Determine The Effects Of Taxes And Inflation On Your Investment Return

Taxes and Inflation Calculator Example

Embedded Example of this Taxes and Inflation Calculator

Strategies That Defer Or Reduce Taxes

Tax-deferred retirement plans give investors the opportunity to defer taxes on investment earnings until retirement (usually age 59½). Pre-tax earnings can be reinvested, greatly compounding the amount of interest you earn from your investments. Some of the most common types of tax-deferred retirement plans include the following:

• 401(k) plans. These plans give employees the ability to place a portion of their salary (up to $16,500 or 100 percent of their compensation) in 2009 and 2010 into a company-sponsored investment account. Taxes are deferred on earnings from the plan until they are withdrawn. In addition, contributions to the plan are deducted from your ordinary income. Employees are given several options for investing the money into their 401(k)s. Most 401(k) plans have matching employer contributions.

Hedging Against Inflation

Inflation can be a serious problem for investors, especially in countries that routinely experience double-digit inflation. Some investors try to minimize the risk of inflation by using hedges. Hedging is the practice of investing in assets for the purpose of reducing or eliminating particular sources of risk in a portfolio.

Suppose you are planning to retire and will receive a pension that pays you a fixed amount of money every month. If we experience high inflation, your monthly purchasing power will deteriorate. You might want to hedge against the risk of inflation by purchasing an asset whose returns are linked to the rate of inflation. Annuities or bonds whose returns are linked to the Consumer Price Index (CPI) will provide you with returns that increase when inflation increases. These types of assets are considered perfect hedges against inflation.