Why don't people ever talk about compound inflation?

[john kane]

i keep reading about how compound interest is amazing. obv i agree it can lead to a decent long term return.

however, it annoys me when people say 'if you stash £x per year for 20 years' you'll be a millionaire by the time your y years old'

why do they calculate compound interest as effective compound interest i.e. interest - taxes on interest - inflation = effective interest.

just i think this would be a far better way to show what your actually making.

[captZEEbo]

Yeah in reality most people only make like 1-3% per year.

I've also heard that inflation isn't static, because some things inflate faster than others (health care) and some things don't inflate as fast as the general inflation rate. There's inflation in each sector of buying things.

[lala]

[ QUOTE ]
i keep reading about how compound interest is amazing. obv i agree it can lead to a decent long term return.

however, it annoys me when people say 'if you stash £x per year for 20 years' you'll be a millionaire by the time your y years old'

why do they calculate compound interest as effective compound interest i.e. interest - taxes on interest - inflation = effective interest.

just i think this would be a far better way to show what your actually making.

[/ QUOTE ]

yeah I completely agree, when I first read books about personal finance a few years ago, I was thinking to myself, damn look how easy it is to become a millionaire just investing a few thousand. Of course they barely mention inflation in those books, and now I realize a million in a few decades won't be much.

[squiffy]

You make a good point.

But there are many ways to defer or completely avoid taxes, so that you do get the full benefits of compounded interest.

If you have an IRA or 401K retirement account in the U.S., the stocks can appreciate and you can collect dividends with taxes deferred until you withdraw them. They can potentially compound for 50 years.

Similarly, if you buy real estate in the U.S., you do not pay any tax on the appreciation unless and until you sell. That's because wealthy landowners have always made the rules in the U.S. So you can buy a piece of land for 100K, it can appreciate to 900K over 40 years, and you pay no tax on the appreciation unless and until you sell.

Even then, there are ways to "exchange" your property for another property of equal or higher value, without paying any tax, even though the exchange is really a sale.

Also, I believe if you die and leave the land to your heirs, they get a stepped up basis to the current market value of the property, so they pay no tax on the appreciation either.

Similarly, with stocks, one important reason that Warren Buffett has touted the benefits of a buy and hold strategy is that if you buy a stock and hold it for 20 years and never sell, you pay no tax on the appreciation. Someone who trades in and out pays tax every time he sells and makes a profit. The buy and holder enjoys the benefits of "compounded" appreciation with taxes deferred.

[NajdorfDefense]

[ QUOTE ]
You make a good point.

Similarly, if you buy real estate in the U.S., you do not pay any tax on the appreciation unless and until you sell. That's because wealthy landowners have always made the rules in the U.S. So you can buy a piece of land for 100K, it can appreciate to 900K over 40 years, and you pay no tax on the appreciation unless and until you sell.

[/ QUOTE ]

You never pay tax on unrealized appreciation. RE is not an exception. If you bought KO or GE or IBM 60 years ago, you'd only pay on the dividends.

[gonebroke2]

I just wish the government would give out the real statistics on inflation. Movement of gold is proof of their lies.

[maxtower]

The 99 cent cheeseburger at Wendys has cost 99 cents for a long time. [img]/images/graemlins/smile.gif[/img]

Maybe they have been shrinking it.

[Guppies]

The local pizza place used to sell a slice of cheese for $1.00. Now it's $1.75!! If I had invested in pizza a few years back I'd be rich now!

[black_russian]

Ive been storing pizza in my garage for decades......Im thinking it may be time to sell!

[MatthewRyan]

OP- many people DO infact talk about real returns rather than nominal returns. However, you're not going to find the guy (mutual fund company/finance teacher/parent/etc) trying to sell you on the greatness of compound interest is not going to be making his case less spectacular by using real returns.

If you assume 2% inflation that basicaly means in 35 years everything* will have doubled in price, or your future dollar value will have 1/2 of its present value. 35 years is importnant because that is from 24-59, the approximate time you will have a 401k or IRA.

I hope I have cleared some things up