$$$$$$$$$$$$$$$

REWARD YOURSELF

HOW TO BUILD WEALTH, INCREASE INCOME

AND CASH FLOW AND REDUCE TAXES

RICHARD P. BLOOM, CLU, ChFC, REBC

$$$$$$$$$$$$$$$

REWARD YOURSELF

HOW TO BUILD WEALTH, INCREASE INCOME

AND CASH FLOW AND REDUCE TAXES
RICHARD P. BLOOM, CLU, ChFC, REBC

MONEYWI$E PUBLISHING COMPANY

PALM BEACH GARDENS, FL 33418
Copyright 2003 by Richard P. Bloom

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the
author and publisher. No patent liability is assumed with respect to the use of the
information herein. Although every precaution has been taken in the preparation of
this book, the author and publisher assume no responsibility for errors or omissions.
Neither is any liability assumed for damages resulting from the use of the
information contained herein.

Printed in the United States of America

 DEDICATION

TO: THOSE WHO SERVE, TEACH AND PROTECT

ABOUT THE AUTHOR

RICHARD P. BLOOM has specialized in financial and retirement

planning and employee benefits for over 30 years. Mr. Bloom is a Life
Member of the Million Dollar Round Table and has received numerous
sales and service achievement awards.
In addition to a BA and M.Ed., he holds the Chartered Life Underwriter,
Chartered Financial Consultant, Registered Health Underwriter and
Registered Employee Benefits Consultant designations from the
American College. He is the author of the financial education books,
ITS IN YOUR INTERE$T and INTERE$T WI$E and may be contacted at
[email protected] and www.moneywise.4t.com.
 CONTENTS
PREFACE

INTRODUCTION

CHAPTER 1 THE WONDERS OF COMPOUND INTEREST

the value of a single deposit over time
the value of annual and monthly deposits over time
rule of 72 & 115 - when money doubles & triples

CHAPTER 2 PRESENT VALUE

the worth today of a future sum.
how much you need to save to reach a goal
fixed vs. variable interest rate comparison

CHAPTER 3 TAXES & TAX-FREE INCOME

tax brackets
after-tax equivalent yields
taxable equivalent yields
double tax-free yields
taxable rule of 72 - taxable rule of 115

CHAPTER 4 TAX DEFERRED INTEREST

tax deferred vs. taxable growth
tax deductible and tax deferred savings

CHAPTER 5 COST OF DELAY

time value of money
annual vs. monthly investing
beginning vs. end of year investing
the earlier the better

CHAPTER 6 HOW LONG WILL YOUR MONEY LAST

withdrawing capital over time

CHAPTER 7 INFLATION
how much you must earn to break even
what your money is worth at various inflation rates
what your money needs to be worth in the future

v
 PREFACE

During your lifetime, you will be confronted with having to make

various financial decisions. Whether you invest or save , you need to
become money wise, especially how interest affects your financial
well being.
MONEY WI$E has been written to provide you with easy to understand
information on how to earn and keep more of your interest on your
money and minimize taxes.
When presented with financial alternatives and strategies concerning
interest, you will be able to make the right choice, rewarding yourself
with hundreds and thousands of dollars in additional interest each
and every year.
It is my hope that this book will help make financial plans and interest
work for, not against you, by becoming a better informed investor,
saver, taxpayer and financially wiser manager of your money.

2003
RICHARD P. BLOOM

VII
 INTRODUCTION

The role that interest plays in our everyday lives is fundamental to our
financial well being.
Today, more than ever, consumers need to become money wise, especially
information that will be financially beneficial to them in order to earn and
keep more on what they save and invest, and pay less in taxes.
Banks, insurance companies and brokerage firms are all competing for your
business. Each has a deal, making it difficult for you to determine which is
best for you.
MONEY WI$E is a guide for consumers who wish to understand and profit
by how interest and taxes affect them. Making sense of the various
alternatives with which you are confronted, you will come out the winner.
My 30 years in the life insurance and financial service industry has made it
very clear to me, that, when it comes to personal financial decisions such
as choosing a savings account, after tax, tax deferred, tax-free or tax
deductible investments, many consumers do not know how to maximize
their financial gain and minimize taxes, costing themselves hundreds and
thousands of dollars every year.
The interest rate you earn, the compounding method, the period of time
involved, your tax bracket, rate of inflation, how early you start, the type of
investment you choose, and your awareness of basic financial concepts,
facts, and strategies will determine eventually how much you profit and how
much you pay.
This book contains many easy to understand tables, examples and
explanations on how to locate, use, and apply the data for specific
situations to help you make the right choice.
You will be able to apply MONEY WI$E, immediately and throughout your
life, rewarding yourself with thousands, tens of thousands, and even
hundreds of thousands of more dollars earned on your money, and saved
on taxes.

IX
INCREASE YOUR WEALTH
BECOME
MONEY WI$E

2
 CHAPTER 1

% THE WONDERS OF COMPOUND INTEREST %

WHAT IS INTEREST?

INTEREST is money paid for the use of money , expressed as a percent

(%) or rate over a period of time. It is the amount of mon ey paid each year
at a declared rate on borrowed or invested capital.
Interest is paid to you for the use of your money or paid by you for using
someone else's money.
Interest can be simple or compound.
Simple interest is interest earned only on the principal.
Compound interest is interest earned on the principal and added to the
original principal as it is earned. You are therefore earning interest on
interest as well as principal. The greater the period of time, the larger the
difference becomes in favor of compound over simple interest. The more
frequent the compounding period the higher your return. This larger
amount is known as the annual percentage yield (a.p.y.), defined as the
actual interest rate your money earns at the stated compound interest rat e
for a full year on a deposit such as a money market or certificate of
deposit.

Albert Einstein called compound interest the "eighth wonder of the world
and the most powerful force on earth" for wealth accumulation.
For example, a deposit of $100 compounding annually at 3% for the past
875 years, would have accumulated to over $6,500,000,000,000 today.
That's 6 trillion dollars. A sum more than enough to wipe out our entire
national debt as of 2003.
One dollar deposited at 3%, compounding annually from the time
Columbus discovered America would have accumulated to over one million
dollars.
If someone had left you $55,000, 50 years ago, and it had compounded
annually at 6%, it would have grown to over $1,000,000 today. A sum of
$8,000 compounding annually at 5% for the past 100 years would likewise
have accumulated today to more than one million dollars.

3
THE SECRET TO BUILDING WEALTH AND GROWING RICH IS TO LET
YOUR MONEY COMPOUND, COMPOUND, AND COMPOUND, YEAR
AFTER YEAR AFTER YEAR.

THE VALUE OF A SINGLE DEPOSIT OVER TIME

How can you easily determine what a lump sum will grow to at various
interest rates and time periods?
The following table based upon the growth of a single deposit of $1.00
provides annual compounding "factors" or multipliers" which will enable
you to obtain an answer for any amount of money.

COMPOUND INTEREST TABLE

HOW A SINGLE DEPOSIT OF $1.00 WILL GROW AT VARIOUS INTEREST RATES
COMPOUNDED ANNUALLY

End of Interest Rate

Year 3% 3.5% 4% 4.5% 5% 5.5% 6% 6.5% 7%
1 1.030 1.035 1.040 1.045 1.050 1.055 1.060 1.065 1.070
2 1.061 1.071 1.082 1.092 1.103 1.113 1.124 1.134 1.145
3 1.093 1.109 1.125 1.141 1.158 1.174 1.191 1.208 1.225
4 1.126 1.148 1.170 1.193 1.216 1.239 1.262 1.286 1.311
5 1.159 1.188 1.217 1.246 1.276 1.307 1.338 1.370 1.403
6 1.194 1.229 1.265 1.302 1.340 1.379 1.419 1.459 1.501
7 1.230 1.272 1.316 1.361 1.407 1.455 1.504 1.554 1.606
8 1.267 1.317 1.369 1.422 1.477 1.535 1.594 1.655 1.718
9 1.305 1.363 1.423 1.486 1.551 1.619 1.689 1.763 1.838
10 1.344 1.411 1.480 1.553 1.629 1.708 1.791 1.877 1.967
15 1.558 1.675 1.801 1.935 2.079 2.232 2.397 2.572 2.759
20 1.806 1.990 2.191 2.412 2.653 2.918 3.207 3.524 3.870
25 2.094 2.363 2.666 3.005 3.386 3.813 4.292 4.828 5.427
30 2.427 2.807 3.243 3.745 4.322 4.984 5.743 6.614 7.612
35 2.814 3.334 3.946 4.667 5.516 6.514 7.686 9.062 10.677
40 3.262 3.959 4.801 5.816 7.040 8.513 10.286 12.416 14.974

4
 End of Interest Rate
Year 7.5% 8% 8.5% 9% 9.5% 10% 12% 15%
1 1.075 1.080 1.085 1.090 1.095 1.100 1.120 1.150
2 1.156 1.166 1.177 1.188 1.199 1.210 1.254 1.323
3 1.242 1.260 1.277 1.295 1.313 1.331 1.405 1.521
4 1.335 1.360 1.386 1.412 1.438 1.464 1.574 1.749
5 1.436 1.469 1.504 1.539 1.574 1.610 1.762 2.011
6 1.543 1.587 1.631 1.677 1.724 1.772 1.974 2.313
7 1.659 1.714 1.770 1.828 1.887 1.949 2.211 2.660
8 1.783 1.851 1.921 1.993 2.067 2.144 2.476 3.059
9 1.917 1.999 2.084 2.172 2.263 2.358 2.773 3.518
10 2.061 2.159 2.261 2.367 2.478 2.594 3.106 4.046
15 2.959 3.172 3.400 3.642 3.901 4.177 5.474 8.137
20 4.248 4.661 5.112 5.604 6.142 6.727 9.646 16.367
25 6.098 6.848 7.687 8.623 9.668 10.835 17.000 32.919
30 8.755 10.063 11.588 13.268 15.220 17.449 29.960 66.212
35 12.569 14.785 17.380 20.414 23.960 28.102 52.800 133.176
40 18.044 21.725 26.133 31.409 37.719 45.259 93.051 267.864

To find how much a single deposit of $25,000 would grow to in 25 years,

assuming a 5% compounded annual interest rate, locate the factor, 3.386,
where the columns for 5% and 25 years intersect and multiply it by
$25,000. Answer: $84,650.
To determine how much a single deposit of $25,000 would grow to at the
end of 25 years if the interest rate was 6% for the first 6 years, 8% for the
next 9 years, and 7% for the remaining 10 years, you would first locate the
factor, 1.419, where the columns for 6% and 6 years intersect and multiply
it by $25,000.
You would next multiply the answer, $35,475, by the factor of 1.999,
located where the columns for 8% and 9 years intersect. Finally, multiply
the answer, $70,915 by the factor, 1.967, located where the columns for
7% and 10 years intersect, to arrive at your answer of $139,490.

