Investors often plan their portfolios with different goals in mind. Some seek to reap high short-term profits while others focus on stable low-return investments. However, taxes play a vital role in determining the amount of wealth you take home, and for this reason, investors should familiarize themselves with after-tax wealth and how it can impact their investment choices. At Pillar Wealth Management, we can help investors with $5 million to $500 million in liquid investment assets with after-tax investing strategies that align with their portfolio goals. Learn about different investment strategies in our book 7 Secrets To High Net Worth Investment Management, Estate, Tax, and Financial Planning. Let’s examine the importance of after-tax investing and some of the strategies you can use.
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What is After-Tax Investing?
If this is your first time hearing about after-tax investing, you may be wondering, “What are after-tax investments?” After-tax investments actually refer to “after-tax returns.” These are the profits investors earn on an investment after the necessary taxes have been deducted. This after-tax investments definition is vital as it may influence an investor’s portfolio decisions in numerous ways. You can learn more about after-tax investments by setting up a free meeting with one of our wealth managers.
So, what is after-tax money called? Post-tax profits go by many names, such as “net income” or “take-home pay.” Each of these terms refers to gains after the necessary taxes have been deducted.
Investors who are unfamiliar with after-tax investments may be wondering how to calculate their own take-home pay. As mentioned above, you can calculate your after-tax profits by calculating and deducting taxes from your investment earnings. However, this figure alone isn’t nearly as helpful as real after-tax earnings.
Real after-tax earnings refer to after-tax earnings that have been adjusted for inflation. You can calculate this amount using a real after-tax rate of return formula, as described below:
- After-tax return before inflation [B]: N x (1 – T)
- Real after-tax return [A]: [(1 + B)/(1 + I) – 1
The terms in the above formula are:
- N = Nominal return
- T = Tax rate
- I = Inflation rate
We can demonstrate how to calculate the real after-tax rate of return using a simple example. Let’s assume an investor earns a nominal rate of return of 13% on their stock investment. The inflation rate for that year is 4%, and the applicable tax rate is 15%. In this scenario, we can first calculate the After-tax return as:
- 0.13 x (1 – 0.15) = 0.11 or 11%
Now we can plug this after-tax return figure into the real after-tax return formula:
[(1 + 0.11)/(1+0.04)] – 1 = 0.0067 or 6.7%
This 6.7% figure is much lower than the 13% nominal return rate the investor originally received, meaning taxes and inflation reduced their profits. However, the investor will still be wealthier than before as long as their real after-tax return rate is positive.
Investors may rethink their investment strategies after learning about real-after tax return rates and their impact on profits. You can learn about some of these investment strategies in our guide for investors with $5 million or more.
Investors who wish to minimize taxes on their investment returns often opt to place their money in tax-advantaged accounts. Such accounts are typically tax-exempt or tax-deferred.
A 401(k) or traditional IRA is a popular type of tax-deferred account. Such accounts offer an upfront tax break and the option of deducting your contributions.
Tax-exempt accounts such as Roth 401(k) or Roth IRA work a bit differently. These accounts accept contributions as after-tax dollars and therefore do not offer the type of tax breaks that tax-deferred accounts provide. However, investments placed in these accounts grow tax-free. Investors can also make qualified withdrawals free of tax.
Inflation impacts investments in multiple ways. For example, a high inflation rate will cause an investor’s liquid assets to appreciate less in value over time. This inflation impacts illiquid assets too, but these tend to appreciate in value. For this reason, many inflation-conscious investors opt to invest in stocks and bonds to safeguard their wealth from inflation and its effects. We discuss such strategies in our special guide for investors with $10 million or more.
As you can see, investors should keep a close eye on taxes and inflation rates if they wish to make investment decisions that align with their portfolio goals. You can get additional guidance on such decisions by speaking with one of our trusted wealth managers.
Investors concerned about maximizing their real after-tax returns can benefit from hiring a wealth manager. Wealth managers are financial professionals who offer a wide range of services such as asset management, tax planning, estate planning, retirement planning, and insurance planning. They are equipped with the expertise required to guide you in making sound investment decisions that fit your goals.
