Reality vs. Reality TV

Admit it. Whether you wait (not-so-patiently) for the next episode of Big Brother or you checked out America’s Got Talent once a couple of years ago, there’s a good chance you’ve experienced at least a taste of reality TV. And we all know that it’s not really reality, however much we want it to be.

We all watch reality television. In fact, worldwide, 70% of the population say they’ve watched reality TV, and between 4% and 65% admitted to watching it on a regular basis if not frequently. American Idol, one of the most popular reality television shows has more than a 50% market share. Let’s put that that in perspective. Most households have more than 100 channels and that one show owns 50% of the market share. But, when it comes to our clients’ money, we need to be clear on the difference between what’s reality, and what we’d like it to be.  

The first detail to discuss is the difference between the nominal rate, the after-tax rate and the real rate of return — which is what the client actually takes home. The nominal rate is what we talk most about —what we’re achieving for our clients and what our clients talk about earning when discussing their investments at cocktail parties. And the nominal rate is what they are looking at historically when they talk about an investment earning a certain amount.

But it’s important to compare things on an equivalent basis. To do that, take the tax rate and then remove inflation to get the actual real rate of return. That’s the rate of return the client is actually earning.

When you take a look at during the week of Thanksgiving 2021, the average five-year CD is earning 1% and the average tax bracket is 25%. That lowers your after-tax rate to about 75 basis points. The taxable equivalent rate on a tax-deferred annuity would be about 2.25—a substantial difference. When you apply the inflation rate to that 75 basis points — which, as of the end of October 2021, is as high as 6.2. That equates to a -5.45% return.

So, in other words, every dollar that’s earned is actually going backwards by 5.45%. That’s the real impact that we need to talk to our clients about when discussing saving versus other safe alternative investments.

Reach out to our retirement income consultants at (800) 589-3000 to get a full understanding about some of the solutions that we can bring to the table to help you put money in motion.

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Don’t get caught up in fake news when it comes to your clients’ retirement planning. Start by helping them understand the real rate of term.

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