McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Taxes, Inflation, and Investment Strategy CHAPTER 20

20-2 Basic Considerations in Developing a Plan Time until retirement Allocation to savings Life expectancy Rate of return

20-3 Planning with Inflation Inflation reduces the retirement benefit To overcome inflation requires greater allocation to savings or higher rates of return on investment. Inflation has an added effect when taxes are incorporated

20-4 Planning with Taxes Taxes further reduces the retirement benefits available To overcome the impact of taxes requires larger allocations to savings or higher returns on investments Inflation combined with taxes further reduces the benefits available Flat versus graduated tax rates

20-5 Tax Shelters Potential benefits for shelters –Postponing payment of tax –Additional earnings on the investment of postponed tax payments Effectiveness of the shelter depend on investment performance and variability in tax rates

20-6 Tax Shelter Accounts Traditional IRAs Roth IRAs 401k and 403b plans Progressive tax rates Capital gains and ordinary income tax considerations

20-7 Table 20-2 Traditional vs. Roth IRA Tax Shelters Under a Progressive Tax Code

20-8 Table 20-3 Investing Roth IRA Contributions into Stock and Bonds

20-9 Table 20-4 Investing Traditional IRA or 401k Contributions in Stocks and Bonds

20-10 Social Security Indexing Factor Series Average Indexed Monthly Income Primary Insurance Amount Performance issues

20-11 Additional Considerations in Planning Financing a child’s education Rent or buy decision Uncertain longevity Marriage, bequests and intergenerational transfers