Impact of Taxes, Inflation, and Currency Illustrated
By
Pinyo, on October 9, 2007
After I wrote “The Weak Dollar is Killing Americans’ Wealth” for Consumerism Commentary last Thursday, I was still intrigued by this new perspective on wealth. As a visual person, I thought this alternative look at the same concept may be easier to grasp and would like to share it here.
Just press the big play button to begin:
This movie can be found at Toufee.com
If you have hard time following the movie, here is the transcript with details:
- $10,000 — We start out with $10,000 on January 1, 1997.
- $22,129 — If we invested $10,000 in the S&P 500 index fund, this is what we have 10 years later on January 1, 2007 (based on historical data from Yahoo! Finance). This assumes:
- Our performance is 100% identical to the S&P 500. Most index funds slightly underperforms the index.
- No yearly expense fees. Normally, we would lose another 0.3-0.5% of the total amount per year.
- No taxes. Normally, we would have to pay tax on the fund distributions yearly, at our normal tax rate.
- All distributions were reinvested
- $20,310 — This is what’s left after we paid 15% long-term capital gains tax, or $1,819.
- Formula: $22,129.17 – 15% * ($22,129.17 – $10,000)
- $15,963 — Equivalent value of 1997 dollar, after we adjusted for the 27.23% inflation rate between January 1997 to January 2007.
- Formula: $20,310 / 127.23%
- $15,171 — Equivalent value of 1997 dollar, after we adjusted for the 4.96% decline in the value of the U.S. Dollar.
- Formula: $15,963 * (1-4.96%)
- $5,171 — Our real gain after we invested $10,000 for 10 years, or 4.26% CAGR.
- $7,470 — Equivalent value of 1997 dollar, if we simply kept the $10,000 under the mattress. We’d lost $2,530 for doing nothing!
I hope you enjoyed this post. Thanks.
Carnivals:
Read more about
long term capital gains,
inflation rate,
expense fees,
Currency Exchange,
capital gains tax,
Capital Gains,
inflation
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Figuring in the decline in the dollar into the equation is somewhat redundant. Inflation includes the devaluation of the currency.
The additional devaluation of your wealth related to dollar depreciation would only occur if you were planning to completely convert the investment to an other currency at the end of the investment.
Russ – welcome to Moolanomy. A friend of mine also said the same thing as you. I have been looking at various studies about the relationship between inflation and currency to see the correlation strength, but could not find what I was looking for.
I will keep your comment in mind and possibly edit the slide show in the future.
Thank you for your input.
This movie is not a visual representation of the idea. It’s still just text.
Personally I found this very thought provoking and I like visual presentations of complex financial issues. Thanks for taking the time to post this
@A.R. – welcome to Moolanomy.
@Make Friends – Thanks! and welcome to Moolanomy.