When is a dollar not a dollar?

Last year, I went to a holiday party where a magician performed tricks for small groups of guests during the cocktail hour. One of his tricks involved taking a crisp dollar bill from me, after I’d written my name on it to demonstrate its authenticity later. The magician then folded up my dollar bill and tore it into pieces.

As a financial planner, I wasn’t amused at the wanton destruction of my money. But the magician moved forward with the trick and somehow put my dollar bill back together, albeit in a somewhat differently arranged manner.


I was left with a dollar…but it wasn’t really a dollar. I couldn’t spend it anywhere. And the experience got me thinking: when else is a dollar not exactly a dollar?

I came up with at least four examples, though there are likely more:

Inside of a Traditional IRA or 401k

These accounts are funded with pre-tax dollars and aren’t subject to taxes while funds stay inside the accounts. But any withdrawals are taxed at ordinary income tax rates, which are the same rates applied to wages. This means that the government technically has a claim on some portion of the funds: someone with an IRA valued at $1 million only “owns” about $700,000 – $800,000, after factoring in taxes.

Annuities with surrender charges

Insurance companies pay the people who sell variable annuities sizable commissions. Folks who buy those annuities can change their minds later and surrender the policies for whatever the value happens to be. If this happens early in the contract of the annuity, the insurance company would be out the money paid on the commission without having the chance to recoup its costs via the (often high) underlying expenses of the contract.

Enter the surrender charge. Rather being able to surrender a policy for full value, owners must pay a charge equal to anywhere between 1-10% of the surrender value for up to the first 5-10 years of the annuity, depending on the contract. As with the IRA example, a variable annuity with a stated value of $1 million may only be worth $900,000, if surrendered in Year 1 with a 10% surrender charge.

When retail investors want to sell individual bonds

Most bonds are bought and sold by institutional investors, who often trade in chunks of hundreds of thousands or millions of dollars. They are the ones setting the bond prices that people see when they view their account statements or check their accounts online. But when retail investors try to sell their individual bonds on the open market, they are often surprised that the price they receive is significantly lower than the “market” price. That’s because there aren’t many buyers for small lots of individual bonds. Values on a statement may not match values in real life.

People with too much cash stored in savings accounts

This example may be the most worst, because on the surface it looks like nothing bad is happening. Consider an account holder who, feeling scared in January, 2008, pulled $100,000 from his investment portfolio, stashed it in a savings account because it felt “safe” relative to the financial chaos going on around him, and left it there for security.

The appeal is that the savings account never goes down in value, unlike his investment portfolio that experienced a lot of volatility through the financial crises. Using the Citi 3-month Treasury Bill index as a proxy for cash, by December, 2017 the savings account had grown to $103,501, for an annual return of 0.34% with zero decreases in value.

But that’s an illusion: if the investor considered the “real” return (net of inflation) of the savings account instead of just the nominal return, things don’t look so good. From January, 2008 through December, 2017, the annualized rate of inflation (as measured by the US Consumer Price Index) was 1.61%. That’s historically very low, but so are the nominal returns for our cash proxy. When adjusted for inflation, the 1/2008 – 12/2017 annualized return of the 3-month T-bill has been -1.25%, which means that the initial $100,000 deposit can only buy $88,182 worth of stuff.

The magician’s trick was fun and games. But at Woodward Financial Advisors, we think it’s serious business to help our clients recognize the full value of as many of their dollars as we can. If you’re interested in seeing if we can help you, please let us know.

About Ben Birken

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