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**Computing Real Rate of Return**

To analyze investments return marginal tax rate is necessary. Computing marginal rate and applying it to gross earnings will tell the after tax yield, or the amount you put in your pocket, before inflation.

*Scenario:*

Using an 8%rate of return and a 42%marginal tax rate:

**How to compute after -tax yield**:

Current yield 8% X (1 – .42 = ).58 [1 minus marginal tax rate means every one dollar of income one have to pay 42 cents.]

**Equals After tax yield 4.64%**

**To compute before tax yield:**

In order to get 8% interest before tax

Investment yield Desired = .08 /( 1- .42 =) .58

Equals Before tax yield needed: **13.8%**

**Explanation:**

If you need 100+8% interest= 108 you have to pay tax on 8 dollar so the rate of return you get actually far below the 8% interest rate. In order to get 8% return you have to earn interest at a rate of 13.8%

100+13.8% (.138) = 113.8

Tax 42% of 13.8 = 5.79

113.8-5.79 = 108.01

**To compute an after-tax real rate of return:**

(*Both taxes and inflation are taken into account*)

**Rate of Return 8% + Expected rate of inflation 2% / 1-Marginal tax rate**

**(8% +2% ═) .10 / (1-.42 =) .58**

So the rate of retun needed for true 8% return after taxes and inflation is .10/.58 = 17.24%

So Break Even for after tax

**(Expected Inflation Rate ═) .02 / (1- Marginal Tax return) .58**

Maximum Return Needed**: 3.45%**

**Diversify your Investment Portfolio:**

Best ways to maximize after-tax return, and take advantage of lower marginal tax rates on dividends and capital gains-producing investments, is to diversify your portfolio. Consult a financial adviser to find an asset-mix that gives the right amount of growth and return, based on current and future needs and risk tolerance.

**Diversification – what to look for in an investment:**

- Safety of principal (risk tolerance required)
- Yield (rate of return and carrying cost)
- Capital appreciation (growth)

- Liquidity and portability (Land vs gold)
- Allocation (too many eggs in one basket)
- Time management (Canada Savings bonds vs. apartment block)
- Expertise required (and related professional costs)
- Tax considerations.

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