When giving my tax-planning, wealth-building seminars, here’s a question I usually ask the audience, “Do you know the Rule of 72 and how it works?” Typically, about one-third of the audience raises their hands.
Then, I’ll explain the wonderful, helpful Rule of 72: “Write the number 72 on a piece of paper. Assume your can get a 10% rate of return. Divide 10 into 72. You get 7.2. What that means is your principal sum will double every 7.2 years..”
“For example, $10,000 compounding for a period of 36 years (will double exactly five times) will give your $320,000. Stop for a minute… do the simple math yourself. Fun, eh?”
But wait! What if that 10% return was subject to a 40% income tax (state and federal)? Then you would only have a 6% return… 6 into 72 means 12 years to double your money. Now your $10,000 will only double 3 times over the same 36-year period ($10,000 to $20,000; to $40,000 and finally to $80,000).
Compare that $80,000 to $320,000 when tax-deferred (or tax-free). A huge difference.
So, now we know two factors that are measurably important to creating wealth: first, rate of return and second, tax-deferred.
Let’s explore the tax-deferred first.
If you have money in a qualified plan (401(k), profit-sharing, any of the many IRAs and other qualified plans), you are on the tax-deferred road. If you are the proud owner of a Roth IRA or the new Roth 401(k), you can wave your tax-free flag.
Now the hard part: The rate of return. How would you like to average over a 16% rate of return per year? You can. The concept is called senior settlements (SS).
Let me introduce you to SS by quoting an article from the Wall Street Journal. (May 18, 2005 issue, titled, “Moving the Market…”):
- “AIG. [The insurance giant] has bought less than 1,500 policies since 2001, according to spokesman Wil Nans.”
- “The industry’s annual returns of 10–15% first attracted European and Asian investors. And a few years ago, Berkshire Hathaway Inc., the investment vehicle of billionaire investor Warren Buffett, began buying life settlements, according to securities filings.”
A SS is simply the purchase of an existing insurance policy from a senior (65 years old or older) by an investor. The selling senior, who no longer wants to pay premiums, gets a much larger price for the policy than taking the cash surrender value from the insurance company. The senior wins. The investor wins by making a large profit without risk (the senior is sure to die).
Can you become one of the investors? Yes, a public company, trading on the NASDAQ makes it easy. The average rate of return on SS investments is 16.36% per year and has been over 16% throughout the company’s 14-year operating history.
You can become a SS investor in one of three ways: taxable, tax-deferred or tax-free. Following are the most common possibilities:
- Taxable. Your own funds or funds you control (like your corporation or other business entities, family limited partner
ships, an any non-charitable trust.)
- Tax-Deferred. Almost everyone can play this profitable game via their qualified plan (IRAs—traditional or rollover,401(k), profit-sharing and any other qualified plan). The trustees of pension plans or other plans that are not self-directed can join the profitable fun by investing the plan funds in SS for the benefit of all participants.
- Tax-Free. A Roth IRA or Roth 401(k) can fatten your tax-free accumulations. Charitable entities—charitable remainder and lead trusts and family foundations—are a perfect fit.
As you can see, we have a very positive attitude toward the potential wealth-building power of SS. But since SS are probably new to almost everyone reading these words, here’s a suggestion: Show this article to you professional advisors – CPA, lawyer, banker, financial planner and others. Discuss SS from at least these two aspects concerning your investments (taxable or otherwise):
- The next time you are about to make an investment, determine how SS compare to other possible investment choices.
- Compare existing investments to your long-term (don’t forget to apply the Rule of 72) and short-term (about three to five years) goals.
Okay, so you want more information about how you can earn 16.36% on average per year without risk. Just fax me (847-674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest (minimum is $50,000 for accredited investors.)