Category: Cash Flow

The Staggering Impact of Taxes On Investment Returns

The purpose of this post is not to make any kind of political statement.  We are not trying to say one side is right or one side is wrong.  The purpose of this post is to simply show mathematically something that politicians should understand.  More importantly, you as a financial professional should understand this because the impact of taxation on our wealth is significant – significant enough that positioning our money in a tax-advantaged situation is one of the most competitive advantages possessed by whole life insurance.

To illustrate the impact taxation has on the accumulation of wealth, I am going to tell you a simple story.  Imagine for a while that you just left your office and are walking to your car.  Before you get to your car, you notice my very nice, high-wheeled motor buggy.  This type of automobile predated the Ford Model T and was the most popular car in 1912.  It appears that I am making some adjustments to the car, so you ask me about it.   As it turns out, I am an inventor similar to Doc Brown from the movie series “Back To The Future.”

Because I have put my time travel invention in the high-wheeled motor buggy, I offer you a unique opportunity to travel with me back to the year 1912.  Without a second thought, you jump in the buggy and after a very exciting ride, we arrive in the year 1912.

To see your city as it was more than one hundred years ago is very strange.  As you stand there taking it all in, you notice a strangely familiar man walking down the street.  As he gets closer, you recognize him as your paternal great-grandfather.  You approach him and talk to him for a while.  After few minutes, I inform you it is time to return to our time, but just before we leave, you hand your great grandfather all the money in your wallet ($500) and ask him to invest it for you.

As you are traveling back to the present time, your mind is racing, trying to calculate how much money you will have when you arrive back in 2017.   Once back to the present time, you return to your office and quickly open a Cash Flow Calculator to help you determine what the balance of your brokerage account should be.

Entering the number of years (104) it has been since 1912, an average rate of return of 12%, and your starting value, you are astonished to see that you should have $65,711,951.


All your money worries dissipate instantly.  But the smile leaves your face when you realize you still have to pay taxes on all that money.  But what tax rate you should use?  Thankfully, within the software is a historical graph showing you exactly what the tax rates have been since 1913.



As a first guess, you use the average maximum tax rate of 57.9%.

You normally do not curse, but what happened to all that money?  Did it just disappear into thin air?  The reality is, taxation stunted the growth of the money so much you would only have $84,143.  This is a far cry from the $65 million you had originally calculated.

But get beyond yourself and take a look at this situation from a macroeconomic point of view.  We live in a society wherein there are needs – needs for roads and bridges and all those things specified under the term “common good.”  Those needs require funding.  Since 1913 the so-called solution to sourcing the funds has been an income tax.  But wouldn’t the best solution be one in which everyone – you and the government – get the most money?

As you adjust the tax rate in the calculator you will notice the numbers change drastically.  Entering 20% you get the following:

In this scenario, the government would collect 15 times as much in tax dollars.  Why wouldn’t a politician vote for a tax rate that would increase the revenue for Uncle Sam as well as increase what individual Americans are able to keep?

Go ahead and play around with the tax rate and you will eventually find an optimal tax rate where you and the government receive the largest amount of money from the paying of taxes.

But you must be careful here.  The optimal tax rate is dependent on the assumption you make in the earnings rate.  If the annual earning rate changes to say 8%, the optimal tax rate will also change.  Care to venture a guess where the optimal tax rate is if you take an even bigger macroeconomic view, i.e. several different earnings rates?

Answer:  15%.

So what good is that information?  Well for starters you have successfully reproduced what is called the Laffer curve. The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer’s main premise that the more an activity such as production is taxed, the less of it is generated.

You still must ask yourself; do you now have the whole truth? Math is Math, but math is not real life.  You are a financial professional, not a tax collector.  Your job is to help your client build their wealth, not Uncle Sam’s.  The best scenario for the individual was when no taxes were taken.

So, here is your chance to correct the error of your ways.  You are offered one more trip back to 1912.  Are you going to tell your great-grandfather to get a higher rate of return or invest the money where it will grow unfettered by taxation?

Why would you do anything different for your clients?


-Jason Henderson for Truth Concepts


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The Myth of Zero Percent Financing for Cars (John & Jane Jones Pt. 2 of 9)

Both Jane and John Jones were smiling as they walked into my office for the second meeting with them.  The first meeting had gone well and I was excited to meet with them.

After a few minutes of catching up and pleasantries, I asked John, “If you were talking to a good friend and they asked what our office was doing for you, what would you tell them?”

