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Old 05-09-2013, 02:29 PM   #1
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Blowing up stock examples for amusement

I ran across someone pushing the idea of investing purely in the stock market with the following example:

x: retire in 30 years
y: invest $100,000 up front for ease of example
z: return rate 10% (supposedly the average stock return over the past 25 years)

Basic math do to figure out how much money y dollars will turn into in x years assuming z interest rate:
y*(1+z)^x = $1,744,940


I decided to have a little fun and produced a counter example, being very generous with inflation and tax rates:

x: retire in 30 years
y: invest $100,000 up front for ease of example
z: return rate 10%
t: tax rate of 30%
i: inflation rate of 3%

Basic math do to figure out how much money y dollars will turn into in x years assuming z interest rate:
y*(1+z)^x = $1,744,940

Unfortunately, this is forgeting a tax rate t you pay on withdraw which changes the equation to:
{[y*(1+z)^x]-y*(1-t)}+y = $1,251,458

Next important factor to consider would be inflation rate of i to actually find what the purchasing power of that future cash out will be.. unfortunately, taxes ignore this fact and tax you on the unadjusted numbers:
[{[y*(1+z)^x]-y*(1-t)}+y]*(1-i)^n = $501,844 in real purchasing power

Pass this simple example on to those that love equities
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Last edited by benjamen; 05-09-2013 at 02:37 PM. Reason: math recalculated
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Old 05-10-2013, 04:30 AM   #2
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Originally Posted by benjamen View Post:
(...)unfortunately, taxes ignore this fact and tax you on the unadjusted numbers:
...yeah, one would think, that it is just an unfortunate coincidence, that the gov't benefits from inflation on EVERY turn...
Like, it is pushing EVER MORE people, into higher tax brackets over the years (just google what percentage of wage earners have had fit into higher bracket when they have introduced that abomination of "progressive income tax scale", and what percentage of wage earners is it today?), like your example of taxing your savings on non-inflation adjusted basis, etc....

The REAL reason why people do not save today, is that government is giving them EVERY incentive possible, to NOT save. I have figured it out at the age of about 25-27, that saving money makes NO financial sense whatsoever, in today's economy. Was bold, brave, young and reckless, and went on the borrowing spree - mortgage, car, etc. It worked rather well for me, I'd say, in the end (apart from the car loan, of course - worst money sink EVER, never made the same mistake twice - despite "being able to afford it", by popular consensus) - because I was making very good money (relatively), had stable employment, and was paying off my debts quicker than necessary (and truth to be told, I never felt comfortable with debt burdens, so I never went into debt over the top...)

RE: stocks making "all time highs" - funny, even when adjusted for OFFICIAL CPI inflation (let alone the REAL, like shadowstats shows), "all time highs" happened in year 2000, never to be seen again (as of yet)

actually.... IT would be interesting to see, what is the difference in purchasing power, depending on the time when you save x amount of dollars, and if the difference between income tax that you'll pay, if you were to spend it versus put it into the retirement account (if you spend it on, say, PMs - you will pay your full income tax on it, depending on your tax bracket, versus if you put it into retirement account - tax is deferred until you start drawing on your retirement, but what is the tax rate then, AND purchasing power decline?) But, given the difference in purchasing power between now & "30 years later" - I wonder if it is not actually BETTER, to spend all your money, on things that would more likely than not, preserve purchasing power, DESPITE being fully taxed on it - and when is the "threshold year", when it starts to pay off, to put your money into retirement account (because you will still get it tax deferred, and the difference between "today", and say "10 years to retirement" purchasing power, will not drop that much anymore.

...clear as mud explanation, I suppose.... Anyone up for the calculations?
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Last edited by bushi; 05-10-2013 at 04:46 AM.
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