5
 HOW $10,000 WILL GROW OVER TIME
AT VARIOUS INTEREST RATES COMPOUNDED ANNUALLY

End of Interest Rate

Year 3% 4% 5% 6% 7% 8% 9% 10% 12% 15%
5 11,592 12,166 12,762 13,382 14,025 14,693 15,386 16,105 17,623 20,113
10 13,439 14,802 16,288 17,908 19,671 21,589 23,673 25,937 31,058 40,455
15 15,579 18,009 20,789 23,965 27,590 31,721 36,424 41,772 54,735 81,370
20 18,061 21,911 26,532 32,071 38,696 46,609 56,044 67,274 96,462 163,665
25 20,937 26,658 33,863 42,918 54,274 68,484 86,230 108,347 170,000 329,189
30 24,272 32,433 43,219 57,434 76,122 100,626 132,676 174,494 299,599 662,117
35 28,138 39,460 55,160 76,860 106,765 147,853 204,139 281,024 527,996 1,331,755
40 32,620 48,010 70,399 102,857 149,744 217,245 314,094 492,592 930,509 2,678,635

To determine how sums greater than $10,000 would grow, without using
the compound interest table, multiply the figures in the table as follows:
SUM FACTOR

$12,000 x 1.2
$15,000 x 1.5
$20,000 x 2
$25,000 x 2.5
$50,000 x 5
$100,000 x 10

To determine how sums less than $10,000 wo uld grow, without using the
compound interest table, divide the figures in the table as follows:
SUM FACTOR

$1,000 -:- 10
$2,000 -:- 5
$4,000 -:- 2.5
$5,000 -:- 2
$8,000 -:- 1.2

6
To determine what a deposit made every year would accumulate to, the
table below provides the factors by interest rate and time period.

ANNUAL COMPOUND INTEREST TABLE

HOW $1.00 DEPOSITED AT THE BEGINNING OF EACH YEAR WILL GROW AT
VARIOUS INTEREST RATES COMPOUNDED ANNUALLY

End of Interest Rate

Year 3% 3.5% 4% 4.5% 5% 5.5% 6% 6.5% 7%
1 1.030 1.035 1.040 1.045 1.050 1.055 1.060 1.065 1.070
2 2.091 2.106 2.122 2.137 2.153 2.168 2.184 2.199 2.215
3 3.184 3.215 3.247 3.278 3.310 3.342 3.375 3.407 3.440
4 4.309 4.363 4.416 4.471 4.526 4.581 4.637 4.694 4.751
5 5.468 5.550 5.633 5.717 5.802 5.888 5.975 6.064 6.153
6 6.663 6.779 6.898 7.019 7.142 7.267 7.394 7.523 7.654
7 7.892 8.052 8.214 8.380 8.549 8.722 8.898 9.077 9.260
8 9.159 9.369 9.583 9.802 10.027 10.256 10.491 10.732 10.978
9 10.464 10.731 11.006 11.288 11.578 11.875 12.181 12.494 12.816
10 11.808 12.142 12.486 12.841 13.207 13.584 13.972 14.372 14.784
15 19.157 19.971 20.825 21.719 22.658 23.641 24.673 25.754 26.881
20 27.676 29.270 30.969 32.783 34.719 36.786 38.993 41.349 43.865
25 37.553 40.313 43.312 46.571 50.114 53.966 58.156 62.715 67.677
30 49.003 53.430 58.328 63.752 69.761 76.419 83.802 91.989 101.073
35 62.276 69.008 76.598 85.164 94.836 105.765 118.121 132.097 147.914
40 77.663 87.510 98.827 111.847 126.840 144.119 164.048 187.048 213.610

End of Interest Rate

Year 7.5% 8% 8.5% 9% 9.5% 10% 12% 15%
1 1.075 1.080 1.085 1.090 1.095 1.100 1.120 1.150
2 2.231 2.246 2.262 2.278 2.294 2.310 2.374 2.473
3 3.473 3.506 3.540 3.573 3.607 3.641 3.779 3.993
4 4.808 4.867 4.925 4.985 5.045 5.105 5.353 5.742
5 6.244 6.336 6.429 6.523 6.619 6.716 7.115 7.754
6 7.787 7.923 8.061 8.200 8.343 8.487 9.089 10.067
7 9.446 9.637 9.831 10.029 10.230 10.436 11.300 12.727
8 11.230 11.488 11.751 12.021 12.297 12.580 13.776 15.786
9 13.147 13.487 13.835 14.193 14.560 14.937 16.549 19.304
10 15.208 15.646 16.096 16.560 17.039 17.531 19.655 23.349
15 28.077 29.324 30.632 32.003 33.442 34.950 41.753 54.718
20 46.553 49.423 52.489 55.765 59.264 63.003 80.699 117.810
25 73.076 78.954 85.355 92.324 99.914 108.182 149.334 244.712
30 111.154 122.346 134.773 148.575 163.908 180.943 270.293 499.957
35 165.821 186.102 209.081 235.125 264.649 298.127 483.463 1013.346
40 244.301 279.781 320.816 368.292 423.239 486.852 859.142 2045.954

To find how much an annual deposit of $2,000 will grow at an assumed 5%

interest rate compounded annually for 20 years, locate the factor, 34.719
where the columns for 5% and 20 years intersect. Multiply the factor by
$2,000 to arrive at your answer, $69,438.

7
 WHAT A DIFFERENCE A RATE MAKES
HOW $2,000 DEPOSITED AT THE BEGINNING OF EACH YEAR WILL GROW AT
VARIOUS INTEREST RATES COMPOUNDED ANNUALLY

Total Interest Rate

Year Deposits 4% 5% 6% 7% 8% 9% 10%
1 $ 2,000 $ 2,080 $ 2,100 $ 2,120 $ 2,140 $ 2,160 $ 2,180 $ 2,200
5 $ 10,000 11,266 11,604 11,951 12,307 12,672 13,047 13,431
10 $ 20,000 24,973 26,414 27,943 29,567 31,291 33,121 34,077
15 $ 30,000 41,649 45,315 49,345 53,776 58,649 64,007 69,899
20 $ 40,000 61,938 69,439 77,985 87,730 98,846 111,529 126,005
25 $ 50,000 86,623 100,227 116,313 135,353 157,909 184,648 216,364
30 $ 60,000 116,657 139,522 167,603 202,146 244,692 297,150 361,887
35 $ 70,000 153,197 189,673 236,242 295,827 372,204 470,249 596,254
40 $ 80,000 197,653 253,680 328,095 427,220 559,562 736,584 973,704

From the above table, you can see how a small difference in interest can,
through the power of compounding result in more money for you.
The following table illustrates what a deposit made every year would grow
to, if compounded monthly.

MONTHLY COMPOUND INTEREST TABLE

HOW $1.00 DEPOSITED AT THE BEGINNING OF EACH YEAR
WILL GROW AT VARIOUS INTEREST RATES

End of Interest Rate

Year 3% 4% 5% 6% 7%
5 $ 5.475 5.645 5.822 6.005 6.195
10 11.834 12.535 13.293 14.105 14.976
15 19.221 20.947 22.882 25.030 27.426
20 27.800 31.216 35.188 39.767 45.074
25 37.766 43.752 50.982 59.644 70.093
30 49.341 59.055 71.249 86.455 105.561
35 62.785 77.736 97.260 122.620 155.840
40 78.402 100.541 130.642 171.401 227.118

8% 9% 10% 12% 15%

5 6.392 6.596 6.808 7.256 7.996
10 15.914 16.923 18.009 20.439 24.481
15 30.101 33.092 36.438 44.387 60.339
20 51.238 58.409 66.760 87.894 135.140
25 82.728 98.045 116.649 166.933 292.760
30 129.644 160.104 198.731 310.523 624.896
35 199.541 257.269 333.781 571.382 1,324.770
40 303.677 409.399 555.980 1,045.283 2,799.537

8
To find how much an annual deposit of $2,000 each year will grow to at an
assumed 5% interest rate, compounded monthly for 25 years; locate the
factor, 50.982 where the columns for 5% and 25 years intersect.
Multiplying the factor by $2,000 gives you $101,964.
If your $2,000 annual deposit was compounding annually for 25 years
at 5% interest, instead of monthly, you would have only $100,227.
The following table will help you calculate what a monthly deposit will
accumulate to in the future at various interest rates, compounded annually.

WHAT A $1.00 MONTHLY DEPOSIT WILL GROW TO IN THE FUTURE

AT VARIOUS INTEREST RATES COMPOUNDING ANNUALLY
End of Interest Rate
Year 3% 4% 5% 6% 7%
1 12.195 12.260 12.325 12.390 12.455
2 24.756 25.010 25.266 25.523 25.782
3 37.123 38.271 38.855 39.445 40.041
4 51.019 52.062 53.122 54.202 55.300
5 64.745 66.404 68.103 69.844 71.626
10 139.802 147.195 155.023 163.310 172.084
15 226.814 245.489 265.956 288.389 312.982
20 327.684 365.079 407.538 455.774 510.599
25 444.621 510.579 588.237 679.771 787.767
30 580.182 687.601 818.859 979.531 1176.509
35 737.335 902.860 1112.980 1380.280 1721.090
40 919.518 1164.860 1488.560 1916.960 2485.520

8% 9% 10% 12% 15%

1 12.520 12.585 12.650 12.780 12.975
2 26.042 26.303 26.565 27.094 27.896
3 40.645 41.255 41.872 43.125 45.056
4 56.417 57.553 58.709 61.080 64.789
5 73.450 75.318 77.230 81.189 87.482
10 181.372 191.203 201.608 224.273 263.441
15 339.945 369.507 401.922 476.435 617.356
20 572.940 643.850 724.529 920.830 1329.206
25 915.286 1065.961 1244.090 1704.007 2760.989
30 1418.306 1715.430 2080.849 3084.232 5640.818
35 2156.350 2713.050 3425.890 5516.660 11433.182
40 3241.800 4249.640 5594.610 9803.428 23083.693

Example: At 5% interest, how much will $135 per month accumulate to by

the end of 15 years? To find the answer, locate the factor at the columns
where 5% and 15 years intersect. Multiply the factor by the monthly deposit
of $135 and you get $35,904, the amount it would have grown to in 15
years.

9
 HOW $100 PER MONTH WILL GROW OVER TIME
AT VARIOUS INTEREST RATES COMPOUNDED ANNUALLY

End of Total Interest Rate

Year Deposits 4% 5% 6% 7% 8% 9% 10%
1 $ 1,200 $1,225 $1,232 $1,238 $1,245 $1,251 $1,257 $1,265
5 6,000 6,639 6,809 6,982 7,160 7,341 7,527 7,717

10 12,000 14,717 15,499 16,326 17,202 18,128 19,108 20,146

15 18,000 24,545 26,590 28,830 31,286 33,978 36,928 40,162

20 24,000 36,503 40,746 45,564 51,041 57,266 64,345 72,399
25 30,000 51,051 58,812 67,958 78,747 91,484 106,530 124,316
30 36,000 68,751 81,870 97,925 117,606 141,761 171,438 207,929

35 42,000 90,286 111,298 138,028 172,109 215,635 271,305 342,589

40 48,000 116,486 148,856 191,696 248,552 324,180 424,964 559,461

To find how much other monthly deposits will grow to, simply multiply by
the appropriate ratio. For example, $200 per month compounded annually,
will accumulate to $135,916 over 25 years. This is arrived at by multi plying
by 2 the factor found where the 6% and 25 year columns intersect.

10
 RULE OF 72 RULE OF 115
WHEN MONEY DOUBLES WHEN MONEY TRIPLES

Instead of searching the compound interest tables for factors to help you
determine how long it will take a sum of money to double or triple at an
assumed interest rate, there is a much quicker method.

The rule of 72 is a fast, though not a 100% accurate method, to determine

how many years it will take money to double based upon an assumed rate
of return. Simply divide 72 by the interest rate and you have your answer.