John was contemplative for a moment and then started to speak. “Well the first thing I would tell them is that you have completely changed my thinking about whole life insurance and its value.  You did not just convince me, but you helped me by using your special calculators, see the whole truth about how money works.  In fact, I would probably tell them that your office has not tried to tell me what to think, but has rather helped me to learn how to think.”

“That is quite a compliment, thank you.  I hope you have opportunities to say exactly that to people you care about,” I replied.  “But I want to make sure you understand one critical thing: I never want you to assume my opinion to be correct.  I want you to question everything I tell you. I want you to make your decision on your own – always.  With that as a starting point, I want to approach an issue that I think is rather important.  Are you ready to get into the serious side of our discussion today?”

Jane answered, “We definitely are!  And, just so you know, my parents are so happy you helped us to see the wisdom in their decision to purchase that whole life policy for me when I was a year old. They send their thanks.”

I couldn’t help but smile.  “Why thank you, Jane. That is very kind of you to report.”  Getting a down to business, I told them about a recent study done by Lexis-Nexis.  “Do you realize that 43% of American families own no life insurance?  And of the 57% that do own it, 30% of those believe they have inadequate amounts of life insurance.  Why do you think such a large portion of Americans are either under-insured or uninsured?”

“But I thought we were going to talk about purchasing a car – that is what we told you we wanted to talk about,” John said.

“Yes, I want to talk about that,”  I replied, but humor me a little as I help you to see a very important financial truth. So why are so many people uninsured or underinsured?”

“Well, I guess it is because people have never met someone like you?” Jane said, almost questioning.

“Or maybe it is because they do not understand the value of life insurance,”  John added.

“You are both on the right track.”  I complimented them.  “Have you noticed there is a disturbing trend in America that people do not understand the value of work?”

“Yes!” was their unified answer.  “It seems that many of my peers do not know how to work or even value the fact that they have a job,” John added.  “They just figure they can get another one if they don’t like what they’re doing or if something goes wrong with their employment.”

“It is a bit alarming, isn’t it?”  I responded.  “But an issue I believe is even more fundamental, is the confusion most people have about which of their assets is most important. What do you think most people would say is their most important asset?”


Once again both Jane and John answered together, “Their house.”

“You’re absolutely right – most people consider their home to be their biggest, most important asset. And it’s pretty safe to say that almost everyone has their house insured. But I disagree with that view. In fact, I think that perspective causes a serious lapse in financial judgment. A home – although definitely an important thing to have – is not the MOST important asset. The most valuable asset almost everyone has is the ability to earn their other assets. I believe – and tell me if you agree – that a person’s most valuable asset is their ability to work and make money. And yet very few have that asset protected sufficiently.”

John spoke up and said, “There you go again, helping us to see the bigger picture.  When you put it that way, I can’t help but agree with you.  I was surprised by the statistics you gave us, but knowing that information, it is even more surprising.  Everyone should insure their best asset.”

“So then, how much insurance should they have on their most valuable asset?”  I asked.

“As much as they can, of course.  At least, that is what everyone does with their house,” John answered.

“I am so glad you said that John. Let me show you why. I want to show you another calculator called the Maximum Potential Calculator.  I am going to use numbers for you both individually as you both are making about $45,000 a year.  I am going to illustrate this until age 65.  Let us assume that you will have a cost of living increase of about 4% each year.”  Pointing to my computer screen I asked, “How much money will each of you potentially earn in those 41 years?”

“Wow that is a big number,” was Jane’s first comment.  “Really?  We are both on track to make nearly 4.5 million dollars by the time we’re 65?” Jane asked.

“Yes, that is the amount of money that will come into your life in the form of payment for your ability to work.  Pretty valuable isn’t it?”  I said.  “There’s another important number to notice on this chart – what is projected to be your salary during the last year when you are 65?”

“$216,046.  Wait, is that for real? It would be great to earn that kind of money.”  John sounded a bit excited.

“Well John, let me ask you a question: will that $216,000 purchase more when you are 65 than your $45,000 salary purchases for you today?”  I asked.

“Of course it will.”  John blurted.

“Actually, the truth is this calculator shows the $216,000 salary you’d earn 41 years from now, is the equivalent of a $45,000 salary today.”  I continued, “In fact you most likely will be able to purchase even less because of taxation.”

“That is depressing.  But knowing that now can help me in the future.  But what does all this have to do with our most valuable asset?”  John inquired.

“The whole goal of home insurance is to replace your home if there is a complete loss. The same is true of life insurance.  What is being replaced is your ability to work and earn money.  In order to know how much life insurance you need, you need to estimate how much you will earn over time.  Let me put this another way –  what amount of money would you need in today’s dollars compounding at the same 4%, to be able to replace your ability to work and earn money?  But we are getting ahead of ourselves.  First, we need to look at another calculator, this one is called the cash flow calculator.  Again using the same 41-year time frame we are going to use your net income ($29,250) instead of your gross income ($45,000) because the government will always get their share.”  Pointing to the screen I asked, “what is the compounded value of your total net income?”

