Investing in Your 20s & 30s For Dummies. Eric TysonЧитать онлайн книгу.
These numbers are simply amazing! Start first with the 25-year column in Table 3-1. For every $1,000 invested over 25 years, you’ll have $1,282 at a 1 percent annual return. At a 9 percent return, you’ll have $8,623, or nearly seven times as much!
Now look at what happens over 40 years. At a 9 percent investment return, you’ll have more than 21 times as much money versus what you’d have with a 1 percent annual investment return.
Here’s a practical example to show you what a dramatic difference earning a few extra percent can make in accomplishing your financial goals. Consider a 30-year-old investor who’s saving toward financial independence/retirement on his $60,000 annual salary. Suppose that his goal is to retire by age 67 with about $45,000 per year to live on (in today’s dollars), which would be about 75 percent of his working salary.
If he begins saving at age 30, he needs to save about $690 per month if you assume that he earns about 5 percent per year average return on his investments. That’s a big chunk to save each year (about $8,300) — amounting to about 14 percent of his gross (pretax) salary.
But what if this investor can earn just a few percent more per year on average from his investments — 8 percent instead of just 5 percent? In that case, he could accomplish the same goal by saving just half as much: $345 per month (or $4,150 per year)!
Considering your goals
How much do you need or want to earn on your investments?
You have to balance your goals with how you feel about risk. Some people can’t handle higher-risk investments. Although investing in stocks, real estate, or small business can produce high long-term returns, investing in these vehicles comes with greater risk, especially over the short term.
Others are at a time in their lives when they can’t afford to take great risk. If you’re still in school, if you’ve lost your job, or if you’re starting a family, your portfolio and nerves may not be able to wait a decade for your riskier investments to recover after a major stumble.
If you work for a living, odds are that you need and want to make your investments grow at a healthy clip. Should your investments grow slowly, you may fall short of your goals of owning a home or retiring or changing careers.
Chapter 4
Minimizing Your Taxes When Investing
IN THIS CHAPTER
You should pay attention to tax issues when making investing decisions. Actually, let me rephrase that. Like plenty of other folks, you could ignore or pay half attention to taxes on your investments. Unless you enjoy paying more taxes, however, you should understand and consider tax ramifications when choosing and managing your investments over the years.
Tax considerations alone shouldn’t dictate how and where you invest your money. You should also weigh investment choices, your desire and the necessity to take risk, personal likes and dislikes, and the number of years you plan to hold the investment.
In this chapter, I explain how the different components of investment returns are taxed. I also present proven, up-to-date strategies to minimize your investment taxes and maximize your returns. Finally, I discuss tax considerations when selling an investment.
Understanding Investment Taxes
When you invest outside tax-sheltered retirement accounts, the profits and distributions on your money are subject to taxation. (Distributions are taxed in the year that they are paid out; appreciation is taxed only when you sell an investment at a profit.) So the nonretirement-account investments that make sense for you depend (at least partly) on your tax situation.
Tracking taxation of investment distributions
The distributions that various investments pay out and the profits that you may make are often taxable, but in some cases, they’re not. It’s important to remember that it’s not what you make before taxes (pretax) on an investment that matters, but what you get to keep after taxes.
Municipal bonds, which state and local governments issue, pay interest that’s federally tax-free and also state-tax-free to residents in the state where the bond is issued. (For more on bonds, see Chapter 9.)
Taxation on your capital gains, which is the profit (sales price minus purchase price) on an investment, is computed under a unique federal taxation system. Investments held and then sold in less than one year at a profit generate what is called short-term capital gains, which are taxed at your normal marginal income tax rate (which I explain in the next section).
Profits from investments that you hold longer than 12 months and then sell at a profit generate what are called long-term capital gains. Under current tax law, these long-term gains are taxed at a maximum 20 percent rate, except for most folks in the two lowest income tax brackets: 10 percent and 12 percent. For these folks, the long-term capital gains tax rate is 0 percent (as in nothing). Dividends paid out on stock are also taxed at the same favorable long-term capital gains tax rates under current tax law.
The Patient Protection and Affordable Care Act (informally referred to as Obamacare) increased the tax rate on the net investment income for taxpayers with adjusted gross income above $200,000 (single return) or $250,000 (joint return). Net investment income includes interest, dividends, and capital gains. The increased tax rate is 3.8 percent.
Determining your tax bracket
Many folks don’t realize it, but the federal government (like most state governments) charges you different income tax rates for different parts of your annual income. You effectively pay less tax on the first dollars of your earnings