Real rate of return change has little impact on discretionary spending?
Submitted by mzmadrone on Mon, 12/11/2017 - 02:18
I must be doing something wrong - I've experimented with different nominal rates of return on regular and retirement assets, and changed inflation assumptions as well, in order to test the impact of changes in real rates of return on discretionary spending and end-of-life net worth, yet discretionary spending actually goes down when real rate of return goes up, and overall, there is very little change regardless of the real rate of return. Assume I'm missing something obvious?
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dan royer
Mon, 12/11/2017 - 09:40
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If there were no federal
If there were no federal taxes, then you'd probably see what you are expecting. But we are taxed on nominal return, not real return. So if inflation is 2% and you earn 3% nominal--let's call that roughly 1% real return, you are taxed on 3%. But if inflation is 19% and you earn 20% nominal, that also is 1% real, but you are taxed on 20% return. This lowers your living standard. Compare your taxes in the two reports you are generating and you'll see what I mean.