RULE OF 72

72 -:- ASSUMED RATE OF RETURN = # OF YEARS MONEY DOUBLES

EX. 72 -:- 5% = 14.40 YEARS EX. 72 -:- 4% = 18 YEARS

$10,000 EARNING 6% COMPOUNDED ANNUALLY

WILL GROW TO $20,000 IN 12 YEARS.

Conversely, if you know that your money has doubled in a certain period of
time, you can determine what your annual compound interest rate was by
dividing 72 by the number of years it took your money to double.

72 -:- # OF YEARS = RATE OF RETURN

EX. 72 -:- 12 YEARS = 6%

The rule of 115, though also not 100% precise, is a shortcut to determine
how long it will take a sum of money to triple based upon an assumed rate
of return. Simply divide 115 by the interest rate and you have your answer.

RULE OF 115

115 -:- ASSUMED RATE OF RETURN = # OF YEARS MONEY TRIPLES

EX. 115-:- 5% = 23 YEARS EX. 115 -:- 4.5% = 25.56 YEARS

$10,000 EARNING 6% COMPOUNDED ANNUALLY

WILL GROW TO $30,000 IN 19.17 YEARS.

Conversely, if you know how long your money took to triple, you can
determine the annual compound interest rate by dividing 115 by the
number of years.

11
 115 -:- # OF YEARS = RATE OF RETURN
EX. 115 -:- 16 YEARS =7.19%

The following table shows the number of years it will take a sum of money
to double and triple at various interest rates compounded annually using
the two shortcut methods.

RULE OF 72 & RULE OF 115 TABLE

Interest Rule of 72 Rule of 115

1.0% 72 years 115 years
2.0% 36 57.5
3.0% 24 38.33
3.5% 20.6 32.86
4.0% 18 28.75
4.5% 16 25.56
5.0% 14.4 23
5.5% 13.1 20.91
6.0% 12 19.17
6.5% 11.1 17.69
7.0% 10.3 16.43
7.5% 9.6 15.33
8.0% 9 14.38
8.5% 8.5 13.53
9.0% 8 12.78
9.5% 7.6 12.11
10% 7.2 11.50
12% 6 9.58

12
 CHAPTER 2

PRESENT VALUE

To save a large amount of money may initially seem difficult to achieve.

However, through the power of compounding over time, a single deposit or
a series of sums of money will make your goal more attainable.
How do you determine how much money you need to save over a given
time period to reach your goal? By understanding how compound
discounting or the present value of money works.
Present value is the value today of a future payment. In other words,
finding the present value of a future amount, whether it is a single
sum or a series of deposits.
The following tables will help you easily determine how much you need to
save either by depositing a lump sum, monthly or annual deposits to reach
a predetermined goal.

COMPOUND DISCOUNT TABLE

WHAT $1.00 TO BE PAID IN THE FUTURE IS WORTH TODAY

End of Interest Rate

Year 3% 4% 5% 6% 7% 8% 9% 10% 12% 15%
1 .971 .962 .952 .943 .935 .926 .917 .909 .893 .870
2 .943 .925 .907 .890 .873 .857 .842 .826 .797 .756
3 .915 .889 .864 .840 .816 .794 .772 .751 .712 .658
4 .888 .855 .823 .792 .763 .735 .708 .683 .636 .572
5 .863 .822 .784 .747 .713 .681 .650 .621 .567 .497
6 .837 .790 .746 .705 .666 .630 .596 .564 .507 .432
7 .813 .760 .711 .665 .623 .583 .547 .513 .452 .376
8 .789 .731 .677 .627 .582 .540 .502 .467 .404 .327
9 .766 .703 .645 .592 .544 .500 .460 .424 .361 .284
10 .744 .676 .614 .558 .508 .463 .422 .386 .322 .247
15 .642 .555 .481 .417 .362 .315 .275 .239 .183 .123
20 .554 .456 .377 .312 .258 .215 .178 .149 .104 .061
25 .478 .375 .295 .233 .184 .146 .116 .092 .059 .030
30 .412 .308 .231 .174 .131 .099 .075 .057 .033 .015
35 .355 .253 .181 .130 .094 .068 .049 .036 .019 .008
40 .307 .208 .142 .097 .067 .046 .032 .022 .011 .004

13
Example: How much money do you need to invest today at an assumed
6% interest rate, compounded annually, that will grow t o $100,000 in 15
years?
Locate the factor, .417 where the columns for 6% and 15 years intersect.
Multiply the factor by $100,000 for your answer, $41,700 .
The following table will help you determine the amount of money you need
to save or invest each month to reach a specific goal.

WHAT YOU NEED TO SAVE EACH MONTH TO REACH A GOAL

End of Interest Rate

Year 3% 4% 5% 6% 7%
1 12.195 12.260 12.325 12.390 12.455
2 24.756 25.010 25.266 25.523 25.782
3 37.123 38.271 38.855 39.445 40.041
4 51.019 52.062 53.122 54.202 55.300
5 64.745 66.404 68.103 69.844 71.626
10 139.802 147.195 155.023 163.310 172.084
15 226.814 245.489 265.956 288.389 312.982
20 327.684 365.079 407.538 455.774 510.599
25 444.621 510.579 588.237 679.771 787.767
30 580.182 687.601 818.859 979.531 1176.509
35 737.335 902.860 1112.980 1380.280 1721.090
40 919.518 1164.860 1488.560 1916.960 2485.520

8% 9% 10% 12% 15%

1 12.520 12.585 12.650 12.780 12.975
2 26.042 26.303 26.565 27.094 27.896
3 40.645 41.255 41.872 43.125 45.056
4 56.417 57.553 58.709 61.080 64.789
5 73.450 75.318 77.230 81.189 87.482
10 181.372 191.203 201.608 224.273 263.441
15 339.945 369.507 401.922 476.435 617.356
20 572.940 643.850 724.529 920.830 1329.206
25 915.286 1065.961 1244.090 1704.007 2760.989
30 1418.306 1715.430 2080.849 3084.232 5640.818
35 2156.350 2713.050 3425.890 5516.660 11433.182
40 3241.800 4249.640 5594.610 9803.428 23083.693

Example: You have set a financial goal to accumulate $50,000 in 15

years, and you want to determine how much you need to save monthly at
an assumed 6% interest rate for 15 years. Locate the factor, 288.389,
found where the columns for 6% and 15 years intersect. Divide the
targeted amount of $50,000 by the factor and you come up with the
amount of $173.38 that must be saved monthly to reach your goal.

14
 HOW MUCH YOU NEED TO SAVE EACH MONTH AT 6%
TO REACH A SPECIFIC GOAL
TO ACCUMULATE THIS AMOUNT
$10,000 $25,000 $50,000 $100,000 $250,000 $500,000 $1,000,000
YEARS
TO SAVE YOU MUST SAVE THIS AMOUNT EACH MONTH
5 $143 $358 $716 $1,432 $3,580 $7,160 $14,320

10 61 153 306 612 1,530 3,060 6,120

15 35 88 176 352 880 1,760 3,520

20 22 55 110 220 550 1,100 2,200

25 15 38 75 150 375 750 1,500

30 10 25 50 100 250 500 1,000

Whether you are planning to save for a car, home, and childs education or
for retirement, the above table will quickly provide a reference point.
To determine amounts not shown, for example, how much must be saved
monthly at 6% to have $30,000 at the end of 10 years. First locate the
columns where 10 years and $10,000 intersect and multiply the number 61
by 3 to get your answer of $183 a month.

The earlier you start, the less money you need each month to reach your
financial goal. For example, you need to save $358 per month, earning 6%
compounded annually, for 5 years, to accumulate $25,000. However, if you
started 5 years earlier, you would only need to save $153 per month, at the
same compound annual rate to reach $ 25,000.

15
 AMOUNT REQUIRED TO BE INVESTED ANNUALLY
IN ADVANCE TO GROW TO $1,000

End of Interest rate

Year 3% 4% 5% 6% 7% 8% 9% 10% 12% 15%
1 970.87 961.54 952.38 943.40 934.58 925.93 917.43 909.09 892.86 869.57
2 478.26 471.34 464.58 457.96 451.49 445.16 438.98 432.90 421.16 404.45
3 314.11 308.03 302.10 296.33 290.70 285.22 279.88 274.65 264.60 250.41
4 232.07 226.43 220.96 215.65 210.49 205.48 200.60 195.88 186.82 174.14
5 182.87 177.53 172.36 167.36 162.51 157.83 153.32 148.90 140.55 128.98
6 150.09 144.96 140.02 135.25 130.65 126.22 121.95 117.82 110.02 99.34
7 126.71 121.74 116.97 112.39 107.99 103.77 99.72 95.82 88.50 78.57
8 109.18 104.35 99.74 95.32 91.09 87.05 83.19 79.49 72.59 63.35
9 95.57 90.86 86.37 82.10 78.02 74.15 70.46 66.95 60.43 51.80
10 84.69 80.09 75.72 71.57 67.64 63.92 60.39 57.04 50.88 42.83
15 52.20 48.02 44.14 40.53 37.19 34.10 31.25 28.61 23.95 18.28
20 36.13 32.29 28.80 25.65 22.80 20.23 17.93 15.87 12.39 8.49
25 26.63 23.09 19.95 17.20 4.78 12.67 10.83 9.24 6.70 4.09
30 20.41 17.14 14.33 11.93 9.89 8.17 6.73 5.52 3.70 2.00
35 16.06 13.06 10.54 8.47 6.76 5.37 4.25 3.35 2.06 .99
40 12.88 10.12 7.88 6.10 4.68 3.57 2.71 2.05 1.16 .49

Example: How much money do you need to invest annually each yea r that
will grow to $100,000 in 20 years at an assumed 6% interest rate
compounded annually? Locate the factor (25.65) where the columns for
6% and 20 years intersect. Multiply the factor by 100, since the table is
based upon factors per $1,000, and you get $2,565 per year.

This next table will tell you how much you need to invest monthly at various
interest rates to accumulate $1,000 over a given time period.

MONTHLY INVESTMENT NEEDED TO ACCUMULATE $1,000

End of Interest Rate

Year 3% 4% 5% 6% 7% 8% 9% 10% 12% 15%
5 $15.45 $15.06 $14.68 $14.32 $13.96 $13.61 $13.28 $12.95 $12.32 $11.43
10 7.15 6.79 6.45 6.12 5.81 5.51 5.23 4.96 4.46 3.80
15 4.41 4.07 3.76 3.47 3.20 2.94 2.71 2.49 2.10 1.62
20 3.05 2.74 2.45 2.19 1.96 1.75 1.55 1.38 1.09 .75
25 2.25 1.96 1.70 1.47 1.27 1.09 .94 .80 .59 .36
30 1.72 1.45 1.22 1.02 .85 .71 .58 .48 .32 .18

16
Example: You want to find how much you need to invest monthly, to
accumulate $200,000 for retirement, 25 years from now, assuming 6%
interest, compounded annually. Multiply the factor of 1.47, located where
the columns for 6% and 25 intersect, by 200, since the above figures are
per $1,000 and you get $294 per month.
Example: You want to determine how much you must invest monthly, at
5% interest, to accumulate $80,000 in 15 years for a child's college tuition.
Multiply the factor of 3.76 by 80 and your answer is $301 per month.
Example: You want to save $30,000 for a down payment on a house in 5
years. How much do you need to invest monthly, assuming a 7% annual
return? Answer: Multiply 13.96 by 30 and you come up with $419 a month.

