One of the main goals of building a retirement portfolio is to maintain purchasing power over time. However, factors like taxes and inflation can erode the future value of your investments. Use our calculator to determine the impact of taxes and inflation on your future purchasing power.
The rate of return refers to how much, on average, the investment is expected to grow each year in percentage terms. Over the long run, United States stock market returns average approximately 10% annually before adjusting for inflation. Government bonds average around 5% annually.
The inflation rate refers to how much, on average, the prices of goods and services are expected to increase during the specified period. Over the last century, inflation in the U.S. has averaged around 3% annually.
The margin tax bracket refers to the highest tax rate that applies to your income. Consult the current federal income tax brackets and rates for your exact percentage.
This refers to the income tax rate applied by the state government. Refer to your state’s tax code for the exact percentage.
With itemized deductions, you add up qualified expenses for the year and subtract them from your taxable income. This differs from the standard deduction, which is a fixed amount set by the IRS every year.
Business owners can leverage investment vehicles like a Roth individual retirement account (IRA) to reduce your tax liabilities. With a traditional IRA, investment contributions are made with pre-tax dollars and withdrawals are only taxed as income when you retire. With a Roth IRA, contributions are made with after-tax dollars, but withdrawals are tax-free.
Purchasing power refers to the amount of goods and services that you can buy with one dollar. As the prices of goods and services rise, your purchasing power decreases. Over time, the effects of inflation tend to erode the real value of an individual’s savings. The goal of investment is to preserve (and preferably grow) purchasing power. As long as your investment portfolio’s rate of return matches or exceeds the rate of inflation, you will maintain or grow your purchasing power over time.
Over the long run, U.S. stocks (as measured by the S&P 500 index) have returned around 10% annually. However, this number ― often referred to as the “nominal” rate of return ― does not account for the effects of inflation. “Real returns” for U.S. stocks ― that is, returns after accounting for inflation ― are approximately 7% annually.