Some of the ways a wealth manager can help with after-tax investing include:
Most investors build up large portfolios over time. These portfolios may contain assets that interested them in the past but no longer align with their overall goals. A wealth manager can first analyze your portfolio and identify the inefficient or tax-heavy ones. They can then restructure your portfolio with real after-tax profits as the top priority. Learn about some of the tax planning strategies we use in our special guide for investors with $5 million or more.
A wealth manager may also advise investors concerned about their after-tax profits to max out their tax-friendly accounts. We discussed some of these accounts earlier because they offer an excellent option for investors who wish to benefit from upfront or long-term tax savings.
Investors who have invested a significant portion of their wealth in traditional mutual funds can benefit from switching to exchange-traded mutual funds (ETFs) with the help of a wealth manager.
ETFs are a great choice for investors because they are tax-efficient. When an individual purchases a traditional mutual fund, the fund manager typically uses the funds to buy different securities. This manager then sells the securities when the investor wishes to get their money back. However, this process creates taxable capital gains.
ETF sales, on the other hand, are a special type of transaction that isn’t generally considered a taxable event. Speak with one of our knowledgeable wealth managers to learn more about ETFs and how they can be a great choice for your portfolio.
A wealth manager can help investors with their investment goals in numerous ways. However, it is important to choose a wealth manager you can trust to manage your wealth effectively. Some vital qualities to look out for in a wealth manager include:
Wealth management is an exclusive field that financial professionals typically get into after working in the financial industry for many years. Despite this, some firms may employ inexperienced wealth managers with a poor understanding of their clients’ needs and goals.
An inexperienced wealth manager may not be able to guide their clients in the right direction since much of their knowledge is based on limited experience. For this reason, it is always best to choose a wealth manager with many years of experience.
Experienced wealth managers can assist their clients with overcoming various types of hurdles and challenges. Many of them have learned from events such as the 2008 financial crisis and helped investors manage their wealth through uncertainties. Therefore, an experienced wealth manager can utilize their experience to navigate through difficult situations confidently.
Wealth managers are unique in the financial world because they offer a wide range of services that other financial professionals may not provide. For example, the wealth managers at Pillar Wealth Management offer services related to:
- Investment management
- Portfolio analysis
- Retirement planning
- Tax planning
- Estate planning
- Insurance planning
A wealth manager who offers numerous services needs to be knowledgeable in different areas. While some acquire knowledge through post-secondary education, they learn the bulk of what they know by serving clients.
For this critical reason, it is vital to ensure the wealth manager you choose possesses in-depth knowledge of each of these areas. You can learn how in-depth our wealth managers’ knowledge is at Pillar Wealth Management by reading our special guide for investors with $5 million or more.
Experienced financial professionals understand that each investor has unique needs and financial goals. This uniqueness means a one-size-fits-all solution cannot work for everyone.
One investor may expect to build up a high amount of wealth in a short amount of time using risky strategies. Other investors may prefer building up their wealth at a slow and steady pace using reliable investments. Offering the same advice to both these investors could lead to disaster, which is why the best wealth managers will take the time to understand each client’s unique background and goals before offering them specifically tailored strategies.
The best wealth managers in the nation are always in high demand. These are the professionals that have reached an expertise level that surpasses their peers’.
Every investor should opt to choose the most experienced and knowledgeable person for the job. However, such wealth managers may be difficult to reach.
The truth is that a wealth manager with numerous clients will be able to offer each one only a limited amount of time and attention. These professionals may be available on an appointment basis only and would be poorly suited for investors who require quick advice on time-critical matters.
A more reliable wealth manager will limit the number of clients they take on so that they can offer each one individual attention whenever required. Such wealth managers are easy to get in touch with and strive to maintain regular communication with their clients.
Investors seeking assistance with their portfolios and financial planning should reach out to the wealth managers at Pillar Wealth Management. Our wealth managers have over six decades of experience serving clients and have familiarized themselves with numerous after-tax investment strategies. They are always available to offer advice and can be reached easily. At Pillar Wealth Management, we strive to provide each of our clients with individual attention and tailor our strategies after studying their portfolios and backgrounds. Place your wealth in the trust of experienced professionals who understand your goals. Please set up a free introductory meeting with one of our premier wealth managers to get started.