A tax equivalent return means whenever we look at the return, we should factor in the impact of tax, which could potentially be huge.
How huge that could be? How about 60%?
We will use a simple example to illustrate.
Example.
A household of a retired couple who live in the state of California is looking for $250K as annual retirement income. How much pre-tax income does this family need to have in order for this $250K to be after-tax amount?
More than 50% higher!
Let's assume the effective income tax rate in California is 9.21%. The marginal Federal income tax rate after $223,050 is 33%.
In order to achieve the equivalent $250K after-tax retirement income, the pre-tax income has to be $397,041, a 59% increase!
Unbelievable, isn't it?!
How huge that could be? How about 60%?
We will use a simple example to illustrate.
Example.
A household of a retired couple who live in the state of California is looking for $250K as annual retirement income. How much pre-tax income does this family need to have in order for this $250K to be after-tax amount?
More than 50% higher!
Let's assume the effective income tax rate in California is 9.21%. The marginal Federal income tax rate after $223,050 is 33%.
In order to achieve the equivalent $250K after-tax retirement income, the pre-tax income has to be $397,041, a 59% increase!
Unbelievable, isn't it?!
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