Go Figure
Go Figure
John Goodell | April 12, 2021
A LOT OF INVESTMENT math focuses on how money grows over time. But as an attorney who’s worked with many clients hoping to retire in comfort, I find myself thinking more about risk—and how the math can work against us. Consider five sets of numbers:
Inflation’s toll: 0.98
Got cash? If you multiply that sum by 0.98, you’ll see your money’s purchasing power a year from now. This assumes 2% inflation, which is the Federal Reserve’s stated target. To be sure, inflation has averaged less than 2% over the past decade. But cumulatively, it has still totaled roughly 17%. An item that cost $10,000 in 2011 would cost $11,692.68 today. Think your wealth is safer sitting in cash? It isn’t.
Goodbye, marriage: 0.5
Half. That’s roughly what you’ll give up if you divorce. Just about any small-town family law attorney will tell you the annoying-but-true adage, “It’s cheaper to keep her.” Each state has its own laws that apply to the division of property in a divorce, but the number approaches 50% in many states.
For instance, if you live in a community property state, the general rule of thumb is you give up 50% of commingled assets, regardless of who contributed what. While there are ways to hedge through pre- and post-nuptial agreements, divorce is a true wealth destroyer.
The taxman’s take: 0 to 0.2—or 0.1 to 0.37
Take the gain on any investment and multiply it by these numbers. The first two numbers tell you how much you might lose to federal taxes if you sell a winning investment that counts as a long-term capital gain, while the last two numbers are the potential tax hit if you have a short-term capital gain.
For couples with total taxable income of less than $80,800 in 2021, the long-term capital gains rate is 0%. Above that amount, the long-term capital gains rate is 15%, unless your taxable income exceeds $501,600, in which case it jumps to 20%. By contrast, short-term capital gains—which are triggered by selling winning investments owned for 365 days or less—are taxed at ordinary income tax rates, which means you’ll lose 10% to 37% of your gain to the taxman. Short-term capital gains are a killer of long-term wealth accumulation.
Those with lower incomes are less affected by the difference between short- and long-term capital gains. Suppose you’re married and your combined taxable income is just above $81,000. Your recent foray into GameStop may have resulted in a quick profit (though probably not), but your tax rate is going to be seven percentage points higher because you didn’t own the stock for more than a year.
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