This week’s theme on the Retirement Quick Tips Podcast is: Maximizing Net After Tax Returns In Your Investment Portfolio

Today, I’m talking about why you should always consider the net after tax return, not just the gross returns of your portfolio. 

The main reason why you should always consider taxes is that “tax drag” as its commonly known - the impact on taxes on your actual, net returns - is one of the biggest haircuts you’ll take on your investments. 

And generally, the higher your income and tax bracket, the more you need to consider the tax drag on your portfolio. 

And the more time you have where that money will be invested, the more taxes will matter as well, since that money that went to Uncle Sam in taxes would have stayed invested otherwise, or at least more of it would have been invested. So you lose the accumulated value when the money that was taxed away would have otherwise stayed invested over time, which really adds up. 

I’m not talking hundreds or thousands, but for an affluent investor - someone with $500,000 to $2 million in investments - the difference in a portfolio return over your lifetime between someone who reduced the tax drag to the extent they could, and the investor who paid no mind to taxes - the difference in portfolio value over a 25-30 year saving and investment lifetime can easily add up to hundreds of thousands of dollars. 

How Taxes Eat Into Your Returns - Case Study Example

Hypothetical value of $6,000 in annual contributions over 30 years

Tax rate = 24% 

Annual return = 6%

 

 

Even if you liquidated both portfolios after 30 years, you’ll still owe capital gains taxes on the taxable account, and income taxed on the IRA - you’ll still be ahead by a good size margin. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.    

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance