Changing tax rates, steady inflation, and higher interest rates — put them together, and this might be a good time to consider the real return on your investments.
As an investor, you probably pay attention to nominal return, which is the percentage increase or decrease in the value of an investment over a given period of time, usually expressed as an annual return.
However, to estimate actual income or growth potential in order to target financial goals — for example, a certain level of retirement income — it’s important to consider the effects of taxes and inflation. The remaining increase or decrease is your real return.
Let’s say you want to purchase a bank-issued certificate of deposit (CD), because you like the lower risk and fixed interest rate that a CD can offer. Rates on CDs have risen, and you might find a two- or three-year CD that offers as much as 3% interest.
That could be appealing, but if you’re taxed at the 22% federal income tax rate, roughly 0.66% will be …
Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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