Would you be interested in a super liquid financial vehicle that outperformed the market by more than 41 % over the last decade? What if I told you it was a Coffee Can?
Consider this. Had you invested $100,000 into the S&P 500 on August 31, 2000, and held your position for exactly 10-years, you would now have $70,470. To grow your $70,470 back to your original $100,000, you will need to recover $29,530. That means you will need to grow your money by 41.9% just to break even. Had you left your money in a Coffee Can over the same period you would be 41.9% ahead.
Now to be fair, the index values as illustrated below do not include the dividends from the S&P 500 stocks. And to continue the fairness argument, these values do not include investment management fees and trading costs that reduce performance. The fees and trading costs could easily eclipse $15,000 during this time period. The Coffee Can, assuming you purchased it at the grocery store, would run about $15.
Before you start recommending the Coffee Can savings plan be sure you know about the downside. The problem with putting your money in a Coffee Can is that it cannot grow. Coffee Cans are also not very safe! Just think about someone looking in your cupboard only to find a Coffee Can with $100,000 in it. You might find some of your money has gone missing after 10 years. Your Coffee Can full of cash could be lost. Let’s not forget how uncomfortable you might feel when someone at a cocktail party asks, “Where do you have your money?” Are you going to tell them the truth?
So, the Coffee Can savings plan may not be the ideal place to save money. But what if we could make this can a little more attractive? When would it cease to be a joke and start to be considered seriously as a viable financial option?
SAFETY
The Coffee Can savings plan needs more protection than the tin can alone provides. Rather than putting it on a shelf or burying it in the backyard, let’s put the Coffee Can on hold with an insurance company that is willing to guarantee the contents of the can will be there ten years from now. Regardless of the outcome, this highly-rated insurance company will assure that the assets remain 100% protected against any loss. Now the Coffee Can is looking a little more attractive. NO LOSSES, EVER!
GROWTH
Now that the Coffee Can is protected, wouldn’t it be great if the money could grow? Let’s say we allow the insurance company to not only guarantee the original amount, but also allow them to manage the money to generate a yield. Each year, the Coffee Can will begin receiving additional money from earned interest. This money would also be protected once credited to your Coffee Can. That would mean that your original amount, plus any growth, would never be exposed to loss. Not bad.
Today, in spite of low interest rates, it is still possible to lock in a 3.15% rate for your Coffee Can money. Below, we’ve added a new line to our chart that shows the value of the 3.15% Coffee Can rate.
After 10-years, growing at 3.15%, the Coffee Can will now have $136,361 inside it. That’s 93% more money than the S&P 500 Index. Because the Coffee Can is 100% insured, the $36,361 of growth is fully protected.
TAX ADVANTAGES
It turns out that SAFETY and GROWTH are not the end of the story. By placing this money with an insurance company, the owner can actually defer the taxes on any growth they experience. In fact, they only pay taxes when they actually use the money. This allows their money to work just a little harder as they earn interest on the money they would have otherwise paid in taxes. For example, if the IRS taxed this Coffee Can at 25% each year, the can would have just $126,270 rather than $136,361.
LIFETIME INCOME
Now let’s say that the insurance company holding the Coffee Can proposes to allow the owner to receive a lifetime of income from the assets under their care. What would that look like?
If the owner is 65 years old, they could receive $9,700 for the rest of their life. That’s a 7.11% cash flow. If the owner is 70 years old, they could receive $11,186 for the rest of their life. That’s a 8.2% cash flow. If the owner is 75 years old, they could receive $13,196 for the rest of their life. That’s a 9.6% cash flow.
HERE’S ANOTHER BENEFIT
For the 65 year old, over 54% of every payment would be excluded from paying Federal income tax. For the 70 year old, over 59% of every payment would be excluded from paying Federal income tax. For the 65 year old, over 65% of every payment would be excluded from paying Federal income tax.
IT’S NOT ABOUT THE COFFEE CAN!
Why does this mythical Coffee Can seem so appealing?
No volatility. Americans approaching retirement, or those already in retirement, clearly understand the value of a safe, secure and predictable financial vehicle. People are choosing safety.
No annual tax liability. The power of tax deferral is the power of tax control. Americans like the idea that they can defer taxes on their growth for as long as they want. In fact, they can choose to defer paying taxes throughout their entire life. Ultimately, the taxes do need to be paid, but until that time, they are earning interest on the money they would have otherwise paid in taxes.
Never run out of money. For the last 100-years, U.S. life expectancy has increased. People know they are living longer, and they find comfort in financial products that demonstrate they will never run out of a structured, guaranteed income.
The good news is that you don’t need a Coffee Can to get all of this done. You can simply show safety minded, financially-conservative people the benefits of a Fixed Annuity, Fixed Indexed Annuity, or even an Immediate Annuity. Properly structuring and planning with these guaranteed products allows people to see the future.
Steven Baker is the President of 1st Financial Insurance Marketing.
www.FFIMCO.com. 1-877-272-7562.
This article is designed to provide accurate and authoritative information on the subject of personal finances. It is provided with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services by providing this Web site. The author and publisher shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential or other damages. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been carefully and appropriately evaluated.
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