This next table shows the amount of a single deposit, required to

accumulate to $100,000 over given time periods, at various interest rates.

SINGLE SUM REQUIRED TO ACCUMULATE TO $100,000

Interest End of Year

Rate 5 10 15 20 25 30 35 40
3% $86,261 $74,409 $64,186 $55,368 $47,761 $41,199 $35,538 $30,656
4% 82,193 67,556 55,526 45,639 37,512 30,832 25,342 20,829
5% 78,353 61,391 48,102 37,689 29,530 23,138 18,129 14,205
6% 74,726 55,839 41,727 31,180 23,300 17,411 13,011 9,722
7% 71,299 50,835 36,245 25,842 18,425 13,137 9,366 6,678
8% 68,058 46,319 31,524 21,455 14,602 9,938 6,764 4,603
9% 64,993 42,241 27,454 17,843 11,597 7,537 4,899 3,184
10% 62,092 38,554 3,940 14,864 9,230 5,731 3,558 2,210
12% 56,743 32,197 18,270 10,367 5,882 3,338 1,894 1,075
15% 49,718 24,718 12,289 6,110 3,040 1,510 751 373

To determine the amount required, that would grow to $100,000 at the end
of 15 years, if invested at 5%, compounded annually, loca te where the 5%
and 15 year columns intersect. Answer: $48,102

17
The following table tells you how much is required to invest annually, each
year at various interest rates to accumulate $100,000.

ANNUAL INVESTMENT REQUIRED TO ACCUMULATE TO $100,000

Interest End of Year

Rate 5 10 15 20 25 30 35 40
3% 18,290 $8,470 $5,220 $3,613 $2,663 $2,041 $1,606 $1,288
4% 17,751 8,009 4,802 3,229 2,309 1,714 1,306 1,011
5% 17,236 7,572 4,414 2,880 1,996 1,433 1,054 788
6% 16,736 7,157 4,053 2,565 1,720 1,193 847 610
7% 16,254 6,764 3,719 2,280 1,478 989 676 468
8% 15,783 6,392 3,410 2,024 1,267 817 537 357
9% 15,332 6,039 3,125 1,793 1,083 673 425 272
10% 14,890 5,704 2,861 1,587 924 553 335 205
12% 14,055 5,088 2,395 1,239 670 370 206 116
15% 12,898 4,283 1,828 849 409 200 99 49

To determine the annual amount required, that would grow to $100,000 at

the end of 20 years, if invested at 5%, compounded annually, locate where
the 5% and 20 year columns intersect. Answer: $2,880.
If instead of $100,000, you wanted to determine the annual amount that
would grow to $50,000 at the end of 20 years, at 6%, divide the figure,
2,565 found at the intersection of the 6% and 20 year columns, in half.
Answer: $1,283 invested annually at 6% would accumulate to $50,000 in
20 years.
To determine the annual amount that would grow to $200,000, at the end
of 25 years, at 6%, multiply the figure, 1,720, found at the intersection of
the 6% and 25 year columns by 2. Answer: $3,440 invested annually at
6% would accumulate to $200,000 in 25 years.

18
The next table compares a fixed investment at a 5%, compound, annual
interest rate over a 10 year period with an investment that produces
various returns for the same period.

FIXED VERSUS VARIABLE

VALUES AT 5% END OF VARIABLE INVESTMENT

FIXED RATE YEAR RETURN VALUES

$105,000 1 +22% $ 122,000

112,400 2 +10% $ 134,000

115,800 3 + 3% $ 138,226

121,600 4 - 12% $ 121,639

127,600 5 + 8% $ 131,370

134,000 6 - 3% $ 127,429

140,700 7 +15% $ 146,543

147,700 8 + 5% $ 153,870

155,100 9 - 8% $ 141,560

162,900 10 +15% $ 162,794

Although the above table is purely hypothetical, it does point out that
sometimes a smaller fixed return, will do as well, and perhaps better than a
less conservative investment. The higher the interest rate and the longer
the time it remains high, the more favorable the comparison.

19
 CHAPTER 3

TAXES

Taxes and inflation are the two worst villains when it comes to reducing the
value of money. While inflation reduces the purchasing powe r of money,
we have no direct control over it.
Taxes on employment income, interest, dividends, and capital gains,
fortunately, can be reduced through various tax savings strategies.
It usually is in your interest to convert taxable interest into tax-free or tax
deferred interest. If you can also convert a non-deductible investment into
any tax deductible retirement plan for which you qualify, you will certainly
get more bang from each dollar.
What you get to keep is more important than what you earn on a n
investment!
That statement should be one of the guiding principles of any saving and
investment plan.
This chapter will deal with tax-free, tax deferred and tax deductible savings
strategies and the tremendous positive effect they have on your bottom
line and in wealth building. By investing in tax advantaged plans and
allowing the power of compound interest to work for you on your money,
you will put yourself on the road to financial security. Easy to use tables
and examples are provided to help you determine the right choice among
investment alternatives.
Investing in tax advantaged plans is like borrowing tax dollars from the IRS
at "0" interest and putting that money to work to earn interest and have that
interest also compound for you, year after year.
One of the things you will enjoy most about tax-free and tax deferred
investing is that you will not receive a 1099 tax form for your interest
earnings.
Always consult with a professional advisor to determine the type of tax
advantaged strategies and financial products most beneficial for you.

20
The following table illustrates how taxes reduce the amount of return on
your money by showing the after tax yield on a taxable investment.

AFTER TAX EQUIVALENT YIELDS

Taxable Tax Brackets

Interest 15% 25% 28% 33% 35%
3% 2.55 2.25 2.16 2.01 1.95
3.5% 2.98 2.63 2.52 2.35 2.28
4% 3.40 3.00 2.88 2.68 2.60
4.5% 3.83 3.38 3.24 3.02 2.93
5% 4.25 3.75 3.60 3.35 3.25
5.5% 4.68 4.13 3.96 3.69 3.58
6% 5.10 4.50 4.32 4.02 3.90
6.5% 5.52 4.88 4.68 4.36 4.23
7% 5.95 5.25 5.04 4.69 4.55
7.5% 6.38 5.63 5.40 5.03 4.88
8% 6.80 6.00 5.76 5.36 5.20
8.5% 7.23 6.38 6.12 5.70 5.53
9% 7.65 6.75 6.48 6.03 5.85
9.5% 8.07 7.13 6.84 6.37 6.18
10% 8.50 7.50 7.20 6.70 6.50
12% 10.20 9.00 8.64 8.04 7.80
15% 12.75 11.25 10.80 10.05 9.75

How do you determine the after tax equivalent yield on an interest rate or
investment return? Multiply the interest rate by 1 minus your federal tax
bracket. Example: What is the after tax rate equivalent on 4% for a person
in the 25% tax bracket?

FORMULA

INTEREST RATE X 1 - INCOME TAX BRACKET = AFTER TAX EQUIVALENT YIELD

4% X (1-25) = 4% X .75 = 3% AFTER TAX RETURN TO YOU

From the above table you can determine the after tax equivalent yield on
an interest rate by locating where the interest rate and tax bracket
intersect. This does not take into consideration any state income tax.

21
 TAX EQUIVALENT YIELDS

When does a 5% interest rate equal an 7.69% inter est yield? The answer
to that question is when you have an investment that provides a tax -free or
tax-deferred yield and you are in the 35% tax bracket.
A tax-exempt or tax-deferred investment that pays the same interest as a
taxable one, has a higher after-tax yield because you either never pay
taxes on the interest or the taxes are deferred into the future.
If your after-tax yield on a tax-free/tax-deferred investment is greater than a
yield from a taxable alternative, tax-exempt/tax-deferred investments such
as annuities, municipal bonds, municipal bond funds and unit investment
trusts that invest in municipal bonds may be the ideal financial product for
you.
The following formula provides a quick way for you to determine whether a
tax-free/tax-deferred yield is worth more than a taxable yield.

FORMULA

TAX FREE / TAX DEFERRED YIELD = TAXABLE EQUIVALENT YIELD

1- (YOUR FEDERAL TAX RATE)

Taxable equivalent yield is the yield you would have to earn on a

taxable investment to match the after tax income you earn from a
tax-free or tax-deferred investment.
Example: You are considering two investment opportunities. The taxable
one has a 5% interest rate, the tax-free offers a 4.5% interest rate. You
are in the 25% marginal tax bracket. To calculate the taxable equivalent of
the tax-free yield, divide the tax-free rate by 1 minus your tax bracket.

4.5 = 4.5 = 6%
1 - .25 .75
The tax-free/tax-deferred investment's tax equivalent yield of 6% is higher
than the taxable investment's 5% interest rate. If you are in the 28%
tax bracket, the result would be even more in favor of the tax -savings
investment.
4.5 = 4.5 = 6.25%
1 - .28 .72
The higher your tax bracket the better you are with a tax-savings
investment

22
To determine the tax-exempt equivalent of a taxable yield, just reverse the
above formula. Multiply the taxable yield by 1 minus your tax bracket.

FORMULA
TAXABLE YIELD x (1 - FED. TAX BRACKET) = TAX EXEMPT EQUIVALENT YIELD

Example: You have a taxable investment of 5% and you are in the 25%
tax bracket. What tax-free/tax-deferred yield do you need to get to equal
the taxable yield?
5% x (1 - .25) = 5% x .75 = 3.75%

The 5% taxable yield is equivalent to a 3.75% tax-free/tax-deferred yield.

By having a tax-free/tax deferred investment, you will increase your net

after-tax income flow on the same amount of money in a taxable account
which earns the same rate of interest, or you can reduce the amount of
your tax-free/tax-deferred investment to obtain the same cash flow or
growth from a larger, interest taxable account.
Either way, you come out ahead.
Example: A sum of $50,000 is earning a 5% interest rate. How much
needs to be invested in a tax-exempt account to create the same cash flow
if you are in the 25% tax bracket and the tax-exempt yield is 4%?

FORMULA
SUM OF MONEY x TAXABLE YIELD x (1 - TAX BRACKET) = NET CASH FLOW

$50,000 x 5% x .75 = $1,875

CASH FLOW -:- TAX EXEMPT % = $$ NEEDED TO INVEST ON A TAX FREE BASIS

$1,875 -:- 4% = $46,875

You can therefore have the same income flow on $46,875, allowing you to
either earn more money on the extra $3,125 or use it for some other
purpose.

23
The following table will provide you with a quick reference guide in
comparing tax-free yields to their taxable equivalent yields.
Taxable equivalent yield is the yield you would have to earn on a
taxable investment to match the after tax income you earn from a tax
free investment.
FORMULA
TAX FREE YIELD = TAXABLE EQUIVALENT YIELD
1- (YOUR FEDERAL TAX RATE)
Example: 3% = 3% = 4%
1- .25 .75
TAXABLE EQUIVALENT YIELD

Tax-Free Tax Brackets

Yield 15% 25% 28% 33% 35%
3% 3.53 4.00 4.17 4.48 4.62
3.5 4.12 4.67 4.86 5.22 5.38
4 4.71 5.33 5.56 5.97 6.15
4.5 5.29 6.00 6.25 6.72 6.92
5 5.88 6.67 6.94 7.46 7.69
5.5 6.47 7.33 7.64 8.21 8.46
6 7.06 8.00 8.33 8.96 9.23
6.5 7.65 8.67 9.03 9.70 10.00
7 8.24 9.33 9.72 10.45 10.77
7.5 8.82 10.00 10.42 11.19 11.54
8 9.41 10.67 11.11 11.94 12.31
8.5 10.00 11.33 11.81 12.69 13.08
9 10.59 12.00 12.50 13.43 13.85
9.5 11.18 12.67 13.19 14.18 14.62
10 11.76 13.33 13.89 14.93 15.38
12 14.12 16.00 16.67 17.91 18.46
15 17.65 20.00 20.83 22.39 23.08

Most people do not think in terms of tax equivalent yields when it comes to
choosing an appropriate investment. If you are one of them, you may be
negatively impacting both your current income and long term accumulation
objectives. Everything depends upon the yields being compared and the
effect one's tax bracket has on determining the tax-equivalent yield.
You must be an informed investor to make the correct investment choice
that will have the greatest positive effect on your money.

