6 ms·

Whom is this a good deal for? 1.045^40 is less than 6, so you'd get back a 6x return after like 40 years if you don't touch the money? Even with the full $150k

Whom is this a good deal for? 1.045^40 is less than 6, so you'd get back a 6x return after like 40 years if you don't touch the money? Even with the full $150k you end up with $1M which hardly seems like anywhere near enough to sustain you in retirement in 2063.

georgeg23 3y ago
1.045^100 = 81x. That sounds more impressive, as inflation over the last hundred years is only 17x. If you withdraw at 40 years you only get 30 years worth (lose ten years of interest according to their terms).
- mlyle 3y ago
  > 1.045^100 = 81x. That sounds more impressive, as inflation over the last hundred years is only 17x. Viewed another way, though, if inflation is the same, "you'll" get 4.7x in real money at the end. On the other hand, you'll be paying tax on that interest, so you are likely to be losing money in absolute terms. A nonprofit might find it attractive, though.
  - georgeg23 3y ago
    I think it's an exaggeration to say you'd be losing money after taxes.. it's still at least 3x, but point taken.
    - mlyle 3y ago
      Say I open a 1 year CD at 5% interest with $100. Say inflation is 3%. I will get $5 of interest. The original $100 would be worth $103. I'd better pay less than $2 of taxes on that $5, or I'd be losing money in absolute terms. If my total marginal tax rate is 30%, then I'll pay $1.50 in taxes, and yield .5%; after 100 years then you'd have 1.6x the money. If my total marginal tax rate is 40% -- say 32% federal + 8% California-- then I'm breaking even. The same logic holds for longer term CDs, as you're paying taxes on interest accrued each year.
      - kasey_junk 3y ago
        A 30% marginal tax rate across 100 years would be extremely abnormal as it implies you are mostly getting taxed at income tax rates at a very high rate.
        mlyle 3y ago
        > getting taxed at income tax rates Interest is taxed at income tax rates. It is a pretty high rate; but people who are excited to lock up $100k for 100 years probably have high incomes. Not everyone can structure all of their earnings and other income as capital gains. For a single person in California, it's 24% + 9.3% at ~$89,000 per year, and 32% + 9.3% at ~$170k per year, and goes up from there. So, here: 2.86% average inflation for past 100 years. (10^(log(16.785)/100) = 1.0286...). 4.75% APR. At ~89k/year, APR-after-marginal-taxes in California is 3.26%; or a real yield of 0.4%. You'll have 1.9x the principal after 100 years. At $170k-single-equivalent/year, there's an after-marginal-tax yield of 2.78%, or an after inflation real yield of -.007%. After 100 years, you'll have about half the principal in real money.
        kasey_junk 3y ago
        Presumably a 100 year cd would largely be used like an annuity, as a retirement vehicle. Which you’d expect to happen at low income tax levels. I suppose if you are the beneficiary of the cd gift you could be taxed at that rate but at that point you have lots of options including donating it to a dag and it kicking off tax advantages to you for years and years.
- cjbgkagh 3y ago
  You should probably not use inflation rates predating the Nixon shock for future predictions. So take the last 50 years and square it and you get ~60x over 100 years. It’s my view that dodgy math enabled deficit spending and speculative asset bubbles soaked up inflation which led to the temporary ability have both low interest and low inflation. Since we’ve already had the everything bubble I don’t thing we can create a bigger bubble to recreate the era of low interest and low inflation. I’m expecting the average interest rate plus inflation for the next 50 years be be greater than the previous 50 years.
saulpw 3y ago
FWIW, these are 100-year CDs, not 40-year--you can't withdraw the money early without significant penalty (10 years' interest in this case). 1.045^100 is 81.5. For reference, USD$1,000 in 1923 is $17,785 in 2023 [0], or 17.7x as much. [0] https://www.usinflationcalculator.com/ https://www.usinflationcalculator.com/
- dataflow 3y ago
  I used 40 years because realistically a 1-year-old is not going to invest $150k to get a return when they're 101. Most likely it'll be like a 30yo investing for when they're 70 or something. Anyway, the point of the question was literally to understand whom this is good for. Is this meant for (say) 40-year-olds trying to invest in their children's retirements rather than their own?
  - deleted 3y ago
    [deleted]
  - saulpw 3y ago
    As per the OP, it's a "Ben Franklin" instrument--he famously left money in his will, not to be used for 200 years, to demonstrate the power of compound interest. So imagine buying $10k of these CDs and leaving them to your alma mater or your children's grandchildren.

