Rate of return is important…however it’s not the most important number


Rate of Return

It’s usually the first question on my client’s mind – how much money have you made me? It’s the underlying question to what’s my rate of return for the quarter, year, etc. But one must remember how to derive at their true (net) rate of return.

Most investors only focus on their “gross” rate of return yet overlook a few other factors. Their BIGGEST expense when it comes to investing is TAXES. Yes, taxes. Ask yourself, “Are you going to invest with pre- or post-tax dollars?” Pre-tax dollars are dollars that will defer taxes today saving you 15%, 25% or more today. But at a future date and unknown rate you will be taxed on those pre-taxed dollars!

You have to decide each year whether Uncle Sam is going to be taxing you on your investments or if you are going to invest those dollars in a tax-deferred vehicle so when you start making distributions, you’ll be hit with a tax bill. Taxes will be by far your biggest expense in calculating your net rate of return. Increasing your rate of return by looking at income tax planning is one of the biggest planning areas when it comes to investing.

Remember our government is broke and they need and want our money.

The tax rate we pay is just as important in the success of our investment and financial plan. Congress may change the rules but we know the playbook today.

There are three other calculations that should be considered when analyzing your performance. What was the actual rate of return of the investment? Did the investment have expenses attached to it such as mutual fund? Did you have to pay an Investment Advisor a fee? If you are unsure about how much you are paying your advisor, what your rate of return is, or how to plan for income taxes for today or tomorrow, let’s talk.

Bottom-line is when you ask about your rate of return, you need to factor four items: taxes, rate of return of the investment, expense of the investment and advisor fees.

It’s not about how much you make, it’s about how much you keep! This has never been more true than it is today.

Yet, the most important number not mentioned above is your overall savings rate. If it’s not meaningful, the items above won’t matter.

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Ask yourself- can my portfolio support my lifestyle in my retirement? 

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