Taxes have a major effect on returns. If you began with $100,000 and earned an annual rate of return of 8%, while paying 33% in taxes on your gains each year, your profit would look like the following:
Profit on $100,000 after 33% tax:
| Year 1 | $5,360 |
| Year 10 | $68,561 |
| Year 20 | $184,128 |
| Year 30 | $378,930 |
If you were earning that same 8% annual return in a tax deferred account, the results would look very different.
Profit on $100,000 with no tax:
| Year 1 | $8,000 |
| Year 10 | $115,893 |
| Year 20 | $366,096 |
| Year 30 | $906,266 |
So, after 30 years you have lost 60% of your potential net worth to taxes!
LESSON: YOU MUST GROW YOUR MONEY TAX DEFERRED OR TAX FREE!
If the $906k were tax deferred and you used 6% per year in retirement, after taxes of 33%, you would receive $36,432 of income annually;On the other hand, if tax-free income, you would receive $54,376 of spendable income annually.