24
 DOUBLE TAX-FREE

If the state in which you reside also taxes your investment income, you
may find a tax-savings investment to be even more rewarding.
To determine the tax equivalent yield for your combined state and federal
tax rate, the following formula applies, since you do not simply add the two,
and any city tax rate, if applicable, together. This is because state and city
taxes are deductible on your federal income tax return if you are itemizing
deductions, and therefore must be taken into account in arriving at one's
true combined tax rate. You must first multiply your state tax rate by 1
minus your federal tax rate. Then add the result to your federal tax rate to
arrive at your total combined effective rate.
FORMULA FOR EFFECTIVE STATE TAX RATE
A) STATE TAX RATE x (1 - FEDERAL TAX BRACKET) = EFFECTIVE STATE RATE

FORMULA FOR COMBINED EFFECTIVE FEDERAL / STATE TAX RATE

B) EFFECTIVE STATE RATE + FEDERAL TAX RATE = COMBINED EFFECTIVE
FEDERAL/STATE TAX RATE

EXAMPLE: Your state tax rate is 6% and your federal tax rate is 25%.
A) 6% x (1 - .25) = 6% x .75= 4.5% EFFECTIVE STATE RATE
B) 4.5% + 25% = 29.5% COMBINED EFFECTIVE FEDERAL/ STATE TAX RATE

Once you have found your combined effective rate, you can utilize the
following formula to determine tax equivalent yields.
FORMULA
TAX-FREE YIELD = TAX EQUIVALENT YIELD
(1 - COMBINED TAX RATE)

In this case, 1 minus your tax rate means, 1 minus your combined tax rate.
If you were comparing two investments, the taxable one had a 6% yield
and the tax-free/tax-deferred one was 5% and your federal tax bracket was
25% and your state rate was 6%, which one provides the best net return?
Your combined effective tax rate, as determined above, is 29.5%.
The tax equivalent yield formula provides the answer.
5% 5%
(1 29.5) = 70.5 = 7.09% TAX EQUIVALENT YIELD
Since 7.09% is greater than 6%, the tax-free/tax deferred investment is the
better choice.

The table below shows what a taxpayer would have to earn from a taxable
investment to equal a double tax-free yield.

25
 TAX EQUIVALENT YIELDS
Tax-
Combined State and Federal Tax Brackets
Free
Yield 18% 20% 29% 30% 35% 36% 38% 39% 40%
3% 3.66 3.75 4.23 4.29 4.62 4.69 4.84 4.92 5.00
3.5 4.27 4.38 4.93 5.00 5.38 5.47 5.65 5.74 5.83
4 4.88 5.00 5.63 5.71 6.15 6.25 6.45 6.56 6.67
4.5 5.49 5.63 6.34 6.43 6.92 7.03 7.26 7.38 7.50
5 6.10 6.25 7.04 7.14 7.69 7.81 8.06 8.20 8.33
5.5 6.71 6.88 7.75 7.86 8.46 8.59 8.87 9.02 9.17
6 7.32 7.50 8.45 8.57 9.23 9.38 9.68 9.84 10.00
6.5 7.93 8.13 9.15 9.29 10.00 10.16 10.48 10.66 10.83
7 8.54 8.75 9.86 10.00 10.77 10.94 11.29 11.48 11.67
7.5 9.15 9.38 10.56 10.71 11.54 11.72 12.10 12.30 12.50
8 9.76 10.00 11.27 11.43 12.31 12.50 12.90 13.11 13.33
8.5 10.37 10.63 11.97 12.14 13.08 13.28 13.71 13.93 14.17
9 10.98 11.25 12.68 12.86 13.85 14.06 14.52 14.75 15.00
9.5 11.59 11.88 13.38 13.57 14.62 14.84 15.32 15.57 15.83
10 12.20 12.50 14.08 14.29 15.38 15.63 16.13 16.39 16.67
12 14.63 15.00 16.90 17.14 18.46 18.75 19.35 19.67 20.00
15 18.29 18.75 21.13 21.43 23.08 23.44 24.19 24.59 25.00

To determine exactly what your combined effective rate is, you will have to
use the tax rate for your state of residence. While some state have no
income tax, others have different rates for earned and invest ment income,
so do your arithmetic carefully.

26
In an earlier chapter, the rule of 72 and the rule of 115 were discussed as
shortcut methods to determine when money would double or triple, but that
was on a pre-tax basis. The table below shows how federal taxes increase
the time period before your money doubles and triples.

NUMBER OF YEARS MONEY WILL DOUBLE AND TRIPLE

NON-TAXABLE VS. TAXABLE
NON-TAXABLE TAXABLE NON-TAXABLE TAXABLE
RULE OF RULE OF RULE OF RULE OF
72 72 115 115
Interest # of Federal Tax Bracket # of Federal Tax Bracket
15
Rate Yrs 25% 28% 33% 35% Yrs 15% 25% 28% 33% 35%
%
3% 24 28 32 33 36 37 38 45 51 53 57 59
3.5 21 24 27 29 31 32 33 39 44 46 49 50
4 18 21 24 25 27 28 29 34 38 40 43 44
4.5 16 19 21 22 24 25 26 30 34 35 38 39
5 14 17 19 20 22 22 23 27 31 32 34 35
5.5 13 15 17 18 20 20 21 25 28 29 31 32
6 12 14 16 17 17 18 19 23 26 27 29 28
6.5 11 13 15 15 15 17 18 21 24 25 26 27
7 10 12 14 14 14 15 16 19 22 23 25 25
7.5 10 11 13 13 14 15 15 18 20 21 23 24
8 9 11 12 13 13 14 14 17 19 20 21 22
8.5 9 10 11 12 13 13 14 16 18 19 20 21
9 8 9 11 11 12 12 13 15 17 18 19 20
9.5 8 9 10 11 11 12 12 14 16 17 18 19
10 7 8 10 10 11 11 12 14 15 16 17 18
12 6 7 8 8 9 9 10 11 13 13 14 15

To find out how long money doubles and triples after deducting for federal
taxes for an interest rate not shown in the above table, the following
formulas are used.

27
 FORMULA

WHEN MONEY DOUBLES AFTER TAXES

First multiply the interest rate by 1 minus your tax bracket to get the net
after tax rate. Divide 72 by the net after tax rate to determine your answer.

A) INTEREST RATE x (1 - TAX BRACKET) = NET AFTER TAX RATE

B) 72 -:- NET RATE = # OF YEARS MONEY WILL DOUBLE AFTER TAXES

EXAMPLE: 5% x .75 (FOR SOMEONE IN THE 25% BRACKET) = 3.75%

72 -:- 3.75 = 19.2 YEARS

FORMULA

WHEN MONEY TRIPLES AFTER TAXES

First multiply the interest rate by 1 minus your tax bracket to get the net
after tax rate. Divide 115 by the net after tax rate to determine your
answer.

A) INTEREST RATE x (1 - TAX BRACKET) = NET AFTER TAX RATE

B) 115 -:- NET RATE = # OF YEARS MONEY WILL TRIPLE AFTER TAXES

To find out how long money doubles and triples after deducting for both
state and federal taxes, you will need to first determine your combined
state and federal effective tax rate by applying the formula previously
discussed.
Then apply the appropriate formula from above, substituting yo ur
combined effective state and federal tax rate:

(1 - COMBINED EFFECTIVE TAX BRACKET) instead of (1 - TAX BRACKET)

28
 CHAPTER 4

TAX DEFERRED INTEREST

This chapter will discuss the advantage of postponing taxes on interest

compared to paying taxes on interest in the year they are due.
The underlying principle of taxes, is, that every $1.00 of taxable income is
reduced by your tax bracket as shown in the table below.

VALUE OF EVERY $1.00 REDUCED BY FEDERAL TAX BRACKET

15% 25% 28% 33% 35%
$0.85 $0.75 $0.72 $0.67 $0.65

HOW MUCH MUST YOU EARN TO NET $1.00 AFTER TAXES

15% 25% 28% 33% 35%
$1.18 $1.33 $1.39 $1.49 $1.54

VALUE OF EVERY $1.00 REDUCED BY

COMBINED STATE AND FEDERAL EFFECTIVE TAX BRACKET
18% 20% 28% 29% 31% 35% 36% 37% 38% 39% 40% 41%
$0.82 $0.80 $0.72 $0.71 $0.69 $0.65 $0.64 $0.63 $0.62 $0.61 $0.60 $0.59

The following table dramatically shows how taxes negatively impact the
amount of return on your money over time.

HOW A SINGLE DEPOSIT OF $1,000 GROWS OVER TIME WITH

TAXES PAID VERSUS DEFERRED AT 5% COMPOUNDED
ANNUALLY
END OF TAX-DEFERRED TAXABLE ACCOUNT BALANCE BY TAX BRACKET *
YEAR ACCOUNT BALANCE 15% 25% 28% 33%
35%
5 $1,276 $1,231 $1,202 $1,193 $1,179 $1,173
10 1,629 1,516 1,445 1,424 1,390 1,377
15 2,079 1,867 1,737 1,700 1,639 1,616
20 2,653 2,299 2,088 2,029 1,933 1,896
25 3,386 2,831 2,510 2,421 2,279 2,225
30 4,322 3,486 3,018 2,889 2,687 2,610
35 5,516 4,292 3,627 3,448 3,169 3,063
40 7,040 5,285 4,360 4,115 3,736 3,594
*ASSUMES TAXES DUE ARE PAID FROM BALANCE OF ACCOUNT IN YEAR DUE

29
As the table illustrates, the tax deferred account accumulates a much
larger amount of money than the taxable account. The higher your tax
bracket, the lower the money in your taxable account.
Since the table shows how $1,000 at 5% interest grows in a tax deferred
versus a taxable account, you can determine the values over a given time
period for any deposit by multiplying the tax deferred and appropriate tax
bracket columns by the number of thousands you wish to invest.
For example, if you have $25,000 to invest at 5% compounded annually
and are in the 25% tax bracket, multiply the numbers in the tax deferred
column and the 25% taxable column by 25 to arrive at your answer.

The following table shows how a deposit of $50,000 at 6% compound

annual interest grows in a taxable versus a tax deferred account.

