Of course, the third resource I use to get investment data for analysis is from other freely available websites. I would actually prefer to use these free resources, however the fact that not one website contains all the data I need makes it difficult….

What could be argued about the long-term future returns ( without accounting for taxes and inflation) is that the dividend component, which historically has accounted for 40% of average annual returns, has decreased significantly over the past 2-3 decades. With current yields around 2% in the S&P 500, the future returns could turn out to be around 5%…

The 31 % tax is still correct, I think – saying “federal tax” is misleading, but they mean capital gains taxes (which, by the way, were the same rate as “earned income taxes” until the supply-siders came along in the 1980s and decided to tax wage income at a higher rate than “unearned” income).

If you look at the footnote, they are using 1990 capital gains rates, adjusted forward and back in the chart for inflation. As of 1990, the top tax bracket in the US was still paying 31% in capital gains. The lower rates we enjoy now are not typical. So no, I think they mean federal taxes on capital gains, not federal taxes on incomes.

Again, it’s a gross simplification for the sake of demonstration. There are multiple tax brackets (someone with no earned income living off their investments would pay 0% capital gains now, for example). I wouldn’t hold this chart up as a proof, but only as an example of what happens when you factor other variables into the “rate of return” equation – which also, in the case of mutual funds, excludes fees. It’s a convenient way to confuse an unsophisticated investor into thinking they are doing better than they really are.

There’s something that just occurred to me–please double check me on this. Let’s say you get a 4% return, and inflation is 3%. What’s your real return? 1%, right? No, I don’t think so.

Let’s say you start with $100 in 1999, gain 4% to have $104 in 2000, and inflation was 3% over that 1-year period. If inflation was 3%, then $100 in 1999 dollars is worth $103 in 2000 dollars. So that means you start in 1999 with $103 in 2000 dollars, and in 2000 you have $104 in 2000 dollars. The gain from $103 to $104 is 0.97%.

I’m not sure if my assumptions about how they measure inflation are correct here. Like I said, please double check me.

However, the chart is just plain wrong in assuming that all of a stock fund’s returns are subject to federal income tax. Capital gains rates are more favorable, and unrealized gains aren’t taxed at all (until they are realized).

I just pulled some performance data on Vanguard’s S&P 500 Index Fund. The 5 year annualized return is 12.69% before taxes, 12.39% after taxes on distributions, and 11.08% after taxes on distributions and sale of fund shares.

In my post “How To Create A Seven Figure Residual Income” (see my link), I assumed a 10% rate of return, which was meant to reflect a mix of large caps and small caps after taxes were paid on distributions. I think this is a fair assumption if you can ignore inflation, which you may or may not be able to do depending on the purpose of your calculations.

Yes, you bring up a valid point about taxation policies. It is as imaginary as our currency — i.e., our money is only as good as the stability of this government since it is no longer backed by gold.