Would you choose to give yourself less money in the future? Historically, bank CDs have done just that. In meetings with older clients, I’ve often heard how large their 2024 tax bills were.

That’s not much of a surprise considering that interest rates have climbed to where they are today.

Substantial sums in money markets, savings, and CDs have earned around 4.5% annual interest. A record 7 trillion dollars are currently being held in money market accounts. It seems that uncertainty has rarely been higher than it is today. And to top it off, the U.S. stock market has recently been at or near all-time highs.

Let’s take a closer look at those CDs and money market accounts. Here’s a fun exercise. Take the interest you earn on a CD and multiply it by your income tax rate. Then subtract that percent of interest owed to taxes. You’ve just determined your tax adjusted return on the CD.

Now, subtract the CPI rate of inflation from your remaining CD return. Is that amount positive or negative? Using average CD rates and middle tax brackets, the real rate of return on a CD has been negative in 17 of the last 20 years.

FDIC insurance is important, and having a stable return can provide peace of mind. But long-term investors know that without some risk there’s typically little reward. I bring this up to show that there are other opportunities available to investors to grow their wealth over the long term. You don’t have to settle for just keeping up with inflation. Or maybe falling short.

How much money is too much money in the bank? That’s a question I’m frequently asked. The answer, of course, varies from person to person. Anyone who tells you there’s a specific number for everyone is missing an important point. Ease of mind is critical to being a prudent investor. If unexpected expenses were to arise, having cash on hand allows long-term investors to remain invested.

But there is a point where too much cash on hand – cash that’s not earning interest – is detrimental to your long-term financial outlook. Work with an advisor to figure out what amount is right for you.

The investment world has expanded greatly over the past 25 years. In 2000, there were 80 exchange traded funds in the United States. Fast forward to today and that number is just over 3,600. ETFs can provide tax efficiency for after-tax investors. The money in your checking, savings or any non-IRA account is an after-tax investment. And the interest, dividends and capital gains paid out each year are taxable.

As the CD example above shows, taxes take a bite out of your investment returns. By structuring these portfolios with taxes in mind, you can keep more in your pocket and less in Uncle Sam’s. Being a long-term investor means having an iron stomach, as downturns are inevitable. Working with an advisor can help to make sure the level of risk in your portfolio is appropriate, given your tolerance for risk.

A 60/40 stock/bond portfolio has returned close to double digits every year since 1987. Inflation over that same time was 2.73% per year. Long-term investors have a great asset on their side. Time. Don’t be afraid to use it.

Email your questions to brandon@lifetimeplanning.com

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Society for Lifetime Planning is not affiliated with Kestra IS or Kestra AS. https://kestrafinancial.com/disclosures

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning past performance are not intended to be forward-looking and should not be viewed as an indication of future results.