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Schannep Investment Advisors, Inc.
Your future is why we're here.
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What's the Real
Return on CDs? The
Toll of Inflation and Taxation |
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Less Top |
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Real Return |
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CD |
Federal |
Less |
After Taxes |
| Year |
Rate |
Tax Rate1 |
Inflation |
and Inflation |
| 1986 |
6.50% |
45% |
1.10% |
2.48% |
| 1987 |
7.01% |
33% |
4.40% |
0.30% |
| 1988 |
7.91% |
33% |
4.40% |
0.90% |
| 1989 |
9.08% |
33% |
4.60% |
1.48% |
| 1990 |
8.17% |
31% |
6.10% |
-0.46% |
| 1991 |
5.91% |
31% |
3.10% |
0.98% |
| 1992 |
3.77% |
31% |
2.90% |
-0.30% |
| 1993 |
3.28% |
31% |
2.70% |
-0.44% |
| 1994 |
4.96% |
31% |
2.70% |
0.72% |
| 1995 |
5.98% |
31% |
2.50% |
1.63% |
| 1996 |
5.47% |
31% |
3.30% |
0.47% |
| 1997 |
6.01% |
31% |
1.70% |
2.45% |
| 1998 |
5.65% |
31% |
1.61% |
2.29% |
| 1999 |
5.73% |
31% |
2.68% |
1.27% |
| 2000 |
7.13% |
31% |
3.39% |
1.53% |
| 2001 |
4.65% |
30.50% |
1.55% |
1.68% |
| 2002 |
3.02% |
27% |
2.38% |
-0.18% |
| 2003 |
1.30% |
27% |
1.89% |
-0.94% |
| 2004 |
2.26% |
27% |
3.57% |
-1.92% |
| 2005 |
4.03% |
35% |
3.84% |
-1.22% |
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2006 |
5.21% |
35% |
2.39% |
1.00% |
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2007 |
5.15% |
35% |
4.08% |
-0.73% |
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2008 |
3.97% |
35% |
1.14% |
1.44% |
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One step forward and two steps back. It's a dance
that's probably familiar to certificate of deposit (CD) investors. Bank
CDs are short-term investments that pay fixed interest but are subject
to fluctuating rollover rates and early withdrawal penalties. After
figuring in taxes and inflation, many people who entrusted their money
to CDs, which are insured by the FDIC for up to $100,000, may have
discovered the high cost of stability-years of poor returns.
No one plans on losing money when they invest-especially not
conservative CD investors. An alternate investment route may be to to take a
long-term approach and invest in the stock market. Although fund shares
are not insured and their value will vary with market conditions,
long-term investing in stocks has historically smoothed out short-term
fluctuations and rewarded patient investors with attractive returns. The
CD income shown below is calculated using the six-month annualized
average monthly CD rate reported by the Federal Reserve. Of course, past
performance cannot guarantee comparable future results.
How Inflation and Taxes Have Spoiled CD Return Rates
In two of the last 20 years CDs have carried a negative "real" rate of
return. In nine of the 18 positive years, CDs carried less than 1%
"real" rate of return. |
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Source: Lipper, Inc. Taxes by year are for the
highest rate as listed in the Advisory Commission, an Intergovernmental
Relationships/Significant Features of Fiscal Federalism. This
information does not constitute tax advice. Please consult your tax
advisor for more complete information. Inflation rates are based on the
Consumer Price Index (CPI), a measure of change in consumer prices, as
determined by the U.S. Bureau of Labor Statistics. |
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( Return to Investment Primer
Index )
This report is
prepared for general circulation and is for informational purposes only. It
is not intended as an offer or solicitation for the purchase or sale of any
financial instrument or service. Market prices and other data may be
obtained from outside sources and is not warranted as to completeness or
accuracy. Any comments, statements and/or recommendations made herein do not
necessarily reflect those of First Allied Securities, Inc., its subsidiaries
or affiliates, and are subject to change without notice.
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Securities offered through
First Allied Securities, Inc. A register broker/dealer. Member FINRA/SIPC.
Schannep Investment Advisors is a registered investment
adviser in the state of Arizona. First Allied Securities, Inc. does not endorse or
support this web site, nor are they affiliated with Schannep Investment Advisors,
Inc.
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