4 ms·

You wouldn't withdraw $500 per year, you would leave it invested and spend $500 that you already have liquid from elsewhere. But it's beside the point. The poi

You wouldn't withdraw $500 per year, you would leave it invested and spend $500 that you already have liquid from elsewhere. But it's beside the point. The point is that opportunity costs must be accounted for.

mlyle 3y ago
> You wouldn't withdraw $500 per year, You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low. Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year. Opportunity costs beyond inflation make the picture even more ridiculous.
- NavinF 3y ago
  Interesting, I used different numbers (10 years and 33% tax) in my comment but got the same result of 0.4% real returns. Check my math
  - mlyle 3y ago
    (10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return. Not surprising that a lower tax rate gets to the same number sooner through compounding. BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.
    - NavinF 3y ago
      Thanks, makes sense
NavinF 3y ago
It doesn't matter when you withdraw the money, the taxes will be the same. $10k earning 5% compounded monthly will be $16,470 in 10 years. After paying 1/3 of the gains in taxes, you'll be left with $14,313 which has a present value of $10,446 at 3.2% inflation. So yeah opportunity costs must be accounted for, but in your scenario the opportunity cost is negligible. We're talking 0.4% per year. Investing in a CD is like pissing in the ocean