well as brokers (the omission of the word “advisor” is purely intentional) who are not opposed to taking all of their clients’ money and placing it into annuities so they can receive  generous commissions. These stories receive much more publicity than those of the people who use annuities as intended:  to provide for additional guarantees. Recently the Wall Street Journal published an article which explained how well annuities did during the market debacle of 2008 and early 2009.

We will explore other areas of annuities to try and clear up what is obviously a confusing subject. If annuities are used as a minority position in a portfolio with adequate consideration given to overall liquidity, they can represent a valuable position in a person’s financial plan.

Disclosure:

The guarantees of an annuity contract are contingent on the claims-paying ability of the issuing insurance company.

There may be additional costs associated with options or features of an annuity.

With either systematic withdrawals or free withdrawals you will still be subject to regular income taxes, as well as the 10% tax penalty on early withdrawals prior to age 59 ½.  You may also incur surrender charges on amounts withdrawn in the early years of the contract.

The foundation of making correct decisions with regard to money and personal finance begins with basic financial knowledge. In working with consumers for over 35 years, I’ve discovered that often times people’s knowledge of these subjects is limited.  It is our goal at SILVER TALKS MONEY is to present these issues with clarity, in an easy to understand fashion.

Albert Einstein called the law of compounding the most important mathematical calculation ever conceived.(quote)
The pure definition of compounding is “interest on interest,” and recognizing the importance of this concept will allow for you to arrive at an incredibly important conclusion: you can make up the money, but you cannot make up the time.  If there is one key phrase from this segment…you just read it!!

The Rule of 72

Please allow me to explain in greater detail, using a logical and simple math example commonly known as the “Rule of 72.” To summarize, the rule of 72 states that when you divide your yield on an investment into 72, the answer will equal in how many years it will take for money to double. For instance, if you invest $10,000 into an investment that achieves a return of 8% per year, your $10,000 will grow to $20,000 in nine years if you do not make any additional deposits. The answer is achieved by dividing the return (8%) into 72; the answer being nine (years.) Hypothetical example used for illustrative purposes only.  Does not take into consideration the consequence of fees and taxes.  Not indicative of any specific investment.  Actual results will vary.

Using this example as a baseline, let’s look at the following example using fictional characters Chris and Pat. Chris joined the workplace soon after graduating from college at age 22, and immediately began investing $5,000 per year.  Chris continued this systematic investment through age 30 and then stopped contributing, but allowed his investments to continue to grow. For the purpose of this example, we are using 8% as the growth factor.

Pat, on the other hand, didn’t do much investing during his/her 20’s, but had an “aha moment” and began investing in the same consistent manner at age 31. Pat invested the same $5,000 per year until age 65.  The following table illustrates both examples.

The Value of Compounding with 8% interest

This example assumes an 8% nominal return compounded monthly, which represents an 8.3% effective return.

Age	Payment	Value at Year End	Age	Payment	Value at Year End
22	$ 5,000	$ 5,415.00	22	$ _	$ _
23	$ 5,000	$ 11,279.45	23	$ _	$ _
24	$ 5,000	$ 17,630.64	24	$ _	$ _
25	$ 5,000	$ 24,508.98	25	$ _	$ _
26	$ 5,000	$ 31,958.23	26	$ _	$ _
27	$ 5,000	$ 40,025.76	27	$ _	$ _
28	$ 5,000	$ 48,762.90	28	$ _	$ _
29	$ 5,000	$ 58,225.22	29	$ _	$ _
30	$ 5,000	$ 68,472.91	30	$ _	$ _
31	$ _	$ 74,156.16	31	$ 5,000	$ 5,415.00
32	$ _	$ 80,311.13	32	$ 5,000	$ 11,279.45
33	$ _	$ 86,976.95	33	$ 5,000	$ 17,630.64
34	$ _	$ 94,196.04	34	$ 5,000	$ 24,508.98
35	$ _	$ 102,014.31	35	$ 5,000	$ 31,958.23
36	$ _	$ 110,481.49	36	$ 5,000	$ 40,025.76
37	$ _	$ 119,651.46	37	$ 5,000	$ 48,762.90
38	$ _	$ 129,582.53	38	$ 5,000	$ 58,225.22
39	$ _	$ 140,337.88	39	$ 5,000	$ 68,472.91
40	$ _	$ 151,985.92	40	$ 5,000	$ 79,571.16
41	$ _	$ 164,600.75	41	$ 5,000	$ 91,590.57
42	$ _	$ 178,262.62	42	$ 5,000	$ 104,607.59
43	$ _	$ 193,058.41	43	$ 5,000	$ 118,705.02
44	$ _	$ 209,082.26	44	$ 5,000	$ 133,972.53
45	$ _	$ 226,436.09	45	$ 5,000	$ 150,507.25
46	$ _	$ 245,230.29	46	$ 5,000	$ 168,414.36
47	$ _	$ 265,584.40	47	$ 5,000	$ 187,807.75
48	$ _	$ 287,627.91	48	$ 5,000	$ 208,810.79
49	$ _	$ 311,501.02	49	$ 5,000	$ 231,557.09
50	$ _	$ 337,355.61	50	$ 5,000	$ 256.191.33
51	$ _	$ 365,356.12	51	$ 5,000	$ 282,870.21
52	$ _	$ 395,680.68	52	$ 5,000	$ 311,763.43
53	$ _	$ 428,522.18	53	$ 5,000	$ 343,054.80
54	$ _	$ 464,089.52	54	$ 5,000	$ 376,943.35
55	$ _	$ 502,608.95	55	$ 5,000	$ 413,644.64
56	$ _	$ 544,325.49	56	$ 5,000	$ 453,392.15
57	$ _	$ 589,504.50	57	$ 5,000	$ 496,438.70
58	$ _	$ 638,433.38	58	$ 5,000	$ 543,058.11
59	$ _	$ 691,423.35	59	$ 5,000	$ 593,546.93
60	$ _	$ 748,811.49	60	$ 5,000	$ 648,226.33
61	$ _	$ 810,962.84	61	$ 5,000	$ 707,444.11
62	$ _	$ 878,272.76	62	$ 5,000	$ 771,576.97
63	$ _	$ 951,169.39	63	$ 5,000	$ 841,032.86
64	$ _	$ 1,030,116.45	64	$ 5,000	$ 916,253.59
65	$ _	$ 1,115,616.12	65	$ 5,000	$ 997,717.64

