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The Investment Leaks… When you are working hard to make your money grow through carefully chosen investments, you want to retain as much of your returns.

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Presentation on theme: "The Investment Leaks… When you are working hard to make your money grow through carefully chosen investments, you want to retain as much of your returns."— Presentation transcript:

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2 The Investment Leaks… When you are working hard to make your money grow through carefully chosen investments, you want to retain as much of your returns as you can. There are three factors that tend to drain off investment income: 1. Inflation 2. Fees and Transaction Costs 3. Taxes

3 The Drips Add Up! Nominal Return $2400 selling price buying price 400 capital gain + 40 dividend income $440 nominal total return 22% Return (440 ÷ 2000 = 22%) Bill purchased 100 shares of stock for $2,000. The broker’s fee was $35. He held the stock for a year and then sold it for $2,400 (less another transaction cost of $35). He received $40 in cash dividends. His income taxes on the transaction were $55 (15% tax bracket). The inflation rate during the year was 3%.

4 The Drips Add Up! (Nominal vs. Real Return) Nominal Return $2400 selling price buying price 400 capital gain + 40 dividend income $440 nominal total return 22% Return (440 ÷ 2000 = 22%) Real Return $2365 selling price (2400 – 35) buying price ( ) 330 capital gain + 40 dividend income - 55 income tax 315 net return - 60 inflation (2000 x.03) $255 real return 13% Return (255 ÷ 2000 = 13%)

5 Inflation You are powerless to stop inflation. All you can really do is choose investments with a good prospect of delivering returns higher than historical inflation rates. Get your excess money out of the bank and start investing!

6 Fees and Transaction Costs 1. Become more self reliant. When you feel comfortable, do your own research and deal with a discount broker to reduce fees. Also, buy no-load, low cost mutual funds (don’t forget the expense ratio). 2. Be a “long-term” investor. Don’t constantly buy and sell in response to changing stock prices. Every time you pay a transaction fee, that stock has to perform better to make up for the fee. Buy high quality growth stocks and hang on to them for a long period of time.

7 Fees and Transaction Costs (cont.) 3. Take advantage of DRIPs. Many quality growth companies offer dividend reinvestment plans. Once you buy the original share of stock, you reinvest all your earnings to purchase more stock with no transaction fees. You are young, so reinvest all your earnings! 4. Look for mutual funds with low turnover rates. Overactive fund managers, who buy and sell stocks too frequently, can really reduce the profitability of mutual fund investments.

8 Taxes Investment income (interest, dividends, and capital gains) is subject to federal, state, and local income taxes at the same rate as other income. Taxes will have a significant impact on your ability to accumulate larger sums of money. The government has established a tax-free investment option, and several tax-deferred investment options that offer many tax advantages.

9 Benefits: Tax-Deferred Retirement Plans 1. You don’t pay taxes on your earnings as they accumulate. 2. You pay taxes when you withdraw money at retirement, but you will have less income at that time so your tax rate will be lower! Start Retirement Planning Early!

10 Options: Tax-Deferred Retirement Plans (K) and 403(B) plans - offered by your employer. – You contribute a % of your income, up to a maximum limit. – Some employers match employees’ savings as much as 50 cents per dollar invested. WOW, that’s FREE money! – The money you contribute is deducted from your income before taxes are calculated, thus lowering the amount of your salary that is subject to taxes. – The employer automatically withholds from your paycheck the amount you designate and deposits the money in a professionally managed investment account of your choice. – 403(B) plans are for employees of non-profit organizations such as schools, hospitals, and religious organizations.

11 Options: Tax-Deferred Retirement Plans 2. Traditional IRA – Not offered by an employer, like a 401(K) or 403(B), but rather set up by an individual. – You can contribute up to $5,000 a year to any approved IRA investment. – You can find approved IRA’s at many institutions, including banks, savings & loans, credit unions, and insurance companies. – The amount you invest in a Traditional IRA is tax deductible.

12 Tax-Free Retirement Plan 1. Roth IRA – Like the Traditional IRA, the Roth IRA is not offered by an employer, but rather set up by an individual. – Like a Traditional IRA, you can contribute up to $5,000 a year to any approved IRA investment. – Unlike the Traditional IRA, the amount you invest in a Roth IRA is not tax deductible. – However, all earnings in a Roth IRA are free of taxes when you withdraw them. – You don’t pay taxes on your earnings as they accumulate!

13 In Summary… Don’t Let Your Money Go Down The Drain! Smart life-long investors always try to… 1. Outperform inflation 2. Hold down investment costs and fees 3. Pay as little of their growing wealth as possible in taxes, without breaking any laws


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