How to turn your tax refund into $300,000

In the United States, the average federal tax refund is about $3,000.1 Simply put, this means that the average American tax filer pays the U.S. government about $250 per month too much and then gets their own money back in one chunk in the spring. That brings up three questions:

1.       Should they be giving the government an interest free loan? 
2.       What should they do with this money?
3.       Seriously… $300,000… How do I get that?
To find out, watch the video or read the text below.

The first question is obvious. Let’s simply be clear that we should not be giving the government an interest-free loan for $3,000 each year.
As to the second question, what people say they want to do is not bad. According to a variety of online polls, about a third of Americans say they will pay down debt, and a third will use it to invest.2,3,4,5

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Unfortunately, although people generally have good intentions, they must not be following through in a disciplined way over the long term.  If two-thirds of the people were actually paying down debt and investing their tax returns on a regular basis, more Americans would be better prepared for their retirement.  Reality would not look like this:

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The short story from these graphs?  More than 60% of the households, age 55-64, have less than $50,000 in retirement savings, with the median net worth of households, 55 and older, being $34,760.  Don’t let that be you.

Now to the third question.  The one you want to know.  How do you get $300,000?  Thankfully, it is mostly math and discipline.

If a person were to get an average refund of $3,000 per year and they were to simply invest that money, $250 every month for 30 years at 7% return, they would have $306,772. (Future growth and investment performance are not guaranteed; see additional disclaimers below.6).

Now you see why I say that people must not be following through with their intentions. The math works, in good weather and bad. It’s discipline that must be breaking down. If two-thirds of the population were actually paying down debt, saving, and investing, we would not have so many people arriving at retirement age with so little. Although $300,000 is probably not enough for a prosperous retirement, it sure would be better than the retirement crisis that is the reality for a large portion of the population.

As to how you can use this information, take a look at the chart below. (Note that inflation and taxes are not considered here.) It shows you what $250 per month will do in various time-frames and various returns.

Besides highlighting the value of starting early, this chart can be used as a quick reference to determine the possible results of your savings efforts.  If you are saving $1,000 per month, for example, your results would be four times as large as saving $250 per month.

If you want to do a more comprehensive in-depth analysis of your savings requirements, taking into account taxes, inflation, Social Security, and numerous other factors, feel free to reach out to me.  I am happy to help.

To a prosperous retirement,

Patrick Stoa
Financial Advisor

  6. This case study is for illustrative purposes only; it is not a representation of any individual person or situation. The investment return figures represented are not intended to reflect the actual performance of any particular security. Individual cases will vary. Investment yields will fluctuate with market conditions. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

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