Looking for the red circle, John answered, “$7,367,704.”

“Great, but that is in dollars of 41 years from now.  What we need is to know the present value of that amount in today’s dollars.”  I quickly brought up a present value calculator and input the numbers. “What amount of money do we need today to make sure your ability to work and earn money can be replaced?”

“About a million dollars,” John said.  After thinking a moment, John looked at Jane and said, “It looks like we each need an insurance policy for $1,000,000.”

“Yes, we do. We better do as we are learning and do the most important things first,”  Jane said.  Turning to me, she said, “We need to get going on protecting our family’s most valuable asset.”

“I am glad that issue is out of the way.  I wanted to cover that with you before we got to your questions about purchasing a car.  Like John said, we like to help our clients discover, learn and understand the whole truth about their financial environment.  When you understand the whole truth, it becomes easy to know what decisions need to be made first.  You two are great students and have a bright future ahead of you,”  I said.  “Now on to another important concept, purchasing a car….”

“Did you get the proposal we sent to you?”  John asked.  “You know that 0% interest loan seems like a no-brainer to me.  But Jane really wanted to get your perspective before we made that purchase.”  John added.

“I am so glad you did because there are a few nuggets of truth you need to understand.  To start off, answer this question for me, ‘How does a car company make money?'”  I asked John

With a puzzled look on his face, John answered, “By selling cars.”

With a little chuckle, I said, “You are right. But think further; why do all the major car manufacturers offer to finance your car for you?  Is it possible they make money financing cars for people?  In fact, the car companies make more money financing the purchase of cars than selling their cars.”  I explained.  “But then there is the interesting offer of 0% financing.  If the financing is the major way they make money, why would they give that up?”


“I am not sure why they would, but isn’t that what they are doing with the 0% financing?”  John answered and asked at the same time.

“How much does the car you are considering cost if you financed it with the manufacturer?”  I asked.

“$35,000.”  Jane volunteered.  “Which will give us a monthly payment of $729.17.”

“Great.  How much will it cost if you pay cash or finance it through an outside source?”  I asked.

John beat Jane to answer, “$32,500.”

“So the car company will give you a rebate of $2,500 if you pay cash and drive off with the car.  Let me show you what the car company is actually doing by using my rate calculator. “I input the numbers, using the rebate cost of the car with the SAME car payment.  I then asked, “What interest rate are they charging?”

“3.68%?”  Jane asked, confused.

“Yes, that is correct.  By just raising the price they can call it 0% financing.”  So here is the next question: should you purchase the car from the manufacturer, using your policy as collateral or should you finance it at the credit union?” I smiled as I asked them.

Thinking out loud, John said.  “Well, at the manufacturer’s dealership our payment will be the same as at our credit union if they charge us 3.68%.  But they have offered us a rate of 2.99%.  So the better interest rate is at the credit union.  I know using our policy is a great way to minimize opportunity costs.”  Looking at me he then asked, “How much does it cost to get a loan from the insurance company?”

I wanted to jump up with excitement.  At our first meeting, this 24-year man wanted to get rid of his wife’s policy, but now he wanted to use that policy to finance a car.  “John,”  I started “you are beginning to understand the real value of a whole life policy.  But as I have said, a number of times, the whole truth is important.  If you use your policy as collateral for a loan from the insurance company, the interest rate will be 5%.”  I then waited to see what they would say next.

Again thinking out loud, but also looking at Jane, John said, “It seems to me that the credit union is the best way to go, unless I am not understanding something.”

“You are right.  You have to remember that just because you have cash values doesn’t mean you have to finance everything possible using those cash values.  You only use them when it is to YOUR advantage.  This time, it appears the credit union is the best way to go,”  I said like a proud teacher.

“Ok then, it is settled.  This has been a great meeting.  We will fill out an application for a $1,000,000 term policy for each of us right now.  We will buy the car using the credit union as the financing tool and set up a time for our next meeting.  Sound good?”

“Sounds great,” I said.


-Jason Henderson for Truth Concepts 

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Truth Concepts on

Visit Truth Concepts on Today!New Truth Concepts Client Presentations!

We’ve been busy loading up our Truth Concepts YouTube channel  with videos for you! Now there are 15 videos featuring Todd Langford and/or Truth Concepts software.