The conclusions we can draw are as follows…

Pat’s total contributions are $175,000 and Chris’ are $45,000, yet Chris has more money at age 65. Why is that? It is because of the power of compounding using the Rule of 72. For those of you who think you can buy your house, educate your kids, and then worry about retirement, I would say that is incorrect decision making. As we wrote earlier, you can make up the money, but you cannot make up the time. The sum which Chris has in the account at age 30, using an 8% compounding figure will allow the money to “turn” over four times by age 65.

Here’s an even more powerful example using the same parameters. Let’s say Chris saves $5,000 per year beginning at age 30, and Pat saves $10,000 per year beginning at age 40. Lets take a look at the results at age 60…Again, the same conclusion, you can make up the money, but you cannot make up the time!! Incredibly powerful stuff!!

The Value of Compounding with 8% interest

(Using flat 8%)

Age	Payment	Value at Year End	Age	Payment	Vaue of Year End
30	$ 5,000	$ 5,400.00	30	$ _	$ _
31	$ 5,000	$ 11,232.00	31	$ _	$ _
32	$ 5,000	$ 17,530.56	32	$ _	$ _
33	$ 5,000	$ 34,333.00	33	$ _	$ _
34	$ 5,000	$ 31,679.68	34	$ _	$ _
35	$ 5,000	$ 39,614.02	35	$ _	$ _
36	$ 5,000	$ 48,183.14	36	$ _	$ _
37	$ 5,000	$ 57,437.79	37	$ _	$ _
38	$ 5,000	$ 67,432.81	38	$ _	$ _
39	$ 5,000	$ 78,227.44	39	$ _	$ _
40	$ _	$ 84,485.63	40	$ 10,000	$ 10,800.00
41	$ _	$ 91,244.48	41	$ 10,000	$ 22,464.00
42	$ _	$ 98,544.04	42	$ 10,000	$ 35,061.12
43	$ _	$ 106,427.56	43	$ 10,000	$ 48,666.01
44	$ _	$ 114,941.77	44	$ 10,000	$ 63,359.29
45	$ _	$ 124,137.11	45	$ 10,000	$ 79,228.03
46	$ _	$ 134,068.08	46	$ 10,000	$ 96,366.28
47	$ _	$ 144,793.53	47	$ 10,000	$ 114,875.58
48	$ _	$ 156,377.01	48	$ 10,000	$ 134,865.62
49	$ _	$ 168,887.17	49	$ 10,000	$ 156,454.87
50	$ _	$ 182,398.14	50		$ 168,971.26
51	$ _	$ 196,989.99	51		$ 182,488.97
52	$ _	$ 212,749.19	52		$ 197,088.08
53	$ _	$ 229,769.13	53		$ 212,855.13
54	$ _	$ 248,150.66	54		$ 229,883.54
55	$ _	$ 268,002.71	55		$ 248,274.22
56	$ _	$ 289,442.93	56		$ 268,163.16
57	$ _	$ 312,598.36	57		$ 289,587.05
58	$ _	$ 337,606.23	58		$ 312,754.02
59	$ _	$ 364,614.73	59		$ 337,774.34
60	$ _	$ 393,783.91	60		$ 364,796.29

Hypothetical examples used for illustrative purposes only.  Not indicative of any specific investment.  Examples do not take into consideration the consequence of fees or taxes.