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Imagine being granted three wishes that could potentially change your financial future. But here's the twist: which of the three options would you choose?
What's Playbook? We're your friendly guide to paying less in taxes (legally!) and putting your money in the right places automatically. Money stuff can feel hard, but we’re here to help along the way.
Meet our hypothetical individual: a resident of sunny California with an annual income of $150,000. Living in San Francisco, they face a tax rate of 32.2% without any 401(k) contributions and 27.6% when they max out their 401(k).
They have annual expenses amounting to $80,000, and we're assuming that anything they can't stash away in an IRA or 401(k) is spent.
Dividends, when received, are reinvested into the portfolio and are taxed as they come in. There's no rebalancing, and tax rates during retirement are assumed to remain the same. And, for simplicity, we're not adjusting any of the inputs for inflation.
Our analysis spans 20 years, from August 1, 2003, to July 31, 2023.
Below is an overview of each scenario, and how much our hypothetical investor was able to invest each month.
While the allure of perfectly timing the market or investing alongside Warren Buffet might seem tempting, the numbers don't lie. Maximizing tax advantages clearly emerges as the winner, with the highest after-tax return of 11.0%. Not only does this strategy provide the highest pre-tax and after-tax values, but it also underscores the importance of tax-efficient investing.
So, if a financial genie were to grant you a wish, remember that sometimes the most straightforward strategies, like maximizing tax advantages, can yield the most significant rewards. Cheers to smart investing!