HOW $50,000 GROWS AT 6% INTEREST

IN A TAXABLE VERSUS TAX DEFERRED ACCOUNT
Annual Tax Deferred
End of Taxable @ 25%
Interest Account
Year Account Balance
Earned Balance
1 $3,000 $ 53,000 $52,250
5 3,553 66,911 62,300
10 4,390 89,542 77,650
15 5,423 119,828 96,750
20 6,700 160,357 120,600
25 8,278 214,594 150,250
30 10,228 287,175 187,250
35 12,636 384,304 233,350
40 15,612 514,286 290,800

To determine values for an investment greater than $50,000, multiply the

above figures by the appropriate ratio. For an investment smaller than
$50,000, divide the above numbers by the appropriate ratio.
What dramatically stands out are the following facts:
TOTAL TAX DEFERRED INTEREST EARNED OVER 40 YEARS= $464,286
TAX-DEFERRED ADVANTAGE OVER TAXABLE ACCOUNT AT 40 YEARS =$223,486

30
What has accounted for the tremendous growth in the tax deferred
account?
Triple compounding!

With a tax deferred account you receive:

1) Interest on your deposit
2) Interest on the interest that was added to your deposit
3) Interest on the money that would have been paid in taxes

The following question is always asked.

By delaying paying taxes, won't taxes have to be paid eventually and
therefore the net result in the end will be the same amount of money as
paying the tax on the interest each year?
Taxes will ultimately have to be paid, that is unavoidable. However, the
answer as to the result being the same is an emphatic no!
In the prior table, the taxable account after 40 years grew to $290,800.
This was the net amount after taxes had been paid each year on the
interest at a 25% tax rate. If the tax deferred account which had grown to
$514,286 at the end of 40 years, $464,286 of which was fully taxable
interest, was withdrawn in a lump sump sum, even at today's highest
federal tax rate of 35%, $162,500 in taxes would have to be paid. This
would leave a net sum of $351,786 which is still $60,986 more than the
taxable account in which taxes were paid each year when due.
However, the real value of the tax deferred account is providing a gre ater
annual income, even after taxes, than the taxable account.
Just how dramatic the difference is in favor of the tax deferred account is
shown below.

Wouldn't you rather have $514,286 providing an annual income than

$290,800?
TAXABLE TAX-DEFERRED
40TH YEAR VALUE $290,800 $514,286
INTEREST RATE 5% 5%
ANNUAL INTEREST EARNED $14,540 $25,714
TAX RATE 28% 28%
TAX DUE $4,071 $7,200
ANNUAL NET INCOME $11,469 $18,514
10 YEAR NET INCOME $114,690 $185,140
20 YEAR NET INCOME $229,380 $370,280
What a difference in your retirement lifestyle!

31
 TAX DEDUCTIBLE SAVINGS AND TAX DEFERRED GROWTH

In addition to the power of tax deferred interest, compounding, if a tax

deduction is also available, it makes for a super investme nt, because you
are investing with pre-tax dollars, unlike investing with after-tax dollars,
whereby every dollar earned is reduced by taxes before it is invested.

The next table shows the accumulated tax savings over time for an annual
$3,000 IRA investment at various tax brackets.

$3,000 IRA
TAX DEDUCTIBLE SAVINGS BY TAX BRACKET
CUMULATIVE TAX SAVINGS

Tax Bracket
End Of Total
15% 25% 28% 33% 35%
Year Deposits
1 $3,000 $ 450 $ 750 $ 840 $ 990 $ 1,050
5 15,000 2,250 3,750 4,200 4,950 5,250
10 30,000 4,500 7,500 8,400 9,900 10,500
15 45,000 4,500 11,250 12,600 14,850 15,750
20 60,000 6,750 15,000 16,800 19,800 21,000
25 75,000 11,250 18,750 21,000 24,750 26,250
30 90,000 13,500 22,500 25,200 29,700 31,500
35 105,000 15,750 26,250 29,400 34,650 36,750
40 120,000 18,000 30,000 33,600 39,600 42,000

32
The next table shows a comparison of an annual $3,000 tax deductible or
tax deferred investment with a taxable plan.
The investment is at 5% interest, compounded annually and the federal tax
bracket is 25%.

$3,000 ANNUAL CONTRIBUTION

TAX DEDUCTIBLE OR TAX DEFERRED PLAN VS. TAXABLE ACCOUNT

END TOTAL VALUE VALUE TOTAL TAXES

OF ANNUAL TAXABLE TAX-SAVINGS SAVED ON TOTAL TAX
YEAR DEPOSITS ACCOUNT ACCOUNT INTEREST DEDUCTION
1 $3,000 $ 3,113 $ 3,150 $ 37 $ 750
5 15,000 16,774 17,406 632 3,750
10 30,000 37,287 39,621 2,334 7,500
15 45,000 61,596 67,974 6,378 11,250
20 60,000 90,820 104,157 13,337 15,000
25 75,000 125,948 150,342 24,394 18,750
30 90,000 168,177 209,283 41,106 22,500
35 105,000 218,939 284,508 65,569 26,250
40 120,000 279,961 380,520 100,559 30,000

Wouldn't you prefer $380,520 earning 5% interest at retirement, than

$265,725? Look at the comparison!

TAXABLE TAX-SAVINGS ACCOUNTS

40TH YEAR VALUE $ 279,961 $ 380,520

INTEREST RATE 5% 5%
ANNUAL INTEREST EARNED $ 13,998 $ 19,026
TAX RATE 25% 25%
TAX DUE $ 3,500 $ 4,757
ANNUAL NET INCOME $ 10,498 $ 14,269
10 YEAR NET INCOME $ 104,980 $ 142,690
20 YEAR NET INCOME $ 209,960 $ 285,380
If you wanted to determine the cumulative tax deductions or taxabl e
account values, tax deferred account values, and cumulative tax savings
on interest at 5% for amounts greater than $3,000 per year, multiply the
figures in the prior tables by the appropriate ratio. For example, for $4,000,
multiply the above figures by 2,etc. For sums less than $3,000 per year,
multiply the numbers by the appropriate ratio. For example, for $600,
multiply by .20, for $1,000, multiply by .333, etc.

33
The type of investment that provides for the postponement of taxes as in
the above examples is called an annuity. Deposits may be made as a lump
sum, monthly or annually.
A fixed annuity, which is issued by an insurance company, pays an
interest rate that is guaranteed to never be lower than a certain minimum
per year. The company also credits an additional amount of interest based
upon its earnings. In addition, some companies provide you with an
interest bonus on your initial deposit and some even credit every deposit,
every year, with an extra interest bonus.

A variable annuity gives you the potential for higher yields based upon
how certain investment accounts you select, perform, while deferring taxes
on dividends and capital gains, but does not provide any interest
guarantees(except in the fixed account) and your principal is at risk, if your
investments perform poorly

An equity index annuity, which provides some minimum type of interest

guaranty and safety of principal, while offering you the opportunity to earn
more based upon how well the S & P and NASDAQ Index performs. Some
of these are subject to participation and rate caps

Annuities are not for everyone, since withdrawals made before age 59 and
a half, with some exceptions, incur a federal 10% penalty tax, in addition to
being fully taxable.

INCREASE YOUR INCOME, NOT YOUR INCOME TAX.

GIVE YOURSELF A TAX HOLIDAY, DEFER TAXES AS
LONG AS POSSIBLE. BECOME MONEY WI$E.

34
 CHAPTER 5

COST OF DELAY

This chapter deals with the time value of money and the advantages of
investing early. For every year that you delay saving any amount of money,
the cost to you is many times greater than the money you did not save.
You can never recover this lost money. It is gone forever.

No one plans to fail financially, but that is what can occur if one fails to
start an investment plan early.
You may think you can not afford to start saving and investing now for a
future goal, but the reality is, you can not afford to wait.

There is no more important ingredient than time in any financial plan. The
longer you delay saving and investing money on a consistent b asis, the
steeper the climb will be to reach your financial goals.
Starting as early as possible, and letting the power of compound interest
work on your money, will lead to financial security.
Procrastination is your biggest enemy.

The first table shows the values year by year for 40 years for a $2,000
annual deposit and a $166.66 monthly deposit (which equals $2,000 over
12 months), at 6% interest, compounded annually. You will be able to
determine from this table, how much money you would have at the end of
a period of time and that the earlier you start or the longer your money
compounds, the more you will accumulate.

The comparison of investing annually at the beginning of the year versus

making monthly deposits is illustrated to show you that it i s in your interest
to make your investment at the beginning rather than over the entire
course of the year, since your money will grow faster. This applies to a
fixed interest type of account like a certificate of deposit, money market or
annuity.

35
The following table will enable you to determine how much money is lost
by waiting 1 to 39 years to invest. The figures are based upon $2,000
annually or $166 monthly, earning 6% interest, compounded annually.

HOW MUCH YOU LOSE BY WAITING

COST OF DELAY

$2000 Annually $166 Monthly

End of ACCUMULATED ACCUMULATED ACCUMULATED ACCUMULATED
Year DEPOSITS VALUES DEPOSITS VALUES
1 $2,000 $2,120 $2,000 $2,065
2 4,000 4,367 4,000 4,254
3 6,000 6,749 6,000 6,574
4 8,000 9,274 8,000 9,033
5 10,000 11,951 10,000 11,640
6 12,000 14,788 12,000 14,403
7 14,000 17,795 14,000 17,333
8 16,000 20,983 16,000 20,437
9 18,000 24,362 18,000 23,729
10 20,000 27,943 20,000 27,217
11 22,000 31,740 22,000 30,915
12 24,000 35,764 24,000 34,834
13 26,000 40,030 26,000 38,988
14 28,000 44,552 28,000 43,392
15 30,000 49,345 30,000 48,063
16 32,000 54,426 32,000 53,012
17 34,000 59,811 34,000 58,257
18 36,000 65,520 36,000 63,817
19 38,000 71,571 38,000 69,711
20 40,000 77,985 40,000 75,959
21 42,000 84,785 42,000 82,582
22 44,000 91,992 44,000 89,602
23 46,000 99,631 46,000 97,043
24 48,000 107,729 48,000 104,931
25 50,000 116,313 50,000 113,291
26 52,000 125,412 52,000 122,154
27 54,000 135,056 54,000 131,548
28 56,000 145,280 56,000 141,506
29 58,000 156,116 58,000 152,061
30 60,000 167,603 60,000 163,250
31 62,000 179,780 62,000 175,110
32 64,000 192,686 64,000 187,682
33 66,000 206,368 66,000 201,008
34 68,000 220,870 68,000 215,133
35 70,000 236,242 70,000 230,106
36 72,000 252,536 72,000 245,977
37 74,000 269,808 74,000 262,801
38 76,000 288,117 76,000 280,634
39 78,000 307,524 78,000 297,472
40 80,000 328,095 80,000 317,385

36
To find the cost of delay from the previous table, just take the figures for
any two time periods and make the comparison.
For example: If you are 35 years old and invested $2,000 annually for 30
years, locate the figures at the 30 year column. Instead of investing this
year, you decided to wait one year, when you were 36 years old, and
invest until you were age 65, which would be for a total of 29 years.
What did it cost you to delay investing for only one year?

VALUE AT END VALUE AT END DIFFERENCE

OF 30 YEARS OF 29 YEARS
$11,487
$167,603 $156,116 - $ 2,000 (ONE LESS DEPOSIT)
$9,487
You thought you saved yourself $2,000 by waiting one year, but it actually
cost you $11,487, in lost interest. Gone forever!
The longer one delays, the greater the difference becomes.
There may never be a really convenient or ideal time to begin an
investment or savings plan. Don't delay, start today!
You can determine the cost of delay for any amount of money at various
interest rates, whether it is a single deposit, monthly or annually, by
referring to the compound interest tables, previously discussed.
The next table illustrates how a $2,000 deposit at 6% made at the
beginning of each calendar year, rather than at year's end or monthly will
accumulate more money for you. Every month you delay costs you money.
Lost forever!

