Today we’re going to talk about rate of return and why rate of return isn’t the end-all-be-all of any financial plan.
If you’ve ever sat down with a financial advisor, watched an ad for a financial advisor, or turned on the finance section of the news, you know that they talk about rate of return a lot. But in our opinion, the risk that’s required to obtain that high rate of return is spoken about enough.
When it comes to risk, are you willing to leave your money at risk in the jungle every single day for the rest of your life in order to earn a high rate of return? Keep in mind that the rate of return isn’t guaranteed and nowhere is it written that you have to lose 50-70% in the market in order to get a high rate of return.
The second thing that isn’t spoken about nearly enough is taxes and what impact our taxes and the current tax laws have on your savings and investments. Whether it’s a qualified government plan like an IRA Simples, SEP, 401k, or 403b or a non-qualified investment account where taxes are paid on growth annually, your money is exposed to taxes. And, as you know, it’s impossible to accumulate wealth in a taxable environment. You may look rich on paper, but the after-tax rate of return is not the same as the pre-tax rate of return that’s often advertised.
So, keep in mind, whenever you’re looking at a mutual fund prospectus, they’re publishing the pre-tax rate of return. We’ve said it before: It’s not how much money you make, it’s how much money you keep. And along those lines, how much are you keeping after fees? There are money management fees, broker advisor fees, and any number of other fees whittling away at your money.
So when you’re thinking about investing and going for a high rate of return, don’t forget to consider the effect of market losses, taxes, and fees. Do not ignore the elephant in the room. What happens if you need to access that money? What’s the rate of return on your money going to be after you access it to buy a new car, put a down payment on your home, pay for a wedding, or send your children to college. The answer is zero. After you drain that tank, after you take the money out of that account, not only are you paying taxes on that money, but you’re also losing any interest. You’ll never see the interest you don’t earn on an account.
These are all factors that need to be considered when designing your financial roadmap and your financial game plan. If you’d like to learn more about our process and how a reasonable rate of return can often get you to your financial goals with less risk, less taxes, and, obviously, less fees, be sure to check out our website at Tier1Capital.com to schedule your free strategy session. Or if you’d like to learn more, be sure to check out our free web course, The Four Steps to Financial Freedom, to learn exactly how our process works and how it could work for you.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.