I.E.T. – Plan For It


By Ed Maass The Pineapple Staff Writer Rather than take the planning path of least resistance investors should understand the implications I.E.T. has on wealth. I.E.T. relates to three factors that can significantly affect growing and protecting your hard earned wealth. Most investors will look at their portfolio statement or mutual fund performance report and see a stated return for what that particular account and/or investment did over a certain period of time. This number is what is called the Nominal return and is very misleading for it does not take into account (3) Factors that change it drastically. Unfortunately looking at nominal returns does not take into account the degrading effects of I.E.T. Inflation, Expenses and Taxes, which are important elements that all investors should be fully aware of. If you desire to achieve a realistic and hopefully successful financial outcome from this point forth then read on. Inflation: The rate at which prices for services and goods rise. As prices rise, the purchasing power of your dollar and the real return generated by your investments falls. Recently inflation has been relatively low, however if we look at a longer term period, say the past 30 years we would see that inflation has averaged just under 3% per year. This means that if your investment portfolio had earned a 6% Nominal return every year over that 30 year time frame your actual Real return would have been cut in half and equaled only 3%. Expenses: Regardless of the investment that you utilize there will be costs/expenses associated with it. Some of you may be thinking….. Not if I use a No Load mutual fund and you would be partially correct. While there would be no upfront cost to purchase the fund there are in fact annual internal expense management fees deducted from your account to pay ongoing fund expenses. If instead of a No-Load fund you purchased individual stocks, bonds and/ or ETF’s you will pay some type of commission, fee based asset management and/or expense management fee. Needless to say nothing is free and as such you should be aware of the costs associated with your specific investments and work to keep them as low as possible. The more you save the greater your account value becomes and the better the beauty of compound interest performs over time. Taxes: Tax rates change over time and the tax treatment of different types of investments may vary as well. In conjunction with that if you are invested {outside of a tax advantaged account} you will have exposure to at least one if not all of the following: Ordinary Income Tax: Interest income from corporate and U.S. government bonds is subject to taxation at ordinary income tax rates and which can be as high as 39.6% for 2013. Dividend Income Tax: Effective Tax year 2013 the maximum rate on qualifying dividend income is 20%. Capital Gains Tax: This tax is paid on the difference between the price you paid for an investment and the higher price at which the investment is sold. If you held the investment for 12 months or less you will pay ordinary income tax rates, if held greater than 12 months the maximum Long-term capital gains rate is 20%. Unearned Income Medicare Contribution Tax: Brand new for 2013 and just what we needed (being facetious of course) an additional tax on our unearned investment income. Will this tax be applied to everyone… No, but for those affected by it they will pay an additional 3.8% that is no longer available for their consumption but given unwillingly to one very needy Uncle……… (Uncle Sam). So my thoughts are as follows: Investing and growing your wealth is much more than simply building and/or acquiring an investment portfolio and putting it on auto pilot (set it and forget it). Everyone hears about the importance of investment selection, asset allocation, and portfolio diversification, but very few take into account the three factors stated above and which can significantly impact the overall outcome of what you hope to have. Inflation may be on the lower end of the spectrum (today) but I can tell you with 100% certainty that nothing that I purchase today is at a price anywhere near the price I purchased it at 10, 20 or 30 years ago and thus I have no expectation of paying less for anything in the future. Inflation: Count on it…Plan for it. Investment expenses, you shouldn’t care that a mutual fund company states that there fund made (X) amount over the past 1, 3 or 5 years. It’s not what you make; it’s what you keep that’s important. Taxes and Death are the only two guarantees in life, both which in my opinion require professional assistance. Seek the help of a CPA to help navigate the tax maze and thus avoid having to pay more then you need to. Ed Maass is a Certified Financial Planner, Chartered Financial Consultant, and Chartered Life Underwriter. Located in Downtown Delray Beach, you can contact him directly at 561-272-0663, or by email at Ed@physicianswealthcare.com