In an investment where the interest is compounding in a taxable environment there is a cost. The tax represents a cost to maintain this particular investment. |
Paying Expenses from Lifestyle: Often we tend to focus on the amount that we actually have in our account as illustrated in screen 4. In order for you to have that amount in your left pocket, you had to reach into your right pocket to cover the taxes due on the interest earned. The tax paid over the period is represented in red. Paying Expenses from Investment: Since in this illustration the taxes due would be taken directly from the investment account we see the amount of taxes taken in red. |
Future Value of an Ideal Investment = FV(Total Rate of Return, Years of Accumulation, Annual Contribution, Initial Balance, Contributions at Beginning of Period) Amount Invested = Initial Balance + sum of contributions Ordinary Income Tax = Sum of Annual Taxable Growth * Ordinary Tax Rate Total less expenses = Future Value of an Ideal Investment - Amount Invested - Ordinary Income Tax. A year-by-year illustration of this solution is displayed in worksheet form by clicking the Documentation button. |