Home	Contact	Contents	About RPA	Client Success	Financial Planning	Investments	Individual	Corporate

When friends and neighbors get together socially, the topic of conversation often turns to savings and investments. Yields on CD's, money market funds, and other types of investment are compared. One person will talk of a "Jumbo" savings account, returning X% annually, while another will speak highly of owning a particular utility stock, currently paying Y%. The "Yield Game", as it is known, seems to concentrate only on the "Gross" return.

There are, however, two other factors which come into play when determining just how profitable a particular investment is:

An example will illustrate the point. Suppose you have funds invested at a gross return rate of 10%. Also assume that inflation is at 4% and income taxes (Federal and State) are at a 35% rate. The calculation of the real rate of return on that investment is as follows:

Beginning Yield 10.00% Less taxes -10% times 35% - 3.50% ----

After Tax Rate of Return 6.50%

During the year, however, inflation has had an impact on your purchasing power. Therefore, in order to calculate the Real Rate of Return we must then divide the After Tax Rate of Return by the Inflation Rate as follows:

And the net result? A healthy investment yield is really, after adjusting for both taxes and inflation, just slightly positive.

When making investment decisions, one must not forget the Real Rate of Return!