georgeg23 3y ago

1.045^100 = 81x. That sounds more impressive, as inflation over the last hundred years is only 17x. If you withdraw at 40 years you only get 30 years worth (lose ten years of interest according to their terms).

mlyle 3y ago
> 1.045^100 = 81x. That sounds more impressive, as inflation over the last hundred years is only 17x. Viewed another way, though, if inflation is the same, "you'll" get 4.7x in real money at the end. On the other hand, you'll be paying tax on that interest, so you are likely to be losing money in absolute terms. A nonprofit might find it attractive, though.
- georgeg23 3y ago
  I think it's an exaggeration to say you'd be losing money after taxes.. it's still at least 3x, but point taken.
  - mlyle 3y ago
    Say I open a 1 year CD at 5% interest with $100. Say inflation is 3%. I will get $5 of interest. The original $100 would be worth $103. I'd better pay less than $2 of taxes on that $5, or I'd be losing money in absolute terms. If my total marginal tax rate is 30%, then I'll pay $1.50 in taxes, and yield .5%; after 100 years then you'd have 1.6x the money. If my total marginal tax rate is 40% -- say 32% federal + 8% California-- then I'm breaking even. The same logic holds for longer term CDs, as you're paying taxes on interest accrued each year.
    - kasey_junk 3y ago
      A 30% marginal tax rate across 100 years would be extremely abnormal as it implies you are mostly getting taxed at income tax rates at a very high rate.
      - mlyle 3y ago
        > getting taxed at income tax rates Interest is taxed at income tax rates. It is a pretty high rate; but people who are excited to lock up $100k for 100 years probably have high incomes. Not everyone can structure all of their earnings and other income as capital gains. For a single person in California, it's 24% + 9.3% at ~$89,000 per year, and 32% + 9.3% at ~$170k per year, and goes up from there. So, here: 2.86% average inflation for past 100 years. (10^(log(16.785)/100) = 1.0286...). 4.75% APR. At ~89k/year, APR-after-marginal-taxes in California is 3.26%; or a real yield of 0.4%. You'll have 1.9x the principal after 100 years. At $170k-single-equivalent/year, there's an after-marginal-tax yield of 2.78%, or an after inflation real yield of -.007%. After 100 years, you'll have about half the principal in real money.
        kasey_junk 3y ago
        Presumably a 100 year cd would largely be used like an annuity, as a retirement vehicle. Which you’d expect to happen at low income tax levels. I suppose if you are the beneficiary of the cd gift you could be taxed at that rate but at that point you have lots of options including donating it to a dag and it kicking off tax advantages to you for years and years.
cjbgkagh 3y ago
You should probably not use inflation rates predating the Nixon shock for future predictions. So take the last 50 years and square it and you get ~60x over 100 years. It’s my view that dodgy math enabled deficit spending and speculative asset bubbles soaked up inflation which led to the temporary ability have both low interest and low inflation. Since we’ve already had the everything bubble I don’t thing we can create a bigger bubble to recreate the era of low interest and low inflation. I’m expecting the average interest rate plus inflation for the next 50 years be be greater than the previous 50 years.

saulpw 3y ago

FWIW, these are 100-year CDs, not 40-year--you can't withdraw the money early without significant penalty (10 years' interest in this case). 1.045^100 is 81.5. For reference, USD$1,000 in 1923 is $17,785 in 2023 [0], or 17.7x as much. [0] https://www.usinflationcalculator.com/ https://www.usinflationcalculator.com/

dataflow 3y ago
I used 40 years because realistically a 1-year-old is not going to invest $150k to get a return when they're 101. Most likely it'll be like a 30yo investing for when they're 70 or something. Anyway, the point of the question was literally to understand whom this is good for. Is this meant for (say) 40-year-olds trying to invest in their children's retirements rather than their own?
- deleted 3y ago
  [deleted]
- saulpw 3y ago
  As per the OP, it's a "Ben Franklin" instrument--he famously left money in his will, not to be used for 200 years, to demonstrate the power of compound interest. So imagine buying $10k of these CDs and leaving them to your alma mater or your children's grandchildren.