It’s often reported that Albert Einstein referred to compound interest as the greatest force on earth – quite a powerful expression from someone universally accepted as a genius. Without exploring the depths of that thought, it is still important to understand the manner and method of how GCU applies interest to each member’s account in their deferred annuity.
All of GCU’s interest rates are Annual Percentage Yield (APY) rates, and compound, daily, on the original principle balance and all previous days’ accumulated interest. For example, if the current rate on an account was 4% and the client invested $100,000, each day we would multiply the account balance by a factor that would result in an account balance of $104,000 at the end of the contract year.
What does this mean to your client? Let’s look at 2 examples: in the first, how compounding interest affects the account balance of a client in a GCU Five Year Advantage annuity, and in the second, the impact on total interest when a client chooses to take monthly interest withdrawals from the same account.
EXAMPLE 1: Impact of Compounding Interest.
A client deposits $100,000 into a GCU Five Year Advantage with a crediting rate of 4.80%, assuming the rate stays the same in all 5 years. The natural inclination is to assume $4,800 per year in interest, for 5 years, or $24,000 total interest at the end of the 5 years, for an account balance of $124,000. However, with GCU’s compounding interest, the same account would look like this:
Current Interest Rate: 4.80%
Amount Deposited: $100,000.00
As you can see, the effect of compounding interest from year to year results in an actual account balance of over $126,417…..
EXAMPLE 2: Impact of Monthly Interest Only Withdrawals.
Same client with $100,000 in the GCU Five Year Advantage (4.80% crediting rate), wants to take monthly withdrawals of “interest only”.
Again, the natural assumption would be to say: $4,800 per year in interest equals $400 per month. However, because of the compounding interest method, the actual monthly results would look like this:
Daily Multiplier for 4.80% = 1.000128457
Amount on Deposit = $100,000.00
28 1.000128457 $100,360.30 $360.30 $360.30
29 1.000128457 $100,373.20
30 1.000128457 $100,386.09 $386.09 $1,544.36
31 1.000128457 $100,398.98 $398.98 $2,792.89
Given one 28 day month per year, four 30 day months, and seven 31 day months, the total of the 12 monthly interest distributions would be $4,697.56. The reason is simple: each month, based on the number of days, the account accumulates interest on the $100,000 principle, the interest is withdrawn, and the account balance goes back to $100,000. You lose the impact of the month to month compounding of interest on the principle and each preceding month’s interest accumulation.
It is extremely important that clients who wish to take monthly interest only distributions understand this.
Clients who wish to take systematic monthly, quarterly, semi-annual, or annual interest or fixed amount distributions MUST complete a “Request for Systematic Withdrawal” and agree to direct deposit via a Direct Deposit Authorization Form. No systematic withdrawal requests will be processed unless accompanied by the direct deposit information.
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