Are you a financial planner? They tend to dislike simple plans that ordinary people can understand and use.
The historical fact is that the American stock market has returned roughly 10.5% annually, including reinvested dividends, since the mid-1920s. I use 8% precisely because it is conservative.
Recent returns have been considerably higher, as you have probably noticed.
A Trump Account works much like an IRA. You do not pay taxes each year on dividends, interest, or capital gains earned inside the account. Taxes are deferred until the money is withdrawn, generally as ordinary income. Simple.
The principle is equally simple: put the money in as early as possible, leave it alone, and let time do the work.
If you are satisfied with 3% or 4%, then by all means stay with bonds. Municipal bonds may even provide tax advantages. They are generally safe—until an issuer runs into trouble and defaults. It happens. I have seen it.
But decades of compounded growth with no annual tax bill on the gains is difficult to beat.
You may have missed the section explaining that Trump Accounts are structured much like IRAs. I tried to make that clear.
Thank you for adding that these accounts are treated similarly to an IRA with taxes deferred until cashing out the account. My error for not reading all of your first write up.
No, my Wife would certainly tell you that I am not a financial planner. Poverty is not a problem for us, but that is more her doing than mine. My 1972 Cornell MBA has given me some experience with compounding, as has holding a number of small investments over the long term. Compounding is a very powerful, and under appreciated phenomenon. Regretably, inflation also compounds, sometimes at rates larger than the compounding on CDs and tax free bonds.
I think the new child accounts are very worth while, and am sure we both hope that inflation does not return us to the early 1970's situation where CDs brought in rates in the area of 10%, but inflation was running up at a similar speed.
With persistent inflation, there really isn’t another game in town. You have to participate in the market. Investors understand that part of the market’s long-term rise simply reflects inflation. If you sit on the sidelines, you’re a dead duck, as we used to say.
I figured n that you may have missed the point that Trump Accounts receive IRA-style tax treatment. No worries. The investments compound tax-deferred for decades. That’s a significant advantage.
A child whose account is consistently funded throughout childhood can accumulate serious capital by retirement. Time does most of the heavy lifting.
One thing I’ve noticed over the years is that many schoolteachers know surprisingly little about how investing actually works. That’s understandable. Most participate in defined-benefit pensions or professionally managed retirement systems that keep them at arm’s length from the mechanics of investing. As a result, many have little firsthand experience with compound growth, index investing, and the extraordinary power of time—and therefore little practical knowledge to pass along to their students.
Bonds do not pay me 8%, neither do CDs, and there is no guarantee whatever that buying stocks will pay that. Why not use a realistic figure of3 or 4% and why will the yearly payments of interest or dividends not be taxed? This is all pretty, but smells like the South end of a North facing male cow.
Gardiner,
Are you a financial planner? They tend to dislike simple plans that ordinary people can understand and use.
The historical fact is that the American stock market has returned roughly 10.5% annually, including reinvested dividends, since the mid-1920s. I use 8% precisely because it is conservative.
Recent returns have been considerably higher, as you have probably noticed.
A Trump Account works much like an IRA. You do not pay taxes each year on dividends, interest, or capital gains earned inside the account. Taxes are deferred until the money is withdrawn, generally as ordinary income. Simple.
The principle is equally simple: put the money in as early as possible, leave it alone, and let time do the work.
If you are satisfied with 3% or 4%, then by all means stay with bonds. Municipal bonds may even provide tax advantages. They are generally safe—until an issuer runs into trouble and defaults. It happens. I have seen it.
But decades of compounded growth with no annual tax bill on the gains is difficult to beat.
You may have missed the section explaining that Trump Accounts are structured much like IRAs. I tried to make that clear.
Jim
Thank you for adding that these accounts are treated similarly to an IRA with taxes deferred until cashing out the account. My error for not reading all of your first write up.
No, my Wife would certainly tell you that I am not a financial planner. Poverty is not a problem for us, but that is more her doing than mine. My 1972 Cornell MBA has given me some experience with compounding, as has holding a number of small investments over the long term. Compounding is a very powerful, and under appreciated phenomenon. Regretably, inflation also compounds, sometimes at rates larger than the compounding on CDs and tax free bonds.
I think the new child accounts are very worth while, and am sure we both hope that inflation does not return us to the early 1970's situation where CDs brought in rates in the area of 10%, but inflation was running up at a similar speed.
Fair Winds, Garry
Garry,
With persistent inflation, there really isn’t another game in town. You have to participate in the market. Investors understand that part of the market’s long-term rise simply reflects inflation. If you sit on the sidelines, you’re a dead duck, as we used to say.
I figured n that you may have missed the point that Trump Accounts receive IRA-style tax treatment. No worries. The investments compound tax-deferred for decades. That’s a significant advantage.
A child whose account is consistently funded throughout childhood can accumulate serious capital by retirement. Time does most of the heavy lifting.
One thing I’ve noticed over the years is that many schoolteachers know surprisingly little about how investing actually works. That’s understandable. Most participate in defined-benefit pensions or professionally managed retirement systems that keep them at arm’s length from the mechanics of investing. As a result, many have little firsthand experience with compound growth, index investing, and the extraordinary power of time—and therefore little practical knowledge to pass along to their students.
Bonds do not pay me 8%, neither do CDs, and there is no guarantee whatever that buying stocks will pay that. Why not use a realistic figure of3 or 4% and why will the yearly payments of interest or dividends not be taxed? This is all pretty, but smells like the South end of a North facing male cow.