Author Topic: How Much You Really Make Investing After Taxes, Fees and Inflation  (Read 5759 times)

arebelspy

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How Much You Really Make Investing After Taxes, Fees and Inflation
« on: September 05, 2014, 06:18:53 PM »
Great article on Lifehacker: How Much You Really Make Investing After Taxes, Fees and Inflation

Includes a nice visual:


There's the S&P from the latest 30 year period we have - the end of 1983 to the end of 2013.

Your return would be 11.09% nominal - 0.55% expenses (a rather high ER for most of us) - 0.96% dividend taxes - 0.62% capital gains taxes - 2.99% inflation = 5.97% real return.

Sure, those 30 years may not be representative of the future, but in general, to give you an idea of how much the various fees, taxes, and inflation suck up of your return, it's a good representation.

Actual PDF study they're summarizing is here: http://www.thornburginvestments.com/pdfs/TH1401.pdf
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EscapeVelocity2020

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Ian

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #2 on: September 05, 2014, 06:35:10 PM »
I would really like to see a similar graph over the long term, especially including worse markets...

Gone Fishing

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #3 on: September 05, 2014, 06:47:48 PM »
All the more reason to manage your fees and your tax load using tax advantaged accounts.
« Last Edit: September 05, 2014, 06:49:22 PM by So Close »

arebelspy

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #4 on: September 05, 2014, 07:38:07 PM »
I would really like to see a similar graph over the long term, especially including worse markets...

In general expenses, taxes, and fees will remain proportionally the same. 

That was my point with:
Quote
Sure, those 30 years may not be representative of the future, but in general, to give you an idea of how much the various fees, taxes, and inflation suck up of your return, it's a good representation.

You may not expect those exact returns, they may be lower, but proportionally those things that affect your return should be similar (specific instances aside - i.e. crazy high inflation of the 70s).
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TomTX

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #5 on: September 05, 2014, 08:45:32 PM »
All the more reason to manage your fees and your tax load using tax advantaged accounts.

Yes, I mostly see it as a compelling argument for minimizing feese/expenses and taxes.

arebelspy

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #6 on: September 05, 2014, 10:44:42 PM »
All the more reason to manage your fees and your tax load using tax advantaged accounts.

Yes, I mostly see it as a compelling argument for minimizing feese/expenses and taxes.

Completely agree!  You can't control what the market does, you can control what fees you pay, and somewhat influence your tax burden.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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SnackDog

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #7 on: September 06, 2014, 01:16:13 AM »
$25,000/yr invested in Vanguard Total Stock Admiral via Roth back door would yield about 11%. After 30 years you would have over $60,000,000.  Plenty for a used Kia hatchback and 700 sq foot 1 bed rental, particularly since you would be gaining $6 million per year in tax free appreciation at that point.

milesdividendmd

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #8 on: September 06, 2014, 02:24:09 AM »
Great article ARS.

This drives home the importance of maxing out tax deferred accounts before loading up taxable accounts and of taking advantage of tax loss harvesting in taxable accounts.

This is why I never contribute a dollar to my taxable accounts until I have maxed out all of my workplace retirement accounts,  my HSA, and my backdoor ROTH.

Free money does not suck.

And tax efficient has real wealth building value.

Rural

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #9 on: September 06, 2014, 06:03:03 AM »
What I saw was "OMG, you beat inflation and still make even more money!"

ender

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #10 on: September 06, 2014, 07:26:27 AM »
Great article, really makes it clear how important tax advantaged accounts are for investors. From this it looks like you end up losing 10.54-8.96 = 1.58% in return due to taxes. Are dividends taxed in Roth/traditional plans? I don't think they are..

Considering the total real return is only about 6%, this means your yearly gain for tax advantaged accounts is 20% better than equivalent taxable accounts (7.5% vs 6%).

That's not even including the benefits of pretax plans, either, on tax deductibility.

beltim

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #11 on: September 06, 2014, 07:46:45 AM »
Pretty awesome, but I'll do you one better: http://people.bu.edu/kotlikof/Does%20It%20Pay%20to%20Work%20and%20Save,%20December%209,2006.pdf

Now there's a paper!  So there's only about a 30% range of effective after-tax income for married-couple incomes between 0 and $50k once you take into account assistance programs.  And 30k is about the third worst salary, after 0 and 10k.  8k and ~24k are highs until you reach about 44k.

Nice cite!

divinvestor

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #12 on: September 06, 2014, 11:16:10 AM »
Great post arebelspy, thanks so much. Just for accuracy's sake @SnackDog, I think you would end up with $6 million after 30 years in your hypothetical, not $60 million.

SnackDog

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Re: How Much You Really Make Investing After Taxes, Fees and Inflation
« Reply #13 on: September 06, 2014, 02:29:20 PM »
Oops, yes. $60 million would take additional 25 years or so.