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Retirement Planning: The Young, Rich, and Stupid
Short-term capital gains are taxed at normal rates, up to
Long-term capital gains are taxed at 0%, 15%, or 20%
Assuming $5 trades, 360 trades per year would cost
One classic study shows active traders returning 6.5%
less than the market.
Another shows retail investors returning 4.2% over the
past 20-years, versus the S&P 500’s 9.2% CAGR.
We’ll investigate the case of two families: the Drews
and the Joneses.
Each is a family of three with 30-year-old parents.
Each brings home $50,000 per year after taxes.
Each saves $7,500 and spends $42,500 per year.
One family uses a low-cost, passive approach to
The other copies the behaviors of the young
millionaires from Fidelity’s study.
Most financial planners will say you need to take 80%
of your yearly spending, and have 25 times that
amount before retiring.
For each family, that means an inflation-adjusted total
This doesn’t include Social Security.
That’s a mistake, but for illustrative purposes, we’ll
ignore Social Security for now.
The Drew family makes one $7,500 investment per
year into the Vanguard 500 Index Fund
The transaction cost is $5 per year
The expense ratio is 0.17%
The fund returns the inflation-adjusted market average since
1993 of 6.7%
Because all of this money is invested in a Roth IRA, there are
no taxes on growth or distributions.
The family invests a total of $7,500 throughout
the year in a dizzying array of stocks.
Let’s tone it down to just 10 trades per month, or $600
Because these investments are in stocks, there is no
Consistent with prior studies covering the past 20
years, this family’s average inflation-adjusted annual
return is 1.7%.
All savings are via a Roth IRA
Growth and distributions are tax-free
The Drew family has
$121,000 in retirement
That’s 14% of their
The Jones Family has
$84,000 in savings.
That’s 10% of their goal,
and 30% less than the
The Drews have $331,000
saved for retirement.
That’s 39% of their final
The Joneses have
That’s 21% of the final
goal, and 47% less than
The Drews are ready for
They have saved
$887,000 for retirement.
The Joneses are nowhere
They have saved
$320,000 for retirement.
Even they work until age
70, they will only reach
They will need to cut
their expected yearly
spending in retirement
This example didn’t even take tax-hits into
consideration, as both families used their Roth IRAs.
Every family’s situation is different, but the results of
active trading will—on average—make huge
Even Fools like us, that like investing in individual
stocks, would rarely need to make more than one or
two trades per month.
As the previous slide mentioned, the effects of taxes—which can be
huge for active traders—weren’t even taken into consideration.
If you’d like to learn about an IRS loophole that helps you avoid
certain taxes on retirement investments, check out the Motley
Fool’s special free report: