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Inflation and Taxes Have Had a Significantly Negative Effect on CD Return Rates

Hello Friends,

I came across this chart from the Hartford Funds that I thought was worth sharing.  Their findings illustrate one of my core beliefs…namely that it is your Purchasing Power, not your Principal Value that matters most in retirement. In the chart, the Real Return of CDs (which is what really matters) was only slightly positive in 3 out of the 19 years once the effects of taxes and inflation are considered.

                                              Past performance does not guarantee future results. Data Sources: Bloomberg, FactSet, and Hartford Funds, 7/23.

While having a portfolio consisting predominantly of CDs (and other Fixed Income investments) may give you peace of mind and rest filled nights, it can be devastating to your future cashflow needs in retirement.  This isn’t to say that CDs are a bad investment. On the contrary, CDs can be a good place to park funds if you need certainty that the funds will be available at some future date.  Some examples of this would be cashflow needs for living expenses, major planned purchases, college, and wedding costs.

What I am against is using fixed income investments to drive the long-term returns that are needed by most people to accrete the future purchasing power they will need to maintain a comfortable retirement lifestyle.

So, what’s a possible alternative?  I’m glad you asked!  Let’s look at the dividends of the Great Companies of United States and the World.  For this example, I’ll use the numbers for the S&P500 index over the last 30 years

As you can see, the cost of living over that period doubled while the dividend yield went up 6 times. Dividends didn’t just keep pace with inflation, they kicked the pants off it! And this analysis doesn’t even include that the original principal amount invested in the S&P went up 10 times over this same 30-year period verses when CD’s mature, all you get back is your original principal investment.

If asked, most people in the general public would say that CD’s and other fixed income investments are the safer way to invest for their retirement income needs versus investing more in equities.  However, because I define money as purchasing power, risk as the extinction of purchasing power, and safety as an income that rises more than living costs do, I counsel that most people need exposure to the constantly rising dividends and capital values of the Great Companies in America and the World to realize their most cherished goals in retirement.

I hope you’ve found this article informative and thought provoking. As always it is a pleasure and an honor to serve you. If you would like to discuss any of this information further, please give me a call. Have a great day and talk with you soon!


Best Wishes and Regards,

David R Henderson

This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. The views expressed are those of David Henderson and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. DCH Wealth Management, nor any of its members, are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. Investment advisory services offered through Mutual Advisors, LLC, DBA DCH Wealth Management, an SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies.

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