INVESTING ANNUALLY AT THE BEGINNING OF THE YEAR

$2,000 ANNUALLY $166.66 MONTHLY
VALUES BY VALUES
END OF DEPOSIT DATE OF MONTHLY
End of
Year
January 1 December 31 Increase Deposits Decrease

5 $11,951 $9,251 $2,700 $11,640 $311

10 27,943 24,362 3,501 27,217 726
15 49,345 44,552 4,793 48,063 1,282
20 77,985 71,571 6,414 75,959 2,026
25 116,313 107,729 8,584 113,291 3,022
30 167,603 156,116 11,487 163,249 4,354
35 236,242 220,870 15,372 230,106 6,136
40 328,095 307,524 20,571 319,569 8,526

37
This next table compares a $2,000 annual investment for 10 years, with no
further investment for the next 25 years, with a $2,000 annual investment
for 25 years, but which started 10 years later. Each investment earned 6%
interest, compounded annually for the entire time period.

INVESTING EARLY FOR 10 YEARS IS BETTER THAN

WAITING 10 YEARS AND THEN INVESTING FOR 25 YEARS
End of
PREMIUM ACCUMULATION PREMIUM ACCUMULATION
Year
$2,000 $2,120 1 0 0
2,000 4,367 2 0 0
2,000 6,749 3 0 0
2,000 9,274 4 0 0
2,000 11,951 5 0 0
2,000 14,788 6 0 0
2,000 17,795 7 0 0
2,000 20,983 8 0 0
2,000 24,362 9 0 0
2,000 27,943 10 0 0
0 29,620 11 $2,000 $2,120
0 37,394 15 $2,000 11,951
0 50,042 20 $2,000 27,943
0 66,967 25 $2,000 49,345
0 89,617 30 $2,000 77,985
0 119,928 35 $2,000 116,313

EARLY LATE
INVESTOR INVESTOR
TOTAL VALUE $119,928 $116,313
TOTAL DEPOSITS $ 20,000 $ 50,000

Imagine depositing $30,000 less, but earning $3,615 more.

The investor, who starts early, reaps the biggest gains.
By delaying investing, you delay the power of interest compounding over
time. The longer the delay, the greater the loss of interest to you, never to
be regained.

38
 CHAPTER 6

HOW LONG WILL YOUR MONEY LAST

This chapter will deal with the subject, how long money will last as it is
being drawn down.
The following table shows how long a sum of money will last at various
compound annual interest rates if a percentage of the original capital is
withdrawn at the beginning of each year. An inflation rate of zero is
assumed.

HOW LONG WILL YOUR MONEY LAST

Interest Rate On Your Investment
Per-cent of
original capital 3% 4% 5% 6% 7% 8% 9% 10% 12% 15%
withdrawn each year
5% 28 36 F O R E V E R
6% 23 28 36 ---------------------------------------------------
7% 18 20 25 33 ------------------------------------------
8% 15 17 20 23 31 ----------------------------------
9% 13 14 15 17 21 27 --------------------------
10% 12 13 14 15 17 20 26 ------------------
12% 9 10 10 10 11 12 14 15 --------
15% 7 8 8 8 8 8 8 10 11 ------

For example, if your capital earns 6% interest, compounded annually, you

can withdraw 10% of your original principal each year, for 15 years, before
you run out of money.

If you wish to always preserve 100% of your principal, and you withdraw
money annually at the end of each year, your withdrawal should be no
more than your compounded interest rate. However, if instead, money is
withdrawn at the beginning of each year or monthly, your withdrawal
should be slightly less than your interest rate, since your entire principal did
not earn a full year's worth of interest. If your capital earned 5% interest
and you withdrew only the interest, your original principal would last
forever.

39
However, if you increased the amount withdrawn by the rate of inflation,
each year, to maintain purchasing power, you could run out of money in a
relatively short period of time.
For example, if you increased your 5% withdrawal each year to
compensate for a 3% annual inflation rate, you would run out of money in
24 years. At a 4% inflation rate, your money would be gone in 22 years.
You would not be increasing your withdrawal from 5% to 8% to
compensate for 3% inflation.
You would be increasing the 5% to 5.15% withdrawal in year one, which is
your 5% withdrawal multiplied by the 3% rate of inflation. In year 2, you
would multiply your previous year's withdrawal of 5.15% of your capital by
the new rate of inflation. If inflation was again 3%, you would multiply the
5.15% withdrawal by 3%, which gives you your new withdrawal amount of
5.30%, rounded off. By year 20, if inflation remains at 3%, you will be
withdrawing over 9% of your remaining capital for that year.

If you were withdrawing 10% of capital, which was earning 5%, the table
shows that you would run out of money in 14 years. If you were to increase
your withdrawal by 3%, to maintain purchasing power, you would run out of
money in 9 years.

It is obvious, that by increasing your withdrawal more than your capital

earns, or increasing your withdrawal each year to maintain purchasing
power due to inflation, you will end up depleting your original capital.
The above examples do not take into consideration any t axes that may
have to be paid.

The fundamental questions which people at or planning for retirement want

to have answered are: How much capital will be needed, how much can be
withdrawn, and how long will it last?

40
The following three tables show how long a monthly withdrawal taken from
capital, earning interest will last. Interest rates from 5-10%, compounded
monthly are illustrated. How long the monthly withdrawal will last is by full
years. Whenever the letter F is used, it means forever, and the symbo l <
means less than.

HOW LONG YOUR CAPITAL WILL LAST

AMOUNT OF MONTHLY WITHDRAWAL
$500 $1000 $1500 $2000 $2500 $3000 $4000 $5000
INTEREST RATES
5% 6% 5% 6% 5% 6% 5% 6% 5% 6% 5% 6% 5% 6% 5% 6%
CAPITAL NO. OF YEARS
$50,000 11 11 5 4 3 3 2 2 1 1 1 1 1 1 <1 <1
100,000 40 F 10 11 6 6 4 4 3 3 3 3 2 2 1 1
150,000 F F 19 23 10 11 7 7 5 6 4 4 3 3 2 2
200,000 F F 35 F 16 18 10 11 8 8 6 6 4 4 3 3
250,000 F F F F 23 30 14 16 10 11 8 9 6 6 4 4
300,000 F F F F 36 F 19 23 13 15 10 11 7 7 5 6
400,000 F F F F F F 36 F 22 26 16 18 10 11 8 8
500,000 F F F F F F F F 36 F 23 30 14 16 10 11
1,000,000 F F F F F F F F F F F F F F 36 F

HOW LONG YOUR CAPITAL WILL LAST

AMOUNT OF MONTHLY WITHDRAWAL
$500 $1000 $1500 $2000 $2500 $3000 $4000 $5000
INTEREST RATES
7% 8% 7% 8% 7% 8% 7% 8% 7% 8% 7% 8% 7% 8% 7% 8%
CAPITAL NO. OF YEARS
$50,000 12 13 5 5 3 3 2 2 1 1 1 1 1 1 <1 <1
100,000 F F 12 13 7 7 5 5 3 3 3 3 2 2 1 1
150,000 F F 29 F 12 13 8 8 6 6 5 5 3 3 2 2
200,000 F F F F 21 27 12 13 9 9 7 7 5 5 3 3
250,000 F F F F 50 F 18 22 12 13 9 10 6 6 5 5
300,000 F F F F F F 29 F 17 20 12 13 8 8 6 6
400,000 F F F F F F F F 50 28 21 27 12 13 9 9
500,000 F F F F F F F F F F 50 F 18 22 12 13
1,000,000 F F F F F F F F F F F F F F F F

41
 HOW LONG YOUR CAPITAL WILL LAST
AMOUNT OF MONTHLY WITHDRAWAL
$500 $1000 $1500 $2000 $2500 $3000 $4000 $5000
INTERE ST RATES
9% 10% 9% 10% 9% 10% 9% 10% 9% 10% 9% 10% 9% 10% 9% 10%
CAPITAL NO. OF YEARS
$50,000 15 18 5 5 3 3 2 2 1 1 1 1 1 1 <1 <1
100,000 F F 15 18 7 8 5 5 4 4 3 3 2 2 1 1
150,000 F F F F 15 18 9 9 6 7 5 5 3 3 2 2
200,000 F F F F F F 15 18 10 11 8 7 5 5 4 4
250,000 F F F F F F 37 F 15 18 11 11 7 7 5 5
300,000 F F F F F F F F 25 F 15 18 9 9 6 7
400,000 F F F F F F F F F F F F 15 18 10 11
500,000 F F F F F F F F F F F F 50 F 15 18
1,000,000 F F F F F F F F F F F F F F F F

From the previous tables, you can easily determine how much capital is
needed to generate various amounts of monthly income and how long it
will continue, by interest rate.
For example, it will take $250,000 earning 6% interest, compounded
monthly to throw off $1,500 a month for 30 years, or $2,500 a month for 11
years.

42
The following table will help you determine how much money you need to
accumulate at retirement, in order to withdraw a monthly income over a
given time period, as the remaining capital continues to earn interest. The
figures assume that the entire capital will be liquidated at the end of each
given time period. The table will also enable you to determine how much
monthly income you could withdraw over a given time period if you
invested a lump sum of money. You can also find the balance remaining
after making withdrawals over a given period of time.

HOW MUCH CAPITAL IS NEEDED TO YIELD $100 A MONTH

HOW MUCH MONTHLY INCOME CAN BE WITHDRAWN

BY DEPOSITING A LUMP SUM?

HOW MUCH OF YOUR ORIGINAL INVESTMENT REMAINS AFTER

MONTHLY WITHDRAWALS OVER A GIVEN TIME PERIOD?

Number Of Years Your Capital Will Last

Interest
5 10 15 20 25 30 35 40
Rate
3% $5,565 10,356 14,481 18,031 21,088 23,719 25,984 27,934
4% 5,430 9,877 13,519 16,502 18,945 20,946 22,585 23,927
5% 5,299 9,428 12,646 15,153 17,106 18,628 19,814 20,738
6% 5,173 9,007 11,850 13,958 15,521 16,679 17,538 18,175
7% 5,050 8,613 11,126 12,898 14,149 15,031 15,653 16,092
8% 4,932 8,242 10,464 11,955 12,956 13,628 14,079 14,382
9% 4,817 7,894 9,859 11,114 11,916 12,428 12,755 12,964
10% 4,707 7,567 9,306 10,362 11,005 11,395 11,632 11,777
12% 4,496 6,970 8,332 9,082 9,495 9,722 9,847 9,916
15% 4,203 6,198 7,145 7,594 7,807 7,909 7,957 7,979

Example: How much capital is needed now, from which you can withdraw
$1,000 per month for 15 years, if the account earns 6% interest? Locate
the figure, $11,850, where the columns for 15 years and 6% interest
intersect. Multiply this number by 10, since the above table illustrates
figures per $100 a month.
The answer is $118,500 will need to be invested in an account earning 6%
a year for 15 years in order to generate $1,000 a month.

43
Example: How much monthly income would you be able to withdraw over
20 years, if you invested $175,000, earning 7% a year, over that time
period.
Locate the figure, $12,898, where the 7% and 20 year columns intersect,
which is the amount of capital that would generate $100 a month for 20
years. Dividing it into $175,000 produces the answer, $1,357 a month.
Since the sum of $175,000 is 13.567 times greater than $12,898, you
would therefore multiply $100 by 13.57.

