Page 173 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes money each month starting from a young age than it is to put aside a large amount of money
each month when you are older. Unless you have other serious financial pressure to take care of,
such as a lot of credit card debt, you should seriously consider starting to save for your retirement
as early as possible.

9.6.1 Compounding your Tax Savings

The power of compounding works when it comes to taxes, too. As we mentioned earlier, it’s
important that you use government-sponsored investment accounts (such as IRAs) as much as
possible while carrying out your retirement plan, since they will usually afford tax-deferred
benefits.

Example: Consider two investments of $1,000 invested for 30 years, one in a tax-deferred
account and the other in a taxable account. Assume that taxes are paid each year on all capital
gains in the taxable account. The end result after 30 years is that taxes leave the taxable investment’s
size at about half that of the tax-deferred account.

Of course, this graph is based on the assumption that the taxable investment account turns over
its portfolio each and every year (i.e., 20% capital gains tax rate is applied to all capital gains each
year). If the taxable portfolio held on to stocks for the long term, for example, the capital gains
taxes would be delayed.
Regardless, it is usually not beneficial to incur taxes sooner, as opposed to later, and this example
should make it clear that failing to take advantage of the tax-sheltering options available could
be very costly.

9.6.2 The Bottom Line

Begin saving for retirement as early as possible and take full advantage of whatever tax-sheltering
opportunities are available for as long as you can.

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