Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
Over the long term, taxation and inflation reduces your real purchasing power. The result can be quite dramatic and must be taken into consideration when investing.
How do Taxes and Inflation affect investment returns?
“You haven’t considered the other risk factors related to investment planning, namely inflation, taxes, and the very real worry that you might outlive your supply of money.”
Again, Uncle Wayne shuffled through his papers to fish out another chart for us.
“Let’s say that in 2019, you invested $100,000 for a twenty-year period in a GIC with an average return of 3.5% before taxes:
2019 $100,000 (investment)
2038 $198,979 (3.5% return, no taxes)
“But you do have to pay taxes, so let’s assume your tax rate is 40%. That would mean your after tax growth is 2.1%, so let’s add that factor to the list.
2019 $100,000 (investment)
2038 $198,797 (3.5% return, no taxes)
2038 $151,536 (2.1% return, after tax)
“Your investment doesn’t look so healthy anymore, and we’re not even finished. We must count inflation as another factor, so let’s use a long-term inflation average of 2% and add that to our list.
2019 $100,000 (investment)
2038 $198,797 (3.5% return, no taxes)
2038 $151,536 (2.1% return, after tax)
2038 $101,979 (0.1% return, after tax, after inflation of 2%)
“What looked like a good investment before taxes and inflation now appears to be pretty darn poor. Your $100,000 has only grown to $101,979 in today’s dollars after twenty long years.”
For more information you can refer to Chapter 3: Protecting and Preserving your Wealth from the book Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
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