Well, remember, the previous post, that we’re at 1.44% net, after tax yield. Now let’s subtract inflation from this yield, to arrive at your true change in value, adjusted for the loss of purchasing power:
1.44% net, after tax yield less
(0.56%) True return
Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value, $56 for each $10,000 you have invested in CD’s!
Now, if I asked you to put money in an investment that was guaranteed to lose $56 for each $10,000 you invested, you’d run away from me faster than a deer from a lion. Yet, if you have CD’s, then you are doing the exact same thing!
So, what does an investor do to get a better return and avoid the new higher tax on their Social Security and other income?
The real secret is to know what items you can invest in, that are off of the “tax hit list”. Things like CD’s and bonds get special tax treatment. So special, that they cause the maximum taxes to be paid!
What you need to do is, figure out how much monthly income you need, and then build a plan that uses tax favored strategies like Indexing to assure you get the earnings on savings you need, avoid wasting money on the taxes you don’t need to pay… with assets that have some chance to keep up with inflation!
See, the risk we’re talking about here is the risk of losing purchasing power!
These risks are profound, yet almost totally ignored by most investors, that is until it’s too late!
This is an astounding analysis that most people do not take the trouble to understand. However, this is the most important analysis you could ever make. For what difference does it make what your gross rate of return is, when you can only keep the net real rate of return after inflation and after taxes?
Again, we are not suggesting that you shouldn’t have some money in low-risk, low- return investments like CD’s… What I am saying is that you must know the true net rate of return.
You must know what actually will keep money in your pocket. When all is said and done, what else matters?