The YouTube channel houses our Truth Concepts, Truth Concepts Academy, and Summit videos, as well as several presentation videos and  Banking for Life excerpts and outtakes with Todd Langford.

Eight of the newer videos are from a client event at a local insurance brokerage. We recorded and “screen captured” Todd’s presentations and divided it up by topic. (FYI, Todd’s presentations followed a presentation by Nelson Nash, you’ll hear him refer to Nelson who is in the audience.)

Truth Concepts: How Banks Make Money (1 of 8)

Even most bankers don’t understand this. (If a bank has a 6% spread between the savings rate and lending rate for customers, they are NOT making 6% on their money!) The reality of bank profits – especially when interest rates are low – is frankly shocking. Approximately 15 minutes.

Truth Concepts: Maximum Potential (2 of 8)

As we mentioned in an earlier email, many advisors like to use this calculator in their first meeting with a client. It outlines what a client’s full financial capability and demonstrates that if you’re saving too little, a chasing higher rate of return isn’t necessarily the answer. Approximately 10 minutes.

Truth Concepts: The True Cost of Paying Cash (3 of 8)

Todd explains opportunity costs and why they matter so much. (Not suitable viewing for Dave Ramsey fans!) Approximately 7 minutes. 

Truth Concepts: Qualified Plan (4 of 8)

Todd examines the real rate of return in a typical qualified plan. What impact does a company match, a typical fee, and taxes have on the dollars in a 401(k) or other tax-deferred retirement plan? It’s not a pleasant surprise to see how much of “our” money ends up in someone else’s pocket!  Approximately 14 minutes.

Truth Concepts: Funding Calculator (5 of 8)

Todd Langford discusses whole life cash value in the context of other savings vehicles (with some interesting commentary on the “safety” of FDIC-insured accounts) and busts the “buy term and invest the difference” myth with hard numbers and compelling logic.  Approximately 16 minutes.

Truth Concepts: Car Financing and Borrowing (6 of 8)

Todd shows the reality of “0%” vehicle financing, then compares the results of making major purchases through bank loans, cash purchases, certificates of deposit or whole life cash value. Emphasizes the advantages of having and using your own capital.  Approximately 23 minutes.

Truth Concepts: Real Estate (7 of 8)

Todd explains the advantage of participating mutual company dividends and analyzes the powerful potential of using cash value to finance other assets and sound, cash-flowing investments. See how leveraging your cash value can produce exponential benefits when combined with other strategies and investments.  Approximately 11 minutes.

Truth Concepts: Laffer Curve on Cash Flow (8 of 8)

Todd gives a contextual history of income taxes and how lower taxes can actually translates into more money for BOTH taxpayers and the government.  Approximately 5 minutes. 

Visit Truth Concepts on Today!

Click on links for individual videos above or view all available videos on the Truth Concepts YouTube channel at:

Can you see the potential of using Truth Concepts software to analyze various financial strategies and communicate with clients about essential financial concepts?

Join Todd in Houston for our next LIVE 3-day training for hands-on training with Truth Concepts calculators. At this writing, our next event is October 22-24, 2014 in Houston, TX. See our Truth Training page for current dates, details and registration.

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Average Does Not Equal Actual

Average Rates of Return are often touted by financial experts, and yet simple math can show us that Average does not equal Actual.

Pretend that you invested $100,000 into a mutual fund that had promised an average rate of return of 25% if you left the money alone for 2 years. In the first year it earned 100%.

After the first year, the investment would look like this:

In the second year, the fund earned -50% (that is a negative 50%) and so now your investment looks like this:

While your funds average was 25% (that is mathematically correct, 100 + -50 / 2 = 25%) its actual yield was 0% because you ended up with only the $100,000 you started with.

So, Average does not equal Actual. If you’d prefer to invest your money in a place that does not roller coaster ride, please contact us and we can direct you to some options.


Please note the above illustration was for educational purposes only.

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How Can We Prove a 15% Flat Tax is the Most Efficient?

Let’s use a Cash Flow Calculator from to tell the whole truth about what happens to an account when it gets taxed. We’ll put in $20 in 1913, the year the tax system started. We’ll show the account earning 20% per year.

We can see below that the account has $798,784,476 (that’s $798 million) in it.


This assumes no taxes or management fees were taken out during this time

If we adjusted the account for inflation, assuming a 4% annual rate, it would have $18,502,442  ($18 million) in it assuming no taxes or management fees.


It’s interesting to note that this income tax was intended to be temporary when it started, was only at 8%, and affected only the upper income earners.  The person who owned this account was in a 50% average tax bracket over those 96 years, using the table below as a guide.


