“The most powerful force in the universe is compound interest,” he remarked. At lunch one day he came up with the “rule of 72.” It’s a tool that is used to estimate how fast compounding works. An analysis of the rule indicates that return increases exponentially as the rate increases. Does risk increase at the same rate as return, or does it increase at all? I haven’t seen anything about his thoughts on risk though.
Compound interest works both ways. If we think about the long-term inflation rate, in a year that 100 is now 97, and you can see that 3% return may just break even. Certificates of Depreciation are at 5% to 6% return. In the long-term, a return of 12% is not difficult at all. We will discuss how to put that to work in a tax-sheltered account in a future post.
The illustrations in Missed Fortune 101 are the best resource for the how, when, and what to pay taxes on, if at all. If you haven’t read it, let’s just say tax-deferred growth and tax-free use of earnings. Wouldn’t that be fun? What do you think the option is? At this point, I can tell you that loans and withdrawals are not taxed by the IRS.
[tags]finance, investing, capital[/tags]