Example: How much capital would you still have after drawing down
$1,000 a month for 10 years, if your original investment was based upon a
6% annual interest rate for 20 years. Locate the figure, $13,958, where the
6% and 20 year columns intersect. Multiplying it by 10 will give you the
amount of your original investment ($139,580), which would produce
$1,000 a month for 20 years. Next, locate the figure, $9, 007, where the 6%
and 10 year columns intersect and multiply it by 10. Answer: $90,070
would still remain.

44
 CHAPTER 7

INFLATION

HOW MUCH MUST I SAVE

HOW LONG MUST I SAVE
HOW LONG WILL MY MONEY LAST

At retirement, many people are faced with the reality t hat they could outlive
their money.
Today, with people living into their eighties, nineties, and even over one
hundred, the focus is on how long will one's financial resources last.
As people are forced to draw down on their life savings and investments to
supplement their social security benefits, the greater that possibility
becomes. This is especially true if you must use your capital faster than
interest replaces the amount withdrawn. When inflation is added to this
scenario, there is a loss of purchasing power, causing a further reduction in
the amount of time that your money will last.
Loss of purchasing power, like taxes, over a period of time is a real money
destroyer.

Retirement is expensive. This means you must better prepare yourself

financially to guard against outliving your resources.
Planning for it should start as early as possible. After all those years
working, the day you retire, the amount of income you receive from
accumulated assets, will be what matters most to you.

It is in your interest to achieve an after-tax return on your money that

exceeds the rate of inflation, year in and year out.
Your tax bracket and the rate of inflation, significantly impact, both the
growth and the purchasing power of your money. The higher they are, the
less you accumulate and the less your money will buy.
At the same time compound interest is increasing the amount of your
money, taxes and inflation are hard at work reducing its value.
The following table illustrates by tax bracket and inflation rate, wha t you
need to earn on a taxable investment to break even.

45
 INFLATION AND TAX TABLE
WHAT YOU NEED TO EARN TO JUST BREAK EVEN

Inflation Rate
Tax
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Bracket
15% 1.18% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.6% 11.8%
25% 1.33 2.67 4.00 5.33 6.67 8.00 9.33 10.67 12.00 13.33
28% 1.39 2.78 4.17 5.56 6.94 8.33 9.72 11.11 12.50 13.89
33% 1.49 2.99 4.48 5.97 7.46 8.96 10.45 11.94 13.43 14.93
35% 1.54 3.08 4.62 6.15 7.69 9.23 10.77 12.31 13.85 15.38

The following formula provides a quick way for you to determine the
interest rate or yield you need to earn on an after -tax basis to equal the
current or an assumed rate of inflation.

FORMULA

INFLATION RATE = BREAK-EVEN INTEREST RATE

(1 - TAX RATE)

For example, at a 2% inflation rate, someone in the 25% tax bracket

would have to earn 2.67% on a taxable investment just to break even.
Dividing the inflation rate by 1- 25% gives you the answer.

2% = 2.67%
. 75

If you also pay state income taxes, you will need to first determine your
combined effective federal and state tax rate, as discussed in the double
tax-free section in chapter 3 and then apply the above formula.
For example, at a 3% inflation rate, someone in the 34% com bined federal
and state tax bracket would need to earn 4.55% on a taxable investment
just to break even.

46
The next table shows how inflation reduces your purchasing power.

WHAT $1 IS WORTH AT VARIOUS RATES OF INFLATION

End of
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Year
1 .990 .980 .971 .962 .952 .943 .935 .926 .917 .909
2 .980 .961 .943 .925 .907 .890 .873 .857 .842 .826
3 .971 .942 .915 .889 .864 .840 .816 .794 .772 .751
4 .961 .924 .888 .855 .823 .792 .763 .735 .708 .683
5 .951 .906 .863 .822 .784 .747 .713 .681 .650 .621
6 .942 .888 .837 .790 .746 .705 .666 .630 .596 .564
7 .933 .871 .813 .760 .711 .665 .623 .583 .547 .513
8 .923 .853 .789 .731 .677 .627 .582 .540 .502 .467
9 .914 .837 .766 .703 .645 .592 .544 .500 .460 .424
10 .905 .820 .744 .676 .614 .558 .508 .463 .422 .386
15 .861 .743 .642 .555 .481 .417 .362 .315 .275 .239
20 .820 .673 .554 .456 .377 .312 .258 .215 .178 .149
25 .780 .610 .478 .375 .295 .233 .184 .146 .116 .092
30 .742 .552 .412 .308 .231 .174 .131 .099 .075 .057
35 .706 .500 .355 .253 .181 .130 .094 .068 .049 .036
40 .672 .453 .307 .208 .142 .097 .067 .046 .032 .022

Since the above table shows the factor per $1, it is very easy to determine
the loss of purchasing power on any amount of money, at various inflation
rates.
Example: To find how much a sum of $1,000 today, would be worth 15
years from now, assuming 3% annual inflation, multiply the factor of .642,
located where the columns for 3% and 15 years intersect, by $1,000.
Answer: $642.
Just as the rule of 72 shows when a sum doubles, when used in
connection with inflation, it tells you when a sum is reduced in value by
half.
Example: When will a sum be reduced by half if the inflation rate is 3% per
year.
FORMULA

72 -:- INFLATION RATE = # OF YEARS IT WILL TAKE A SUM TO BE HALVED.

72 -:- 3% = 24 YEARS

47
The following table will help you determine today, the amount of future
income needed, with the equivalent purchasing power. By using this table,
you can determine how much income, you will need, to keep up with
inflation.

WHAT YOUR MONEY NEEDS TO BE WORTH IN THE FUTURE

THE VALUE OF $1.00

End of Inflation Rate

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10
2 1.02 1.04 1.06 1.08 1.10 1.12 1.14 1.17 1.19 1.21
3 1.03 1.06 1.09 1.12 1.16 1.19 1.23 1.26 1.30 1.33
4 1.04 1.08 1.13 1.17 1.22 1.26 1.31 1.36 1.41 1.46
5 1.05 1.10 1.16 1.22 1.28 1.34 1.40 1.47 1.54 1.61
6 1.06 1.13 1.19 1.27 1.34 1.42 1.50 1.59 1.68 1.77
7 1.07 1.14 1.23 1.32 1.41 1.50 1.61 1.71 1.83 1.95
8 1.08 1.17 1.27 1.37 1.48 1.59 1.72 1.85 1.99 2.14
9 1.09 1.20 1.30 1.42 1.55 1.69 1.84 2.00 2.17 2.36
10 1.11 1.22 1.34 1.48 1.63 1.79 1.97 2.16 2.37 2.59
15 1.16 1.35 1.56 1.80 2.08 2.40 2.76 3.17 3.64 4.18
20 1.22 1.49 1.81 2.19 2.65 3.21 3.87 4.66 5.60 6.73
25 1.28 1.64 2.09 2.67 3.39 4.29 5.43 6.85 8.62 10.83
30 1.35 1.81 2.43 3.24 4.32 5.74 7.61 10.06 13.27 17.45
35 1.49 2.00 2.81 3.95 5.52 7.69 10.68 14.79 20.42 28.10
40 1.65 2.21 3.26 4.80 7.04 10.29 14.97 21.72 31.41 45.26

Since the above table shows the factor for $1, you can easily determine
how much money you will need to keep up with inflation.

Example: How much money will you need in 20 years to replace $1,000
today that has the equivalent purchasing power, if the inflation rate is a
constant 3%? Multiply the factor, 1.81, found where the columns for 3%
and 20 years intersect by $1,000. Answer: $1,810.
Example: Your present income is $45,000 and you would like to determine
how much you will need in 10 years, if inflation is a constant 4%, for you to
have the same purchasing power. Multiplying $45,000 by the factor,1.48,
gives you $66,600.
Example: In today's dollars, you save $100 per month. Assuming an
average annual inflation rate of 2% over 15 years, how much will you need
to save at that time, to retain the same purchasing power. Answer:
Multiply $100 by the factor, 1.35, and you come up with $135 a month.

48
The next table shows how inflation destroys the purchasing power of your
money.

FUTURE PURCHASING POWER OF $1,000

End of Annual Inflation Rate

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
5 $951 $906 $863 $822 $784 $747 $713 $681 $650 $621
10 905 820 744 676 614 558 508 463 422 386
15 861 743 642 555 481 417 362 315 275 239
20 820 673 554 456 377 312 258 215 178 149
25 780 610 478 375 295 233 184 146 116 92
30 742 552 412 308 231 174 131 99 75 57
35 706 500 356 253 181 130 94 68 49 36
40 672 453 307 208 142 97 67 46 32 22

This next table shows what you will need to equal the purchasing power of
$1,000 in today's dollars.

WHAT YOUR MONEY NEEDS TO BE WORTH IN THE FUTURE

TO EQUAL $1000

End of Inflation Rate

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
5 $1,050 $1,104 $1,159 $1,217 $1,276 $1,338 $1,403 $1,469 $1,540 $1,610
10 1,111 1,219 1,344 1,480 1,629 1,790 1,967 2,159 2,370 2,590
15 1,161 1,346 1,558 1,801 2,079 2,397 2,759 3,172 3,642 4,180
20 1,220 1,486 1,806 2,191 2,653 3,207 3,870 4,661 5,604 6,730
25 1,280 1,641 2,094 2,666 3,386 4,292 5,427 6,848 8,623 10,830
30 1,350 1,811 2,427 3,243 4,322 5,743 7,612 10,063 13,270 17,450
35 1,490 2,000 2,814 3,946 5,516 7,686 10,677 14,785 20,420 28,103
40 1,650 2,208 3,262 4,801 7,040 10,286 14,974 21,725 31,410 45,260

Since the above tables are per $1,000, you can determine larger amounts
by multiplying by the appropriate ratio. If you wanted to find the figure for
an amount that was not an exact multiple, for example, $75,500, just
multiply by 75.5.

49
 IT'S IN YOUR INTEREST TO START IMMEDIATELY

I hope that you have already become MONEY WI$E and taken control
of your interest.
If not, start today, don't delay.

Don't ever let it control you!

Become money wise and utilize tax deferred, tax-free and tax
deductible strategies to increase your income, reduce taxes and build
wealth.

May your interest always be very rewarding and you achieve financial
security.

50
 REWARD $ YOURSELF
INCREASE INCOME AND BUILD WEALTH
BECOME MONEY WI$E

MONEY WI$E is a guide for consumers who wish to understand and

profit by becoming money wise. The role that financial strategies and
interest plays in your life is fundamental to your financial well
being. Consumers need to know information that will be financially
beneficial to them in order to earn and keep more on what they save
and invest, pay less in taxes and become better managers of their
money.
When it comes to personal financial decisions such as choosing a
savings account, or other after-tax, tax-deferred, tax-free and tax-
deductible investments, many consumers do not know how to
maximize their financial gain and minimize taxes, costing themselves
hundreds and thousands of dollars every year. By making sense of
the various alternatives with which you are confronted, you will come
out the winner.
The type of financial investment you choose, the interest rate or yield
you earn, the time period involved, how early you start, the rate of
inflation, your tax bracket and your awareness of basic financial
concepts, facts and strategies will determine eventually how much
you profit.
This book contains many easy-to-understand tables, examples and
explanations on how to locate, use and apply the data for specific
situations to help you make the right choice.
You will be able to apply MONEY WI$E immediately and throughout
your life, rewarding yourself with thousands, tens of thousands and
even hundreds of thousands of more dollars earned on your money
and saved on taxes.

51
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