So, applying the 50% tax bracket to the $798 million account would cut it in half, right?  NO, it brings it down to $188,247.  Notice below in the government only gets $188,227.


How is that?  It’s due to the fact that taxes are predatory or confiscating in nature.  Every time taxes are taken out of the account, those tax dollars can no longer earn the 20% rate of return the account is earning. This is also known as opportunity cost since the tax dollars lose the opportunity to earn interest. 

Now, let’s see what dropping the tax to 40% would do.  Watch both the End of Year Account Value on the far right and the Tax  Payment in red next to it to see how to increase both the owner of the account’s estate and the government’s take as well.


 Lowering taxes to 40% shows the owner at $1,061,598 and the government at $707,719.


 Lowering taxes to 30% shows the owner at $5,806,250 and the government at $2,448,384.


Lowering taxes to 20% shows the owner at $30,831,664 and the government at $7,707,911.


Lowering taxes to 10% shows the owner at $159,111,913 and the government at $17,679,099.


Lowering taxes to 5% shows the owner at $357,715,937 and the government at $18,827,154  If we really want the government to get the most, we’ll try 6.65%.


So we could surmise that if one is talking about 20% rates of return, a 6.65% tax bracket is the most efficient. According to our studies, if we are talking about a 9% rate of return, a 15% rate of taxation is the most efficient.

So now that you know the whole truth about the matter, what do you do with this information? Focus on accounts that do not get eroded by taxes and/or implement strategies that mitigate the taxation on these types of accounts such as taking dividends, interest and capital gains in cash instead of re-investing them.

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How to Calculate the Lost Opportunity Cost of the Typical way to Educate Kids.

How to Calculate the Lost Opportunity Cost of the Typical way to Educate Kids.

A college education that cost $30,000 per year in today’s dollars with a  6% inflation for a 4 and a 6 year old will remove $2,187,493 from the parents wealth by the time they are 68 years old. How? The actual cost of the school plus the opportunity cost of the money removed from the parents’ estate assuming it was earning 5%.  We’ll use a Cash Flow Calculator from to tell you the whole truth about the cost of college.

First we see in cash flow column 1 (fourth from the left) the result of $30,000 inflated out at 6% for 12 years since the child is 6 years old.  Notice we’ve assumed a 5 year college attendance time frame.  Then in column 2, that same $30,000 inflated out at 6% for 14 years since the second child is 4 years old.  You get these by putting in the $30,000 at the top, copying the 5 years you want saved, deleting the whole column, then pasting the 5 years back in.

(Note: these numbers are several years old and the figures are actually extremely conservative… you will pay MUCH more for a private education with room and board now and you may need to adjust figures upward.)

The $824,443 shown is the compound cost of 10 tuitions that will start 12 and 14 years from today. 

So, if we wanted to know how much of our current assets would be needed to fund this education, we use the Present Value Calculator which shows we need $342,619 today, assuming we could earn 5% net on the money.

To confirm that number, copy (don’t type) the $342,619 with all its decimal points from above and paste it into the Present Value box on the top left in the Cash Flow calculator .

Then highlight the 5 years of Annual Cash Flow, right click, Select “Change Sign” and this will confirm your Present Value number is correct because it depletes the account to zero over the 18 years as shown below.  Make sure to do this for both columns.

Or we could use the Payment Calculator to figure out that we would have to put away $27,914.08 a year for the next 18 years to accomplish the same thing, again assuming a 5% net rate of return.

This too can be proven so you know you’ve done the calculations correctly by copying the $27,914.08 and all its decimal places from above and pasting it into a third cash flow column as shown below.  Make sure you remove the Present Value number as well.

Now comes the really hard part (as if putting away $28,000 a year isn’t hard enough).  Let’s say the parents were 30 years old at the time you looked at this.  That means they are 48 when the second child finishes her 5 years of schooling.  If they had not paid for college, the $824,554 could have grown to $2,187,493 by the time they were 68 years old.

That amount of money would kick off a pay down (spending principle and interest over the next 20 years) of $167,171 per year (only partially taxable due to pay down or spend down strategy) from age 68 to age 88.

What could you do differently now that you know the whole truth about your money?  You could find a way to get your dollars to do lots of jobs instead of just the job of educating your children.  Then the dollars sent to the school don’t create such huge opportunity cost that pulls against your own wealth.  See the article entitled “How to Get One Dollar to do Lots of Jobs” for examples and ideas.

Kim would also recommend being honest with yourself and your children about the real cost of college and looking for ways to minimize costs through community college, scholarships, work study programs or otherwise allowing the student to participate in paying for costs or repaying loans, etc.

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