Net, Net, Net: Expenses, Taxes and Inflation Can Eat Your Nest Egg – What To Do?

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The following is an excerpt from Hello Harold, a book by Harold Evensky - click here for a free Kindle version!

As dangerous as it is to simply extrapolate past returns into future expectations, an even bigger mistake is planning a financial future based on nominal gross returns, forgetting about how large bite expenses, taxes, and inflation will take from the bottom line. Ultimately, all you truly have to spend is net-net-net returns – the amount left over after those three bullies have taken their share.

Bob: Hello, Harold.

Harold Evensky: Bob, how are you doing? How was the cruise?

B: It was terrific – pure decadence. We’ve already planned the next one. I had lots of time on the cruise and I’ve been thinking about our last conversation. I’ve decided that what you said seems pretty obviously true.

HE: What is? I’m eager to hear it because lately, it seems like nothing is obvious about investing.

B: That when I make investment decisions, I should be looking to the future, not to what happened yesterday.

HE: That’s right, Bob. You’ve recognized one of the fundamental concepts of good investing. Planning your future through a rearview mirror is just as dangerous as using one to drive down a highway.